Master Limited Partnerships (MLPs)

Master Limited Partnerships, or MLPs, are publicly traded partnerships in the natural resources, commodity or real estate industries.

• MLPs are a corporate structure with a different tax treatment. Those businesses can include different types of energy assets, each of which has different levels of volatility, risk, and cash-flow stability. 
• MLPs have been perennial favorites of individual investors, thanks to their unique tax structure and high income. Indeed, until last year they had outperformed the Standard & Poor's 500 for a dozen years in a row. Last year, however, the Alerian MLP Index returned less than 5%, to the broad market's 16%.
• ETFs: https://finviz.com/screener.ashx?v=211&ta=0&o=-volume&t=AMLP,MLPA

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MLPs have attracted investor attention for their generous dividends. There are 75 master limited partnerships listed on U.S. exchanges with market capitalization of $500 million or more.

The most common MLPs are companies that transport and store oil and gas, which gives them reliable cash flow. These pipeline and storage companies typically charge a steady fee for their service, regardless of commodity prices. But the MLP landscape has changed dramatically in 2012.

For starters, there has been an explosion in U.S. drilling for crude oil and natural gas, which should funnel an estimated $250 billion into the U.S. energy infrastructure over the next 25 years. In October 2012, the Internal Revenue Service expanded the types of energy assets that can qualify for MLP status.

• Calumet (CLMT), with a dividend yield above 8 percent, is a fast-growing processor of oil into a variety of fuels and other products such as solvents and waxes. It made four acquisitions in 2012 and raised its dividend four times.
• Access Midstream  (ACMP); Gas gathering/processing;  Contracted volumes and prices should mean 15% distribution growth.
• MarkWest Energy (MWE) ; Gas gathering/processing; Significant growth opportunity in Marcellus, Utica shales.
• Genesis Energy (GEL); Crude oil logistics;  One of the few pure-play MLPs in crude oil logistics.
• Tesoro Logistics (TLLP) ; Crude oil logistics; Young MLP. With asset additions, likely to produce 12%-15% growth.
• Delek Logistics (DKL); Crude oil logistics; Pricing power as fee-based contracts renew; underleveraged balance sheet.
• Oiltanking Partners (OILT);  Crude oil logistics; Gulf Coast storage expansion could result in two years of 16% total returns.
• Western Gas (WES);  Gathering/processing;   More assets added by parent mean 16% distribution growth in 2013.
• Targa Resources (NGLS); Gathering/processing; More fee-based business should produce 17% total returns in next year.
• Alerian MLP Index ($AMZ); Benchmark of 50 largest; Market cap weighted.

• Natural Resource Partners (NRP), an MLP that owns and manages coal properties, has been hurt by the downturn that has affected the coal industry. Revenue and profit growth stalled in 2012 and dividends were held steady. NRP's yield is 12.5 percent.
• Oneok Partners (OKS). It operates pipelines that gather, process, and transport natural-gas liquids. It could grow distributions 13% in 2013 and 2014. Its 4.7% yield is lower than the sector average, but this is one of the best organic-growth stories. It has $7 billion in projects that should help generate a 17% total return over 12 months.
• Northern Tier Energy (ticker: NTI);  refinery and gas-station operator
• Linn Energy (LINE)
• Inergy (NRGY), a more established MLP that stores and supplies natural gas and propane. 
• PetroLogistics (PDH); operates a dehydrogenation plant
• ClearBridge Energy MLP Fund (ticker: CEM), the ClearBridge Energy MLP Opportunity Fund (EMO), and the newer ClearBridge Energy MLP Total Return Fund (CTR)
• ALPS Alerian MLP ETF (AMLP) and the JPMorgan Alerian MLP ETN (AMJ)

Exchange traded products for master limited partnerships include:

