The tax-advantaged master limited partnership (MLP) structure combines the tax benefits of a limited partnership with the liquidity of publicly traded securities. Congress approved these publicly traded partnerships by natural resource companies in the 1980s. MLPs have been crucial in recent years to the midstream sector as it works to fulfill the infrastructure needs of the rapidly changing U.S. energy industry. The National Association of Publicly Traded Partnerships, based in Arlington, Virginia, has played a crucial role in explaining what MLPs are to government officials, as well as to the public. Mary LYMAN:, the association’s executive director, has a background that fits her role well. After graduating from Harvard University with a law degree, she served on staff in the House of Representatives, observing the creation and administration of tax law first hand. She took time to visit with Midstream Business and discuss the association’s role and how it is changing.

MIDSTREAM: Talk about yourself for a moment. How did you come to lead the association?

LYMAN: I first came to Washington after I graduatedfrom law school to work for my congressman, who wasa member of the House Ways and Means Committee.And, the position I took gave me some expertise on taxpolicy. That was odd because when I was in law schoolI took one tax course—and hated it. But taxes are moreinteresting as a policy issue.

My congressman eventually ran for the Senate—and lost. So I then joined the private sector, the firm of Chambers Associates, as a tax lobbyist. MLPs were actually some of my first clients. My boss had been a lobbyist for Apache Oil, which had formed the first MLP.

When Congress, back in the eighties, started making noise about corporate taxation of MLPs, an ad-hoc lobbying group was formed to fight it. The group eventually became the association. In 1987, we incorporated and made it into a formal trade association. So for a number of years, my boss at the time ran it, and I was the tax person. In 2005, I took over as the head.

MIDSTREAM: The definition of what an MLP can do seems to be expanding. Do you see that as a good thing?

LYMAN: Yes, I assume that you’re talking about the series of private-letter rulings by the Internal Revenue Service that have pushed out the definition of qualifying income. I think it certainly fits with the intent of Congress to include a broad range of energy activities. If you look at the original language that was written in the tax code, it’s pretty broad.

I think it’s certainly good thing if it opens up the MLP structure to other areas of the energy industry that are important to the U.S. and that can drive the same benefit that midstream people have.

MIDSTREAM: What business sectors do you see as prospective for the publicly traded partnership structure?

LYMAN: Just going from what we’ve been seeing in the private-letter rulings, I would certainly expect to see some growth in the oilfield services area. We started out with Seadrill Ltd. It was the first to actually come out, but I’ve seen other ones that relate to other oilfield activities, and even one that approved a water pipeline that would carry water out to fracing operations.

My guess is that as activity continues to grow in the shale plays, oilfield services go right along with that. I wouldn’t be surprised to see more MLPs there. We could also see expansion into other natural resources areas. We’ve had the fertilizer MLPs in the past couple of years, and we just had Hi-Crush Partners, which produces frac sand, and SunCoke Energy, which takes coal and makes it into coke.

You also have this attempt in Congress to expand MLPs even further into alternative energy. I don’t know how that will play out, but I certainly would say there will be activity in the oilfield services and maybe some things we haven't seen before in the natural resource area.

MIDSTREAM: Some unitholders fear the federal government’s quest for greater tax revenue will impact, or do away with, partnerships’ tax-advantaged structure. Do you think that’s a possibility?

LYMAN: It’s always a possibility, particularly when Congress is making noise about tax reform. I think there could be some headlines this year as Congress discusses the best ways to tax businesses; whether they should raise revenue and how. But I believe that Congress, in the end, will realize the importance and the value of MLPs in providing energy infrastructure. This allows us to make the most of the shale plays, which is a transformational thing and has opened up the possibility of real energy independence.

Some figures that we have put together are that MLPs have invested about $113 billion in private capital for energy infrastructure since 2007, and they are planning to invest $25 billion more this year. We believe if you took away the MLP structure, then that steady stream of investment would be considerably slowed. We had an economist look at this, and he predicted that in the first year after taking away MLPs we would see close to a 30% drop in investment. Ten years later the investment would still be as much as 20% lower as a result; so there would be less, and slower, investment. The energy infrastructure that the U.S. would need wouldn’t be built, and we would probably see higher energy prices.

