Yesterday, Sol-Wind filed its S-1 with the Securities & Exchange Commission for its listing on the NYSE. Its ticker symbol will be SLWD.
Here is a link to my structure diagrams for Sol-Wind and comparisons of it to a yieldco, a private equity fund manager MLP and an oil and gas MLP.
While publicly traded entities are generally required to be taxed as corporations, there is an exception under I.R.C. § 7704 pursuant to which certain publicly traded master limited partnerships are taxed as partnerships. Sol-Wind’s structure is a master limited partnership (MLP) that meets the exception in I.R.C. § 7704 to be publicly traded, yet taxed as a partnership.
Because Sol-Wind’s underlying assets are renewable energy projects that do not generate “qualifying income” for purposes of I.R.C. § 7704(d), the structure includes a blocker corporation1 between the MLP and the assets. As a result, the venture will owe corporate tax. However, according to the disclosure in the S-1, Sol-Wind does not “expect [its] corporate subsidiaries to generate a significant amount of taxable income for at least the next 30 years.” Thus, on a present value basis the use of the corporate blocker to meet the rules of I.R.C. § 7704(d) results in only a de minimis tax cost. The tax cost is minimal because Sol-Wind has bought and will buy renewable energy projects that qualify for accelerated depreciation and tax credits and these tax benefits should more than offset the taxable income of the corporation. The tax attributes that are not used in the current year to zero out the blocker corporation’s tax liability can be carried forward 20 years.
The S-1 also discloses that Sol-Wind has and will generally enter into “tax equity transactions” as a means of providing capital to acquire the renewable energy assets. As explained in the S-1:
U.S. federal [and] state…governments…have established various tax incentives to support the development of renewable energy assets, which permits for the sale of tax equity. The incentives include PTCs, ITCs, accelerated tax depreciation and certain state tax credits (collectively, "Tax Benefits"). Investors in tax equity typically receive all or virtually all of the Tax Benefits, including PTCs, ITCs and depreciation, from U.S. solar and wind power generation assets and a small amount of cash flows from each asset.
It is not entirely clear from the S-1 how Sol-Wind can both monetize the Tax Benefits in tax equity transactions and still not owe any corporate level tax for 30 years. Presumably, it will monetize less than all of the Tax Benefits in the tax equity transactions to enable the corporate blocker to shelter its income for the next 30 years.
Comparison of Sol-Wind’s MLP to Other Structures
The Sol-Wind structure is like an upside down yieldco. In the yieldco structure, the public entity is a corporation that owns a partnership; in the Sol-Wind structure, the public entity is a partnership that owns a corporation. One drawback of the Sol-Wind structure is that the public investors will receive an IRS Schedule K-1 from the MLP, which causes tax filing complexity not present in the yieldco structure (where the public holds corporate stock).
The Sol-Wind structure is similar to the MLP structure used by private equity fund managers that went public (e.g., KKR). These MLPs also had underlying assets that generated non-qualifying income under I.R.C. § 7704(d) and, therefore, had to have a blocker corporation between their business operations and the MLP.
The blocker structure used by Sol-Wind and the private equity fund manager MLPs is different from the classic structure used for oil and gas MLPs. Oil and gas MLPs do not need to interpose a corporation between the MLP and the underlying business operations because oil and gas assets generate “qualifying income” under I.R.C. § 7704(d). Thus, the corporate tax is avoided completely.
If the MLP Parity Act is enacted, then Sol-Wind’s solar and wind projects would be deemed to generate “qualifying income” and Sol-Wind could qualify as an MLP without the use of the corporate blocker. In other words, passage of the MLP Parity Act means that Sol-Wind (and other MLPs owning renewable energy assets) could use the classic MLP structure and thereby avoid the extra corporate level tax, as is the case for oil and gas MLPs. A discussion of the MLP Parity Act is available here.
1 The blocker corporation is a limited liability company organized in Delaware that makes an election to be taxed as a corporation.