• Global X MLP & Energy Infrastructure ETF (MLPX)  (https://www.globalxfunds.com/funds/mlpx/)
• ALPS Alerian MLP ETF (NYSEArca: AMLP)
• JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ)
• Exchange Traded Concepts Yorkville High Income MLP ETF (NYSEArca:YMLP)
• First Trust North American Energy Infrastructure Fund (NYSEArca:EMLP)
• Global X MLP ETF (NYSEArca: MLPA)  (https://www.globalxfunds.com/funds/mlpa/)
• Global X YieldCo Index ETF (YLCO) (https://www.globalxfunds.com/funds/ylco/)
• Credit Suisse Cushing 30 MLP Index ETN (NYSEArca: MLPN)
• Morgan Stanley Cushing MLP High Income Index ETN (NYSEArca: MLPY)
• UBS E-TRACS Alerian MLP Infrastructure Index (NYSEArca: MLPI)
• UBS E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index (NYSEArca: MLPL)
• UBS E-TRACS Wells Fargo MLP Index (NYSEArca: MLPW)
• UBS E-TRACS Alerian Natural Gas MLP Index (NYSEArca: MLPG)

ALPS Ale

Company / Ticker	Recent Price	12 Mo. Chg	Yield	Industry	Comment
Access Midstream / ACMP	$37.30	30%	4.80%	Gas gathering/processing	Contracted volumes and prices should mean 15% distribution growth.
MarkWest Energy / MWE	57.41	-3	5.7	Gas gathering/processing	Significant growth opportunity in Marcellus, Utica shales.
Genesis Energy / GEL	44.3	47	4.4	Crude oil logistics	One of the few pure-play MLPs in crude oil logistics.
Tesoro Logistics / TLLP	48.91	34	3.9	Crude oil logistics	Young MLP. With asset additions, likely to produce 12%-15% growth.
Delek Logistics / DKL	28.36	36*	3.2*	Crude oil logistics	Pricing power as fee-based contracts renew; underleveraged balance sheet.
*Since Nov. 1, 2012 IPO.
Index / Ticker
Alerian MLP Index / AMZ	$431.65	6%	5.5%	Benchmark of 50 largest	Market cap weighted.

More info on MLPs:

1. Nearly 100 energy companies are structured as MLPs, which allows them to avoid corporate taxation. They pay out the vast majority of their cash flow to partners (i.e., shareholders). This encourages high payouts -- today on the order of 5.5% -- and creates an advantageous, albeit complicated, tax structure for investors as well.
2. The most common MLPs are companies that transport and store oil and gas, which gives them reliable cash flow. These pipeline and storage companies typically charge a steady fee for their service, regardless of commodity prices. But the MLP landscape has changed dramatically in 2012.
3. For starters, there has been an explosion in U.S. drilling for crude oil and natural gas, which should funnel an estimated $250 billion into the U.S. energy infrastructure over the next 25 years. In October, the Internal Revenue Service expanded the types of energy assets that can qualify for MLP status.
4. MLPs pass on 80% to 90% of cash flows to investors, and retain a little bit for internal purposes. Since they distribute virtually all their cash, growth, such as buying or building an asset, is typically financed by issuing new shares or debt.
5. Over the past 10 years, MLP growth was driven by energy corporations, typically pipeline companies selling assets into MLPs, a strategy known as a drop-down. Today, the explosive growth in the production of crude oil, natural gas, and natural-gas liquids like ethane and propane has resulted in a massive build-out of new energy infrastructure, including new pipelines, processing plants, and storage facilities, which will drive the sector's growth. 
6. The second change in the MLP landscape is the recent creation of MLPs with atypical assets. These new, riskier MLP offerings have garnered a lot of attention, and some have done well, but they make up less than 5% of the sector's market value.
7. Many are nontraditional assets. They're refiners, fertilizers, frac sand [a material used in hydraulic fracturing, or fracking, a process of extracting oil, natural gas, and natural-gas liquids from rock]. Most of these companies have a "variable distribution policy," not the traditional policy of stable, growing distributions.
8. In the Alerian MLP Index of 50 names at the end of last year, the spread between the lowest and the highest yielder was 10.3 percentage points. That reflects the growth, risk, and volatility of the assets in these nontraditional MLPs. Some nontraditional MLPs that are not in the index have yields as high as 20%.
9. How is an MLP's distribution taxed.  Investors receive distributions that reflect their share of an MLP's cash flow. Their K-1 tax form reflects their share of the business' taxable profits. An MLP's assets—such as pipelines—produce cash and have a long life, but can be depreciated over a shorter period, reducing the amount of profit that is taxable. Taxable profits are typically about 20% of the cash distribution an MLP pays out annually. That's why sometimes you hear "MLP distributions are 80% tax-deferred."
10. Most MLP investors are maniacally focused on yield as the only valuation metric. But they should also consider the yield's growth. The total return of an MLP is the yield plus the growth rate of that yield over time. In the past three years, stocks in the Alerian MLP Index that grew distributions up to 3% annually generated an annualized total return of 8.5%. Those that grew distributions by more than 10% every year generated a 27.7% annualized return.

