IRS Ruling: Ethylene Crackers are eligible for MLP status
The IRS took under advisement a request from Ethylene cracker for treatment as a MLP. The rumor is that it's WLK because the Chacos family owns 70%. WLK becoming an MLP would result in tax efficient distributions of about 10% so the Chacos family has a lot of incentive to change WLK to an MLP. From Goldman Sachs on October 17, 2012.
In a Private Letter Ruling dated 10/12/12, the IRS, in response to a request
for clarification from an existing MLP, concluded “that income derived
from processing NGLs into olefins will constitute qualifying income” within
an MLP structure. According to the IRS letter, the unnamed MLP in
question “intends to acquire and operate a facility that processes ethane
and propane into olefins through a cracking process.” We interpret this
ruling to mean that, in this particular case, income from an ethylene steam
cracker is “qualifying income” as it relates to MLPs tax-advantaged status.
This follows similar IRS rulings related to PetroLogistics (PDH) and
Enterprise Products Partners (EPD) classifying income from propane
dehydrogenation (PDH) units as “qualifying income”.
The IRS ruling potentially opens the door for other chemical companies
with ethylene steam crackers to pursue placing those assets into the taxadvantaged
MLP corporate structure. While the ruling was specific to the
existing unnamed MLP in question and therefore is not an open-ended
precedent for others, it is the first time to our knowledge that income from
an ethylene cracker has been approved as “qualifying income.”
Considering the potential tax benefits of an MLP structure and the fact that
publicly traded MLPs trade at 7X-12X EBITDA (vs. ethylene-heavy
chemicals companies’ 5X-6X multiples), we think it behooves chemical
management teams and boards to explore moving at least part of their
business to a potentially value-enhancing MLP structure
WLK and others would have to spin off the ethylene cracking part into a separately traded MLP, because the rest of their business can't be in an MLP. PDH is exclusively a propylene cracker. EPD is a pipeline company company plus a propylene cracker. The other interesting one to watch is the MLP spinoff from Phillips66, which may be the first MLP to have railroads, because those railroads only transport petroleum related cargo.