Master limited partnership
Encyclopedia
Master limited partnership (MLP) is a limited partnership
that is publicly traded on a securities exchange. It combines the tax
benefits of a limited partnership with the liquidity of publicly traded securities.
Master Limited Partnerships are limited by US Code to only apply to enterprises that engage in certain businesses, mostly pertaining to the use of natural resources, such as petroleum and natural gas extraction and transportation. Some real estate enterprises may also qualify as MLPs. To qualify for MLP status, a partnership must generate at least 90 percent of its income from what the Internal Revenue Service (IRS) deems "qualifying" sources. For many MLPs, these include all manner of activities related to the production, processing or transportation of oil, natural gas and coal.
Some private equity management companies such as Blackstone Group
(NYSE: BX) and Fortress Investment Group
(NYSE: FIG) are structured as MLPs.
In practice, MLPs pay their investors through quarterly required distributions (QRD), the amount of which is stated in the contract between the limited partners (the investors) and the general partner (the managers or GP). Typically, the higher the quarterly distributions paid to LP unitholders, the higher the management fee paid to the GP. The idea is that the GP has an incentive to try to boost distributions through pursuing income-accretive acquisitions and organic growth projects. Failure to pay the QRD may constitute an event of default
.
Because MLPs are a partnership, they avoid the corporate income tax, on both a state and federal basis. Additionally, the limited partner (investor) may also record a pro-rated share of the MLP's depreciation on his or her own tax forms to reduce liability. This is the primary benefit of MLPs and gives MLPs relatively cheap funding costs.
The tax implications of MLPs for individual investors are complex. The distributions are taxed at the marginal rate of the partner unlike dividends from qualified stock corporations. On the other hand, there is no advantage to claiming the pro-rated share of the MLP's depreciation (see above) when held in a tax deferred account. To encourage tax-deferred investors, many MLPs set up corporation holding companies of LP claims which can issue common equity.
Usually, in the MLP structure, the general partner starts with a small (usually 2%) stake in the company but is given incentive distributions from net income after the QRD. Since these distributions are usually paid in the form of increased equity claims, over time, this allows the general partner to attain higher and higher percentage of ownership in the company.
In May 2010, the first ever MLP mutual fund was launched, with a stated goal of providing "a high level of inflation-protected income currently through a 7.8 percent distribution yield, which is higher than equity alternatives such as REITs and Utilities." The fund is a part of the SteelPath Mutual Fund Family.
On August 25, 2010, the first MLP exchange traded fund (ETF) was launched by Alerian, the company that manages the benchmark MLP index (NYSE: ^AMZ). This fund was similarly designed to the above mentioned mutual fund in that it avails a new level of diversification to investors and, according to Alerian President Kenny Feng, "provides a single Form 1099, no K-1s, and allows investors to potentially benefit from return of capital and qualified dividend
tax treatment of distributions." The fund is known as the Alerian MLP ETF (NYSE: AMLP).
Advantages of investing in energy infrastructure MLPs not only provide tax benefits flowing to investors but also low commodity exposure.
An example is the pipeline company Kinder Morgan Energy Partners. The main corporation, Knight, Inc. (formerly traded on the NYSE as KMI), is the operator of the pipelines and other assets. However, the pipelines themselves are owned by the MLP Kinder Morgan Energy Partners, L.P. (NYSE:KMP). Finally, part of KMP's limited partner interests are held by the corporation Kinder Morgan Management LLC (NYSE:KMR) which allows tax-deferred investors to participate in KMP's operations.
Since 2003, MLPs as an asset class have grown from $30bn in investment to $300bn today, and have also been the best performing asset class in the world over the last 10, 5, and 3 year periods. The recent finding of gas and oil in the United States and future growth of shale drilling will lead to the continued success for MLPs.
Limited partnership
A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners , there are one or more limited partners . It is a partnership in which only one partner is required to be a general partner.The GPs are, in all major respects,...
that is publicly traded on a securities exchange. It combines the tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
benefits of a limited partnership with the liquidity of publicly traded securities.
Master Limited Partnerships are limited by US Code to only apply to enterprises that engage in certain businesses, mostly pertaining to the use of natural resources, such as petroleum and natural gas extraction and transportation. Some real estate enterprises may also qualify as MLPs. To qualify for MLP status, a partnership must generate at least 90 percent of its income from what the Internal Revenue Service (IRS) deems "qualifying" sources. For many MLPs, these include all manner of activities related to the production, processing or transportation of oil, natural gas and coal.
