Although the MLP business structure is a uniquely American institution, accessing the benefits of the U.S. capital markets without paying income taxes is an attractive option to foreign companies.

Structuring as a “yield-co” enables a non-U.S. company to access the U.S. capital markets available to an MLP. A non-U.S. MLP is typically taxed like a corporation, but because its assets are offshore or abroad, there is little, if any, U.S.-taxable income. A foreign MLP may also have its taxes offset by prior losses or accelerated depreciation.

Sean Wheeler, a partner in the Houston office of Latham Watkins LLP, explained the genesis of the yield-co structure as an early attempt by renewable energy and power companies to capitalize on the MLP structure without meeting the MLP’s tax rules.

“Then they figured out if they build these huge power plants that generate a lot of losses over time, they can use those losses to offset future income,” he told Midstream Business. “In the U.S., these renewable/power companies decided to go public as a corporation and offset income with prior losses. They pay out distributions and look basically just like an MLP without being an MLP. That’s what’s happened in the U.S. market.”

The offshore leap

One traditional midstream company has also made the leap into offshore MLP/yield-co status. VTTI Energy Partners, which has the bulk of its assets in various countries, went public this summer as the first foreign entity MLP with land-based fixed assets. Based in London and born of a terminal project in Rotterdam, VTTI’s success on the U.S. exchange is likely to inspire others to do the same, Wheeler said.

“More and more people are going to be looking at the offshore MLP/yield-co structure as a way of going public in the U.S. and tapping the MLP market,” he said. “You’ve had one [company] do it so far, and we’re getting calls that lead me to believe there are a number of people interested in this product. … I think over time as more offshore MLPs/yield-cos develop and prove themselves, that their investor base will expand and there might be a merging of the two concepts, particularly for the offshore guys.”

For the most part, only an entity that generates income from certain natural resource activities may trade on a national securities exchange and earn a pass-through from federal income taxes at the entity level. As Wheeler explained, the economic structure of an MLP is unique relative to other publicly traded entities because MLPs are traded based on a multiple of cash flow—not net income.

Not ‘MLP-able’

Last year, yield-cos went public similarly to MLPs but without the assets to qualify for the pass-through tax treatment. The yield-co may own, operate and acquire contracted renewable and conventional generation and thermal infrastructure assets, but those aren’t “MLP-able” options.

But like MLPs, yield-cos avail themselves to investors seeking stable and growing dividend income from a diverse portfolio of low-risk, high-quality assets. Since the first non-U.S. company—Spain’s Abengoa Yield Plc—went public successfully last year as a yield-co with both conventional and renewable assets, Wheeler expects more to follow that path.

“If you’re offshore, the difference between the [MLPs and yieldcos] is minimal,” Wheeler said. “If you’re onshore, the difference is one is a partnership that’s taxed as a partnership, and the other is a corporation that’s taxed as a corporation, which is the yield-co structure, but the corporation doesn’t pay any taxes because it has net operating losses and accelerated depreciation to offset the income.”

And there will likely be more to come. Foreign companies both in the traditional midstream space as well as those in the power business want to do business in the U.S.

“We have the broadest and deepest and most liquid capital markets in the world, and we have a large segment of those capital markets that is familiar with yield-oriented structures and is willing to fund them,” Wheeler said. “There is an investor base in the U.S. that understands the product and is willing to put money behind the product and appreciates the value that an energy company offers to them through stable distributions and opportunities for growth.”

Deon Daugherty can be reached at ddaugherty@hartenergy.com or 713-260-1065.