A Master Limited Partnership, or MLP, is a type of partnership that is publicly traded on a securities exchange. MLPs combine the tax structure of limited partnerships with the liquidity of publicly traded securities. Usually, private partnerships are relatively illiquid compared to public equities.
In this low interest rate environment, many consider MLPs a sensible long-term income oriented investment allocation. Most MLPs are publicly traded oil and gas pipeline businesses that earn stable income from the transport of oil, gasoline and/or natural gas. Many such MLPs derive their revenue based on the amount of product transported and are not sensitive to price fluctuations except where they affect demand.
MLPs usually provide their investors, the limited partners, with distributions which are similar to dividends, but taxed differently. It is expected that the distribution growth of MLPs can grow at a rate at or ahead of inflation, based upon energy demand and price growth, as well as continued business expansion.
Some MLPs involve other natural resources, and certain other industries, but oil and gas are the most common. Additionally, not all oil and gas-oriented MLPs own pipelines. Some extract petroleum, while others store it, and there are also MLPs that specialize in specific sub-categories such as propane, which is produced as a byproduct of natural gas processing and petroleum refining.
Below are recent equity performance rates for five high-yield, small cap MLPs that are publicly traded in the United States: Breitburn Energy Partners L.P. (NASDAQ:BBEP), Calumet Specialty Products Partners LP (NASDAQ:CLMT), Ferrellgas Partners LP (NYSE:FGP), Martin Midstream Partners LP (MMLP) and Pioneer Southwest Energy Partners (PSE). I have provided 1-week, 1-month and 2012-to-date equity performance rates, as well as the current annualized yield each MLP distributes.
All of the above-listed MLPs have appreciated so far in 2012, except for Ferrellgas, a propane distributor. Like natural gas, propane prices have been under weakness over the last several months. Nonetheless, Ferrellgas is the best performing listed equity over the last month.
Since MLPs are partnerships, they do not pay corporate income taxes. The tax liability of the MLP is passed on to its holders. Each investor receives a K-1 statement that details their share of the partnership's net income. Partnership income is then taxed at the investor's individual tax rate.
MLPs may also make cash distributions that are not taxed received, but reduce the cost of partnership shares/units and create a tax liability that is deferred until the MLP is sold. Additionally, MLPs may distribute unrelated business taxable income. Such UBTI could be subject to taxation and require a special tax filing even when held in an IRA, if the UBTI exceeds $1,000 in a year.