Email of the day (1)
Comment of the Day

February 14 2013

Commentary by Eoin Treacy

Email of the day (1)

on potential changes to the tax treatment of Master Limited Partnerships
“I was very early to MLP investing and I continue to believe that this is a very attractive area for new investment. In the Unites States, our energy infrastructure was designed for importing oil and gas. Now, we have it here in abundance and may still be in the early stages of the build out. With the beneficial tax structure of Master Limited Partnerships (publicly traded) there have always been investors worried that this would change and be a target. We have used this fear as a buying opportunity.

"I read the following piece from Morgan Stanley last weekend. Another confirmation why MLPs will continue to be a large component of our separately managed accounts (I also manage MLP only strategies)."

Eoin Treacy's view Thank you for this update on the perceptions of how Master Limited Partnerships should be treated for tax purposes in Washington DC. A number of the reports you have so kindly sent through over the years have highlighted an increased level of anxiety that the sector's favourable tax structure would be tampered with.

The recommendations made by Senator Murkowski represent an innovative pivot that would protect the status quo and extend it to sectors that the Obama administration wishes to foster. Here is a section:

The master limited partnership (MLP) is a special business structure that permits a company to raise capital like a corporation but pay taxes like a partnership. Instead of paying corporate income tax, a company distributes its cash flow on a quarterly basis to its investors, who can buy in on the public market and pay their own taxes on these distributions. Companies that have the steady cash flows of pipelines and similar operations have found MLP status to be helpful.

Renewable energy companies, with a few exceptions, are not eligible for the MLP structure and are not able to take advantage of a business framework that holds advantages in both capital-raising and taxation. In order to offer MLPs to renewable energy companies, Congress should:

- Consider wholesale reform of the Internal Revenue Code as part of a broader approach to resolve inconsistent tax characteristics within the energy sector.

- Make MLPs more widely available by amending the Internal Revenue Code of 1986 to extend the MLP structure to include biodiesel, biomass, hydropower, solar, wind, and virtually every other kind of alternative energy source, with the exception of nuclear energy.”

The JPMorgan Alerian MLP ETN has rallied impressively since the end of December. While somewhat overbought in the short-term a sustained move below the 200-day MA, currently near $40, would be required to question medium-term scope for additional upside.

Among MLPs involved in the pipelines sector, Enterprise Products Partners LP has a similar pattern to the ETN. Energy Transfer Partners broke out of its almost two year range in January and a sustained move below $45 would be required to question medium-term upside potential. Following an impressive rally from mid-December Magellan Midstream is consolidating in the region of $50. Plains All American Pipeline is becoming increasingly overextended and is susceptible to a consolidation of recent powerful gains. Western Gas Partners has a similar pattern. Kinder Morgan appears to be consolidating in the region of the upper side of the more than yearlong range as it unwinds the short-term overbought condition.

Back to top