MLPs are publicly traded partnerships that combine the tax benefits of a limited partnership with the liquidity of common stock. They must derive at least 90% of their income from qualifying sources, including energy and natural resource activities, real estate income, and/or income from commodity investments.
In general, MLPs consist of 1) General Partners, who manage the daily operations, often have ownership stakes in Limited Partners, and may have incentive distribution rights and 2) Limited Partners, who provide capital and are entitled to quarterly cash distributions.
Many focus on energy-related industries and natural resources, with a major emphasis on oil and gas midstream companies; these businesses tend to consist of gathering systems, pipelines, and storage facilities that concentrate on transporting or refining raw fuel for a fee, rather than discovering or extracting it. MLPs typically pay out the majority of their operating cash flow in the form of quarterly distributions.
- Benefits
Focuses on attractive growth prospects, strong business models, stable distribution yields, and management teams able to successfully deploy capital
- Actively managed through a separate account, offering full transparency and direct
pass-through of the tax advantages of MLP holdings
- Over time, MLPs have provided double-digit, tax-advantaged returns.
These are derived from:
- Distribution yield. Many MLPs generate stable cash flows. These cash flows are often
protected by high barriers to entry, inflation adjustments and highly regulated environments, as well as the tendency of certain large infrastructure assets, such as pipelines, to operate with little direct competition.
- Distribution growth. Over the past decade, the industry as a whole grew distributions
by 8%1, even through the recent recession. Organic growth and expansion through acquisition have also been durable and stable over the past 12 months, and this trend may continue.
- Low correlation relative to other asset classes
- Tax advantages
MLP investors enjoy two main tax advantages:
- Pass—through tax treatment. MLPs are exempt from taxes at the entity level.
The tax liability passes to its individual investors, who will be responsible for paying tax on their portion of earnings. MLP investors, therefore, avoid the double taxation imposed on corporate shareholders.
- Tax deferrals. A portion of quarterly distributions is generally considered
return of capital, so taxes due on that portion of income may be deferred until the MLP is sold.
- Inflation protection
MLPs offer exposure to physical assets, whose value tends to outpace inflation. Additionally, many have regulated periodic income adjustments tied to the Producer Price Index or the Consumer Price Index (CPI). Over time, distribution growth has exceeded CPI.
For additional information, please contact Kent Wolgemuth at 347-354-1240 or via email at kw@lampertcm.com