A couple of weeks ago RBN’s Sandy Fielden attended the Platts Master Limited Partnership (MLP) Symposium in Las Vegas and listened to a number of presentations about the performance of these specialized corporate structures and the rivers of investment capital that their high income yields are attracting. You can’t turn your head in the energy midstream business without bumping into an MLP. Today we explain what MLPs are and why they dominate today’s energy midstream business.
Before we start – a quick disclaimer. RBN Energy does not advocate investment in in MLPs. We are not an investment advisor. The purpose of this article is not investment advice or endorsement.
What are MLP’s?
MLPs are a type of U.S. corporate structure first used in 1981; federal tax reform legislation in 1986 limited the use of MLPs to entities involved in real estate and natural resources infrastructure. MLPs are partnerships that trade on public exchanges. A partnership differs from a regular company because it is considered to be the aggregate of its partners rather than a separate entity. Instead of individual stockholders owning stock that is issued by a company as just one of a number of ways to raise money, partners in an MLP own distinct pieces of the partnership called units. These units are like individual fractions of the partnership and their attractiveness lies in their favorable tax treatment. Because the partnership is not an entity, it pays no corporate taxes on its profits. Tax liabilities are instead “passed through” to individual unit holders who pay tax on their share of MLP profits at their individual tax rate. Unit holders typically receive cash distributions from their MLP every quarter based on earnings but are also allocated a share of depreciation on MLP assets that offsets the tax liability on cash distributions. Bottom line – MLPs avoid corporate tax and that reduces their cost of capital. Like a lot of tax law this is pretty complex stuff and we are only scratching the surface. If you would like to learn more about MLP structures than we can explain in a blog, here is a link to a glossary of terms. Useful information is also available from the National Association of Publically Traded Partnerships website.