3 Energy MLPs for the Price of One

Much has been written about the benefits of owning oil and gas Master Limited Partnerships, or MLPs as they’re commonly referred to.

They trade just like stocks, but are structured as limited partnerships instead of as corporations. Buyers purchase “units” instead of “shares”. This is done primarily to avoid corporate taxation, and allows more of the MLPs profits to be passed onto the unit holder.

Of course, there’s no free lunch when it comes to taxes, so the unit holder is ultimately responsible for the taxes on the profits – potentially a complicated task when April 15th rolls around.

Despite the extra work for you or your accountant, MLPs are just too good to overlook, especially if you have an appetite for income. Dividend yields of 7-10% or more are the norm, rather than the exception.

Just like stocks, there are good MLPs and bad ones. Kinder Morgan Energy Partners, LP (NYSE:KMP) is the undisputed king of the oil and gas MLPs, and sports a dividend yield of 7.85%.

The real question then becomes which ones to invest in? And what if you want to own more than one?

The easiest way to solve that problem is to let someone who has a lot of experience in evaluating and — more importantly – owning MLPs. There’s always something to be said for having “skin in the game”, so to speak.

That expert someone turns out to be Enterprise GP Holdings, LP (NYSE:EPE), itself a limited partnership. It’s in the business of evaluating and owning investments in other partnerships, primarily in the midstream energy industry and related businesses.

Currently, it holds investments in TEPPCO Partners, LP, Energy Transfer Equity, LP and Enterprise Products Partners, LP. It also holds investments in their respective general partners.

TEPPCO Partners, LP (NYSE:TPP) owns and operates natural gas pipelines, liquefied petroleum gas pipelines, as well as natural gas gathering systems and a marine transportation system.

Enterprise Products Partners (NYSE:EPD) provides services to both producers and consumers of natural gas, natural gas liquids and other petrochemicals. It is also one of the largest developers of pipeline and other energy infrastructure in the United States and the Gulf of Mexico.

Energy Transfer Equity, LP (NYSE:ETE) through its subsidiaries, operates natural gas pipelines and also is engaged in retail propane operations.

Enterprise GP holdings currently sports a dividend yield of 6.59%, and trades about 12.6% higher than it did a year ago. The company is largely insulated from price swings in oil and gas since it doesn’t own the materials, but merely transports them.

So if you’re income oriented, or you’ve been thinking of investing in MLPs but just can’t decide, an investment in Enterprise GP Holdings will give you three for the price of one.

Disclosure: None.

Comments

[stink726:]

Thanks for the article.

Aug 06 04:23 PM

[skyraider:]

David,
Many of us who are retired have most of our investable funds in an IRA. We rely on the IRA for income prior to the time we must take our RMD. Even after we are looking for income producing investments.
As you know MLP don't work in IRA's. However, there are a few closed end funds that hold oil and gas MLP and because of the way the closed end fund is structured the tax issue is solved for IRA investments.
One that I hold is KYE (Kayne Anderson Energy Total Return) It got killed along with the MLP's in oil and gas at the end of last year but it is coming back. One draw back is the management fee which is about 1.9% I believe.
I would appreciate your thoughts on this fund and this approach to investing in MLP's.

Thanks,
skyraider

Aug 06 04:56 PM

[OneRichOne:]

Funny, I own several MLP's inside my IRA and the nice thing is you don't need to fill out the Schedule K or anything else. When you withdraw from the IRA you are taxed only on the funds withdrawn. I take withdrawals as I need, monthly from the income. I try to invest only in companies that pay over 6% and the average of all investment income must be over 8%. This will generate enough income that even after the RMD there is some money left to invest in other companies. I diversify enough that my monthly income is about the same month to month. Thanks for the article.

Aug 06 06:29 PM

[skyraider:]

OneRichOne,
I will check my facts on the tax issue but most of the things I see mention there could be a tax problem if you hold an MLP inside an IRA. It could be that if your income from the MLPs is less than $1,000 then this unrelated business income, I think that is what they call it, is not a problem.
Anyway, if you have some better info please post it. I would love to hold these in my IRA.

Thanks,
skyraider


On Aug 06 06:29 PM OneRichOne wrote:

> Funny, I own several MLP's inside my IRA and the nice thing is you
> don't need to fill out the Schedule K or anything else. When you
> withdraw from the IRA you are taxed only on the funds withdrawn.
> I take withdrawals as I need, monthly from the income. I try to invest
> only in companies that pay over 6% and the average of all investment
> income must be over 8%. This will generate enough income that even
> after the RMD there is some money left to invest in other companies.
> I diversify enough that my monthly income is about the same month
> to month. Thanks for the article.