We’ve been making that case with Congress and have had a pretty good reaction to it. Another thing that we stress is how MLPs have really caught on and have become popular with individual investors. Changing their tax status would affect millions of individuals—and many of them are older. I go to an occasional trade show or investor conference and do an MLP panel, and it’s always retirees who come up to me with questions. They are attracted to MLPs for the steady income stream, which is pretty hard to get anywhere else these days. The proposals that we’re seeing to expand MLP treatment to alternative energy are an intriguing factor. They do seem to be gaining support so there is always the possibility that instead of adversely changing MLPs, Congress could end up expanding MLPs.

MIDSTREAM: Some have speculated MLPs eventually will allow the federal government to move away from comparatively high income tax rates imposed on C-corps in the U.S. without having to cut those tax rates. Do you think that’s the intent of MLP supporters in Congress?

LYMAN: I am not a mind reader, and I can’t speak to the thinking of all congressional MLP supporters, but I think most of them support MLPs for the reasons I have been talking about. They know the value of the MLP structure to the domestic energy industry. A lot of the strong supporters are from energy states and know how MLPs have been used. They want to see that continue.

MIDSTREAM: What do you think are the most effective efforts of the association?

LYMAN: I think our most effective efforts have been in educating legislators and staff, at both federal and state levels, about what MLPs are and what they do. This is something that the average person often doesn’t know a lot about. And as a result of that education, they often come to support us.

A couple of examples: First, on the federal level back in the mid-2000s when ethanol mandates went through. It looked as if a lot of ethanol would be made, then would need to be stored and moved onto sales points. We spent a lot of time on Capitol Hill educating congressmen, senators and their staff, about what MLPs do and how they have become very important in the pipeline and terminal industries.

If ethanol was going to become such an important fuel and was going to have to be manufactured and moved around to other parts of the country, then pipelines are the most logical way of doing it—and that would involve MLPs. And as a result of that effort, as you probably know, in 2008 ethanol and some more fuels were added to the list of qualifying natural resources.

On the state level, we’ve been very successful in changing things that would hurt MLPs. A lot of states have enacted compliance laws, things like requiring withholding from distributions. That would be impossible for MLPs to comply with, and with no real appreciable increase in revenue collected. When we have shown that to the states, the laws have been changed.

MIDSTREAM: Do you find the association’s most important role with Congress is to provide information or to serve as an advocate for its members?

LYMAN: It’s hard to distinguish between the two. We serve as an advocate by providing information—because until we talk to them, most members of Congress don’t know a lot about MLPs or have never heard of them. Once they do know what MLPs are about, they usually are supportive. So certainly we do a lot of advocacy, but I think education on MLPs’ role in the whole energy picture is part of that advocacy.

MIDSTREAM: How has the MLP structure advanced development of a freestanding, growing energy midstream?

LYMAN: We believe that the MLP structure has been a very effective and very efficient structure for raising capital in the midstream space. Midstream assets, like pipelines, require a lot of capital to build. But once they’re in the ground, they don’t require a lot of capital to maintain, and they generate a very steady, reliable, fee-based cash stream. But they have a comparatively low return, especially pipelines that are FERC [Federal Energy Regulatory Commission]-regulated.

And for this reason, in the late 1990s and going into the 2000s, you saw integrated energy companies increasingly put capital in other investments that would produce a higher yield. They spun off midstream assets into MLPs or sold them to MLPs. And the reason the MLP structure works so well is that it lowers the cost of capital enough that companies can raise the capital they need to invest and still provide a reasonable return.

Second, MLPs attract investors to put their capital into midstream assets. Investors are attracted to MLPs because they’re stable, relatively low-risk, provide a good income stream with a better yield than they would receive from CDs or the income-oriented investments you see in today’s market. Everybody is interested in the shale plays, and this is a way to participate in them. And, you can get some income and a decent return with the possibility of some growth.

So I think those factors have enabled a lot more investment in the midstream sector than I think you otherwise would have seen. There was this great transformation, in our view, of what the domestic energy picture was going to look like, and the realization that there was going to be a lot of capital invested and infrastructure built to take advantage of this. And MLPs were there to do it.

MIDSTREAM: What do you see for the association’s future?

LYMAN: Assuming that we settle all these tax questions, which I hope we do, in the future I would see the association continuing to do a lot of what it does now in terms of educating policymakers. But I hope that we would be able to do less of the legislative education role and spend more time reaching out to investors and educating them.

We try to do as much as that as we can. We have a lot of material on our website, and I go the occasional tradeshow and speak to investment groups. But it would be good if we could devote more resources and time to that because I think that would also benefit our members in the long run.

These could include some of the things that you see other trade associations do, like educational programs, exchange of information—things that are geared toward the members rather than toward the outside.

Comments