After the Kinder Morgan Deal, What's Next for MLPs?

[mikelp]

Dan: the NY Times ran this article yesterday after the news of Kinder Morgan's $70B consolidation. We can't expect you to have a crystal ball on things like this, but you have your ear to the ground regarding energy sector news. Do you have any concerns regarding future IRS tax treatment of our beloved energy MLPs, and the future of the MLP structure? At one time several years ago, I was overweighted in the Canadian energy trusts, and got hammered in the Halloween massacre, when Canada changed their tax treatment of their energy royalty trusts. It's just the nature of the federal government these days to be scouring businesses looking for ways to pick our pockets and raise more federal revenues to feed their insatiable appetite for pork barrel spending. I would think it would be impossible to push such changes in the MLP structure thru the House of Representatives. For now, I'm not making any changes to my holdings based on a NY Times article. Any thoughts?

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http://dealbook.nytimes.com/2014/08/12/ ... blogs&_r=0

With Kinder Morgan renouncing the master limited partnership it helped pioneer, questions have emerged about the future of the structure.

But even before Kinder Morgan struck its $70 billion deal to consolidate, the pace of new M.L.P. formation had slowed markedly this year.

In April, the Internal Revenue Service quietly put the brakes on what had become a rush of energy companies reincorporating as M.L.P.s.

Most new master limited partnerships – which pay no corporate taxes and distribute all earnings to investors – are formed after being granted so-called private letter rulings from the I.R.S. Such rulings grant companies the permission to go ahead and reorganize as a partnership, passing along profits to shareholders and slashing their corporate tax bill.

A flood of applications for such rulings, and the I.R.S.’s willingness in granting them, has contributed to the soaring popularity of M.L.P.s in recent years.

Indeed, in 2013, the floodgates had opened for new M.L.P. formation, with 20 new such companies going public worth nearly $6 billion combined. That was up from 13 new listings in 2011 and 2012.

But in April, the I.R.S. stopped issuing such rulings.

“There has been a pause,” John Koskinen, the I.R.S. commissioner, said at a congressional hearing at the time, according to Reuters. The pause “is to try to make sure the letter rulings are all consistent and to try to see if there is a way to give broader guidance to the industry,” he said.

The concern was that the I.R.S. was being too lenient in granting private letter requests, inadvertently allowing companies that should in fact be structured as corporations to enjoy the tax benefits of the partnership structure. As a result, the I.R.S. was unwittingly depriving the government of badly needed revenue.

“There had been a large volume of P.L.R. requests pushing the envelope,” said Mary Lyman, executive director of the National Association of Publicly Traded Partnerships, an industry group.

Since the I.R.S. clamped down on issuing new private letter rulings, the pace has slowed sharply. This year, just 11 new M.L.P.s have gone public, with an aggregate value of about $3.5 billion, according to Dealogic.

The I.R.S. is reportedly re-evaluating the standards prospective M.L.P.s should meet to be granted a private letter ruling, and Ms. Lyman said new letters were expected to be issued as early as September.

In the wake of the Kinder Morgan deal on Monday, however, the Treasury Department emphasized that it was looking at how M.L.P.s could be contributing to the broader erosion of the corporate tax base.

That suggests that even when private letter rulings resume, Washington may be more judicious in deciding just which companies can become M.L.P.s.

[Jacobpilot]

I would think that if the IRS changes its plan to issue PLR on MLP's that the value of
existing MLP's would go up ( supply and demand, less supply )?

[dan_s]

I doubt the IRS will change the rules for existing MLPs. Canada made a HUGE mistake when they reversed their stance on trusts. MLPs are partnerships for tax purposes and Subchapter K (which covers partnerships) has been around for a long time.

Plus, I think the IRS gets more tax revenues by letting the taxable income flow through to individuals since they are in higher tax brackets. Take a look at E&P companies that are C-Corps and you will see that they don't pay much income tax anyway.