Aug 06 10:28 PM

[RichardGC:]

OneRichOne:
I don't know what MLP's you own, but everyone should be aware of something called UBTI (unrelated business taxable income) which can trigger taxes even in an IRA when it exceeds $1,000 per year. If you want to hold a MLP inside of an IRA, or even better, a Roth IRA, consider Kinder Morgan (KMR). This pays in additional units, not cash, and avoids the tax issue. Even better, you have an ongoing dividend reinvest plan working for you.

Disclosure: long KMR in my Roth

Aug 06 10:42 PM

[prairiedog555:]

This is a very good, incitefull article, also timely for me as I am trying to decide where to increase my MLP exposure.
I wish there were more articles like this in SA that give direct investment advise instead of political, social or other non-investment commentaries.
SA editors please take note of this.

Aug 07 07:13 AM

[tedstr:]

LINE reccomended by Cramer last night...for what it's worth. Any opinions on that.

Aug 07 09:14 AM

[Uncle Pie:]

This writer owns MLPs including EPD, KMP, OKS and EEP in a taxable, ie. non-IRA account. If you'd like to own a solid, high yielding pipeline company that is NOT an MLP and therefore has no issues with K-1s or "incentive distributions" to the general partners which significantly dilute the returns to the limited partners (us), take a look at Canada's Pembina Pipeline Income Trust PMBIF. The current yield is around 10% and in the most recent annual report management opines that they expect to maintain the current distribution rate for the next five years or so even though Canadian govt requires them to convert from an income trust to a corporation in 2011. Pembina transports about 1/2 of the oil produced in Alberta, according to their annual report. This security may be considered for either an IRA or for a taxable account. The author owns some units of PMBIF. Check out the investor presentation on the company website and the tax info. for US investors.

Aug 07 09:26 AM

[Emerald:]

Agree. You can safely own KMR inside an IRA. Its the cousin of KMP but pays in stock to avoid the UBIT.


On Aug 06 10:42 PM RichardGC wrote:

> OneRichOne:
> I don't know what MLP's you own, but everyone should be aware of
> something called UBTI (unrelated business taxable income) which can
> trigger taxes even in an IRA when it exceeds $1,000 per year. If
> you want to hold a MLP inside of an IRA, or even better, a Roth IRA,
> consider Kinder Morgan (seekingalpha.com/symbo...). This
> pays in additional units, not cash, and avoids the tax issue. Even
> better, you have an ongoing dividend reinvest plan working for you.
>
>
> Disclosure: long KMR in my Roth

Aug 07 10:25 AM

[elliot_mllr:]

Energy Transfer Equity (ETE) is in fact the general partner for Energy Transfer Partners (ETP). ETE also owns a large percentage of the limited partnership units (I believe around 70%) of ETP and it also receives incentive distribution rights from ETP. TEPPCO (TPP) is about to merge into Enterprise Product Partners (EPD).
Distributions from ETE and ETP (and also LINE, referred to by one reader, above) are 100% returns of capital and are therefore entirely tax-deferred. Distributions from EPD and TPP are 90% returns of capital and 90% tax deferred.

Aug 07 11:38 AM

[MichaelAK:]

Uncle Pie,

My issue with Can royalty trust is what is going to happen in 2011? Big issue on tax and distribution and how they can or will be effected. One reason why MLP might be safer until the fallout in Canada and Tax is resolved. One fund not mentioned that I have been accumulating is the Tortoise Energy Infrastructure Partners, TYG. Have a very diversified holdings of MLPs.


On Aug 07 09:26 AM Uncle Pie wrote:

> This writer owns MLPs including EPD, KMP, OKS and EEP in a taxable,
> ie. non-IRA account. If you'd like to own a solid, high yielding
> pipeline company that is NOT an MLP and therefore has no issues with
> K-1s or "incentive distributions" to the general partners which significantly
> dilute the returns to the limited partners (us), take a look at Canada's
> Pembina Pipeline Income Trust PMBIF. The current yield is around
> 10% and in the most recent annual report management opines that they
> expect to maintain the current distribution rate for the next five
> years or so even though Canadian govt requires them to convert from
> an income trust to a corporation in 2011. Pembina transports about
> 1/2 of the oil produced in Alberta, according to their annual report.
> This security may be considered for either an IRA or for a taxable
> account. The author owns some units of PMBIF. Check out the investor
> presentation on the company website and the tax info. for US investors.

Aug 07 12:09 PM

[Dotcom:]

I have ETP, EPD, OKS in an IRA. My CPA says hmmm - eh, that shouldn't be a problem... and I don't worry about it. I continue to read that some folks have concerns, but haven't heard anyone say that you need to stay out of these high yielders if you're investing inside and IRA. My gut is telling me that there's probably more positive than negative impacts with these investments inside an IRA. I'm open to a solid, simple explanation of the pros & cons and the bottom line.

Aug 07 01:08 PM

[biomedlives:]

I regard LINE as a good investment here because it has an excellent yield and a hedging program that covers 100% of its production through 2011.


