Comparison of Typical MLP and Yieldco Structures

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The rise of master limited partnerships (MLPs) as an asset class has coincided with investors’ desire for stable and growing cash flow. In 2013, there were 21 initial public offerings (IPOs) of MLPs and more are on the way in 2014. In general, only entities that generate income from qualifying natural resource activities can be traded on a national securities exchange and be treated as a pass-through for federal income tax purposes (that is, not be subject to federal income taxes at the entity level). The economic structure of an MLP is unique relative to other publicly traded entities, because the entire economic structure of an MLP revolves around cash flow. In fact, MLPs are traded based on a multiple of cash flow — not net income.

In 2013, a new type of vehicle went public with a story very similar to an MLP but without possessing assets that would qualify for pass-through tax treatment. This entity (Yieldco) owns, operates and acquires contracted renewable and conventional generation and thermal infrastructure assets, which are not “MLP-able” assets. Like MLPs, Yieldco and similar companies are positioning themselves as vehicles for investors seeking stable and growing dividend income from a diversified portfolio of lower-risk high-quality assets. More of these types of vehicles are in the planning stages.

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