Some private equity management companies such as Blackstone Group
Blackstone Group
The Blackstone Group L.P. is an American-based alternative asset management and financial services company that specializes in private equity, real estate, and credit and marketable alternative investment strategies, as well as financial advisory services, such as mergers and acquisitions ,...
(NYSE: BX) and Fortress Investment Group
Fortress Investment Group
Fortress Investment Group LLC is an investment management firm based in New York, New York. The company went public on February 9, 2007.-History:...
(NYSE: FIG) are structured as MLPs.
In practice, MLPs pay their investors through quarterly required distributions (QRD), the amount of which is stated in the contract between the limited partners (the investors) and the general partner (the managers or GP). Typically, the higher the quarterly distributions paid to LP unitholders, the higher the management fee paid to the GP. The idea is that the GP has an incentive to try to boost distributions through pursuing income-accretive acquisitions and organic growth projects. Failure to pay the QRD may constitute an event of default
Event of default
Event of default is a term used in commercial loan documentation. It refers to the occurrence of an event which allows the lender to demand repayment of the loan in advance of its normal due date...
.
Because MLPs are a partnership, they avoid the corporate income tax, on both a state and federal basis. Additionally, the limited partner (investor) may also record a pro-rated share of the MLP's depreciation on his or her own tax forms to reduce liability. This is the primary benefit of MLPs and gives MLPs relatively cheap funding costs.
The tax implications of MLPs for individual investors are complex. The distributions are taxed at the marginal rate of the partner unlike dividends from qualified stock corporations. On the other hand, there is no advantage to claiming the pro-rated share of the MLP's depreciation (see above) when held in a tax deferred account. To encourage tax-deferred investors, many MLPs set up corporation holding companies of LP claims which can issue common equity.
Usually, in the MLP structure, the general partner starts with a small (usually 2%) stake in the company but is given incentive distributions from net income after the QRD. Since these distributions are usually paid in the form of increased equity claims, over time, this allows the general partner to attain higher and higher percentage of ownership in the company.
In May 2010, the first ever MLP mutual fund was launched, with a stated goal of providing "a high level of inflation-protected income currently through a 7.8 percent distribution yield, which is higher than equity alternatives such as REITs and Utilities." The fund is a part of the SteelPath Mutual Fund Family.
On August 25, 2010, the first MLP exchange traded fund (ETF) was launched by Alerian, the company that manages the benchmark MLP index (NYSE: ^AMZ). This fund was similarly designed to the above mentioned mutual fund in that it avails a new level of diversification to investors and, according to Alerian President Kenny Feng, "provides a single Form 1099, no K-1s, and allows investors to potentially benefit from return of capital and qualified dividend
Qualified dividend
Qualified dividends, as defined by the United States Internal Revenue Code, are ordinary dividends that meet specific criteria to be taxed at the lower long-term capital gains tax rate rather than at higher tax rate for an individual's ordinary income...
tax treatment of distributions." The fund is known as the Alerian MLP ETF (NYSE: AMLP).
Energy MLPs
Because of such stringent provisions on MLPs, and the nature of the QRD, the vast majority of MLPs are pipeline businesses, which earn very stable income from the transport of oil, gasoline or natural gas. Hedge fund manager Jerry Swank, who invests exclusively in energy MLPs, defines energy MLPs as owning energy infrastructure in the U.S., including most of the pipelines, natural gas, gasoline, oil, storage, terminals, and processing plants. They are integral to run the energy infrastructure to the U.S., therefore providing a very basic, stable business, which have consistently performed for investors.Advantages of investing in energy infrastructure MLPs not only provide tax benefits flowing to investors but also low commodity exposure.
An example is the pipeline company Kinder Morgan Energy Partners. The main corporation, Knight, Inc. (formerly traded on the NYSE as KMI), is the operator of the pipelines and other assets. However, the pipelines themselves are owned by the MLP Kinder Morgan Energy Partners, L.P. (NYSE:KMP). Finally, part of KMP's limited partner interests are held by the corporation Kinder Morgan Management LLC (NYSE:KMR) which allows tax-deferred investors to participate in KMP's operations.
Since 2003, MLPs as an asset class have grown from $30bn in investment to $300bn today, and have also been the best performing asset class in the world over the last 10, 5, and 3 year periods. The recent finding of gas and oil in the United States and future growth of shale drilling will lead to the continued success for MLPs.