Energy Master Limited Partnerships
About Master Limited Partnerships (MLPs)
According to Section 7704 of the Tax Code, passed by Congress in 1987, an Energy MLP is:
- Limited Partnerships that trade in the form of partnership units on securities exchanges much like stocks
- The typical MLP is structured with a General Partner (GP) providing management and the Limited Partners (LP) contributing the capital
- When GPs successfully grow business and profits, cash distributions may also grow
- A portion of the cash distributions received by LP unit holders in a given year is considered return of capital and is tax-deferred until the units are sold, since the cost basis is adjusted lower.
- 90% or more of the partnerships’ income must come from specific sources such as oil, gas, petroleum products, coal and other minerals, timber, carbon dioxide, and alternative fuels (ethanol, biodiesel, etc)
- Partnership assets are related to the production, processing, distribution, and storage of energy and are a necessary part of a modern economy
Why Energy MLPs?
- Income: Income is valuable in volatile stock markets
- Tax Advantages: Investors receive more of the income and pay less tax on that income, because MLPs are partnerships
- U.S. demand for energy is expected to grow over time
- Energy adequate to power a modern economy is not optional, it is essential
- Energy MLPs own the networks of storage facilities and pipelines used to transport that energy from the refineries to the end-users, thus playing a critical role in providing energy to the U.S.
- MLPs charge fees for transporting petroleum products and the Federal Energy Regulatory Commission regulates the transmission rates they may charge for interstate pipelines
Note: MLPs may not satisfy the initial 10/10 Test we use to screen common stocks. We use MLPs to fulfill a similar function that bonds often perform for portfolios. We can also structure a bond component for a portfolio when required. Because of their partnership structure, MLPs offer tax-advantaged current yields to most investors. Investors should consult with their tax professionals to determine whether MLPs are appropriate investments for them.
An investment in a Master Limited Partnership (MLP) unit involves risks that differ from a similar investment in equity securities including ownership controls associated with the limited partnership structure, high debt to equity ratios, and certain tax risks.