On Aug 07 09:14 AM tedstr wrote:

> LINE reccomended by Cramer last night...for what it's worth. Any
> opinions on that.

Aug 07 03:20 PM

[biomedlives:]

Disclosure: long LINE


On Aug 07 03:20 PM biomedlives wrote:

> I regard LINE as a good investment here because it has an excellent
> yield and a hedging program that covers 100% of its production through
> 2011.

Aug 07 03:23 PM

[Liqal:]

What about CEF
DHG ?

Aug 07 07:41 PM

[maryanne:]

Takes a little more effort but the Schedule K is not a big deal. Scooped up lot of MLP including KMP, MMP, EPD, ETP during their Nov and Mar lows. Also have KYE, a cef with both MLP and Canroys. Think PWE is the strongest of all the Canroys and will make it thru 2011.

Aug 09 04:38 PM

[kertch:]

It's true that UBTI (unrelated business taxable income) can trigger a tax event even in an IRA, but most MLP's operate at a UBTI loss. This is due to thier unique structure and business. Your payment is paid out of cash flow before expenses and is therefore not a dividend (which are paid out of profits). MLP's write down thier profits through depreciation of thier assets, which is usually covers all thier profits. So in a normal operating environment you, as a partner in the MLP, will not have a positive UBTI. However, there may be times when a large windfall occurs which cannot be entirely covered by asset depreciation in which case you might owe taxes.

Aug 11 05:34 PM

[Griff777:]

There is a lot of bad information being put out there regarding owning an MLP inside an IRA.

A few myths along with some facts:

(1) Holding a MLP inside a traditional IRA disqualifies the IRA.

Fact: Not true, see IRS publcation 590, page 45

(2) MLP's should not be held in an IRA because if UBTI exceeds $1000 there will be an IRS penalty.

Fact: Please see IRS publication
www.irs.gov/pub/irs-pd...
which discusses this issue. If a normally tax exempt trust or organization (read IRA) exceeds $1000 total in reported K1 UBTI, then the trustee of the trust must file IRS form 990T and pay a tax using IRA funds at the corporate tax rate.

Note that the trustee pays the tax from the trust, not the individual.

(3) Because the IRS never intended MLP's to be used in a non taxable trust (read IRA) the high penalty taxes imposed make the MLP something you don't want to hold in an IRA.

Fact: The IRS probably didn't intend for a tax advantaged high yielding MLP to be held in a tax deferred IRA - but who cares if it produces high returns?

Most UBTI shown online 20 of a K1 from a MLP is negligible or negative, so the $1000 limit probably won't come into play, but look at an extreme example where the MLP pays a 10% distribution and 90% of the payout is deferred and 10% is UBTI. Using a total distribution of $100,000 here is the math:

$90,000 is tax deferred and the IRS will never see a penny until you start taking a distribution which will be taxed at whatever your individual tax rate is - same as anything else in an IRA.

The $10,000 UBTI will be taxed at the corporate rate of 35% and the IRA trustee will file form 990T (after you send trustee the K1's you receive) and pay the IRS $3500 from your IRA. So the MLP distribution of $100,000 is reduced by $3500 and the effective MLP yield is 9.65%. Would you rather have the 9.65% or Walmart's dividend of 2.1%?

For more info, see this link:
www.mhinvest.com/suppo...

Sep 26 01:36 PM

[Griff777:]

And to follow up on holding the ETF "GLD" in an IRA (its ok), please see page 49 (of 94) of the prospectus for "GLD" - please note that the sponsor has a letter on file from the IRS that as long as physical delivery of gold is not taken holding shares of the ETF "GLD" WILL NOT RESULT IN A TAXABLE DISTRIBUTION.

www.spdrgoldshares.com...

"Investment by Certain Retirement Plans
Code section 408(m) provides that the acquisition of a ‘‘collectible’’ by an individual retirement
account, or IRA, or a participant-directed account maintained under any plan that is tax-qualified
under Code section 401(a) is treated as a taxable distribution from the account to the owner of the
IRA, or to the participant for whom the plan account is maintained, of an amount equal to the cost to
the account of acquiring the collectible. The Sponsor has received a private letter ruling from the IRS
to the effect that a purchase of Shares by an IRA, or by a participant-directed account under a Code
section 401(a) plan, will not be treated as resulting in a taxable distribution to the IRA owner or plan
participant under Code section 408(m). However, if any of the Shares so purchased are distributed
from the IRA or plan account to the IRA owner or plan participant, or if any gold received by such
IRA or plan account upon the redemption of any of the Shares purchased by it is distributed to the
IRA owner or plan participant, the Shares or gold so distributed will be subject to federal income tax
in the year of distribution, to the extent provided under the applicable provisions of Code section
408(d) or Code section 402. See also ‘‘ERISA and Related Considerations.’’

Nov 17 11:27 AM