MLPs have a Mexican cousin?
I have five first cousins that are awesome! We don’t get to see each other very much, but when any of us are together, it’s as if no time has passed since our last visit. We shared grandparents, our parents were raised together, and there are familial traits that bind us together despite how we all grow and change. Because the cousin relationship is special, we’re happy that MLPs now have a baby cousin of their own, the FIBRA E.
The FIBRA E structure was first announced in September of 2015 and has recently begun making headlines. On April 1st, Mexico’s tax administration published updated guidelines for companies wishing to organize as a FIBRA E. On June 1st, the Federal Electricity Commission (CFE) became the first company to file under the structure. The company is seeking to raise $10 billion pesos ($539 million US) with the deal expected to close in the last half of this year.
According to President Enrique Peña Nieto, the purpose of FIBRA Es is to attract capital into the space to finance large infrastructure projects which have historically been owned and funded by the government. Much like MLPs, at least 90% of gross income each year must come from certain qualifying sources to avoid corporate level tax. The exclusive list of activities include:
- Oil and gas midstream and downstream activities (does not include retail)
- Electricity generation, transmission, and distribution
- Certain infrastructure contracts with 7-year terms or longer
- Administration and management of FIBRA E trusts
Clearly, the qualifying income rules for FIBRA Es differ a bit from MLPs. For example, companies that distribute electricity are considered utilities in the US and cannot be MLPs. Also the infrastructure contracts mentioned could include roads or bridges, not just pipelines or storage tanks like we’ve become accustomed to think of in relation to MLPs. Remember, these two are more analogous to cousins than sisters.
Another key difference: FIBRA Es are trusts, not limited partnerships. In addition, FIBRA Es are required to distribute at least 95% of annual net income to certificate holders. Although it is a common misconception, MLPs have no legal requirement to meet a predetermined threshold and have discretion in regards to how much cash to distribute to unitholders.
Both structures have sponsors, will pay incentive distribution rights, and are expected to pay out quarterly distributions. Risks such as interest rates, access to capital, and legislative changes are also a commonality. For a detailed look at how these structures compare, check out this slide deck from Baker Botts. The presentation has several charts that highlight the nuances that differentiate the two.
As is clear, with only one company having filed as a FIBRA E at this point, the cousin of MLPs is just an infant. Some industry analysts have speculated that if the FIBRA E structure is well received, Petroleos Mexicanos (PEMEX), the large Mexican state-owned petroleum company, may be one of the companies that will utilize this vehicle to help raise capital. As with anything that grows and changes with time, it will be interesting to see how the FIBRA E space evolves.
