MLP Overview

What is an MLP?

A master limited partnership, or MLP, is a limited partnership that is publically traded and listed on a national securities exchange. MLPs are typically a stable yield investment with an opportunity to participate in business upside. All “available cash” generated by the MLP is distributed quarterly to the unitholders of record. Because the majority of cash flow is paid out, growth is usually financed through external funding.

Is owning units of an MLP the same as owning stock in a corporation?

No, MLP owners are typically a general partner and limited partners with distinctly different tax and governance implications than corporate stockholders. MLP income is not taxed at the entity level, but is passed through to the partners, thereby avoiding double taxation of dividends common to corporations. The lack of entity-level taxes results in a higher cash flow payout to unitholders.

What are the key tax issues for individuals?

MLP taxable income is passed through to the partners, including the limited partners, on a ratable basis. Unitholders will receive a K-1, not a 1099, in March of the following year, with their share of allocable income and deductions. Cash distributions typically exceed allocable income, resulting in a reduced tax basis. Upon selling the units, the individual will pay ordinary income tax on the difference between the purchase price and the current tax basis and potential capital gains tax on the amount the units appreciated over the purchase price. The deductibility of MLP losses are limited in a number of ways. For example, for individual investors any losses the MLP generates cannot offset income and gains from investments in other publicly traded partnerships or stocks.

Why don't MLPs pay tax at the entity level?

MLPs are exempt from the payment of entity level federal income taxes. MLPs receive a corporate tax exemption if 90% or greater of income comes from “qualifying sources”. These sources specifically include natural resource related activities such as natural gas processing, transportation, refining, marketing, and storage.

Who governs the MLP?

The general partner and its Board of Directors make business decisions for the MLP. In most cases, the general partner is 100% owned by the sponsor of the MLP. Limited partners do not typically elect the directors of the general partner. As a result, most MLPs do not have annual meetings of unitholders. The general partner has incentive to manage the MLP effectively and increase the cash distribution over time through receipt of proportionally greater share of the cash flow in excess of the minimum quarterly distribution (MQD).

Will I receive an annual proxy in the mail?

No, MLPs have limited voting rights, with essentially all management decisions made by the general partner.

How do you determine cash distributions?

Cash available for distribution is equal to net income plus depreciation and amortization expense and distributions in excess of earnings from equity method investment — minus interest expense, maintenance capital expenditures and cash reserves established by our general partner.

What are Incentive Distribution Rights? How are distributions allocated among the general and limited partners?

Incentive Distribution Rights (IDRs) provide incentive for the general partner to increase the cash distribution per unit over time by allowing the general partner to receive increasing percentages of available cash flow. Most master limited partnerships have a tiered structure for sharing available cash between the general and limited partners, with the general partner working from an initial 2 percent up to a potential 50 percent payout of available cash.

Where can I go for more information?

You can access more information on master limited partnerships at the website for the Master Limited Partnership Association.