*** ALPS Alerian MLP ETF (NYSEArca: AMLP)  *** 

ALPS Alerian MLP ETF (NYSEArca: AMLP) holds $4.3 billion in total net assets. The ETF has gathered more than $2.5 billion of inflows the past year.

Morningstar issued a caution flag related to a complicated tax issue associated with MLPs, which are companies involved with the storage and transportation of commodities such as oil or natural gas.

The Investment Company Act of 1940 forbids open-end mutual funds from having more than 25% of their portfolio in MLPs.

“To get around this issue, AMLP is actually structured as a corporation that pays income tax: Before return is passed on to the investor, it must be taxed at the corporate level,” says Morningstar analyst Abby Woodham. “Although AMLP’s prospectus expense ratio is 0.85%, its gross expense ratio (which accounts for these tax liabilities) is almost 5% as of September.”

AMLP’s prospectus discloses that the ETF’s structure as a “C” corporation means the fund accrues deferred tax liability associated with the capital appreciation of its MLP investments and distributions. The ETF’s accrued deferred tax liability is reflected each day in the fund’s net asset value.

An oil tanker is docked at the Kinder Morgan terminal in Carteret, N.J., on Sept. 8, 2008. Kinder Morgan Energy Partners operates pipelines and terminals for oil and natural gas.

=======  MLPs Boom As Low-Tax, High-Dividend Energy Plays

Master limited partnerships, formerly an obscure business structure, have boomed in recent years as low-tax, high-yield ways to cash in on America's energy revival.

MLPs are largely, but not exclusively, energy-related.

They do not pay corporate taxes as long as they pass profits to investors, much like real estate investment trusts.

But there are drawbacks.
Some 45 MLPs were formed from 2010 to September 2013, according to PwC. That's near half of the 111 MLPs at the end of last year. The U.S. needs roughly $200 billion invested in natural gas infrastructure to meet growing and shifting energy demands over the next 20 years, according to the Interstate Natural Gas Association of America.

Plains GP Holdings (PAGP) raised $2.82 billion in its October IPO, the biggest new issue of 2013. Plains GP owns a big stake in another MLP: Plains All American Pipeline (PAA) .

The Kinder Morgan Inc. (KMI) corporate structure is more complex. It serves as general partner for several other listed companies, including Kinder Morgan Energy Partners (KMP) and El Paso Pipeline Partners (EPB).

Kinder Morgan Inc. and El Paso Pipeline late Wednesday reported lower earnings, missing estimates. Kinder Morgan Energy EPS rose 3%, topping views.

Apache Oil was the first MLP, in 1981. Enjoying the liquidity of publicly traded securities along with the tax benefits of limited partnerships, MLPs rapidly expanded beyond energy — including Burger King, Motel 6 and even the Boston Celtics.

Energy ... And Private Equity
Concerned that corporations would become MLPs en masse to avoid taxes, Congress in 1987 restricted them to companies earning at least 90% of their income from specific sources, primarily energy development.

In 2008, Congress expanded MLPs to include alternative fuels such as ethanol and biodiesel. Some would like to see MLPs expanded to renewable energy projects so they don't have to rely on uncertain tax credits.

Today, most MLPs are energy-related. But several private equity firms, including Blackstone (BX) and KKR (KKR), have used a loophole in recent years to list as MLPs. Icahn Enterprises (IEP) invests in a diverse set of holdings from metals and energy to home fashion and rail cars.

With interest rates at historic lows, making borrowing cheaper and lowering the cost of capital investment, coupled with the shale oil and gas boom, MLPs have become more prominent. Certain integrated energy companies spun off assets such as pipelines to MLPs to focus on their primary businesses as well as accruing some of the tax benefits.

MLP assets grew from $1.5 billion in 2004 to $40.6 billion last year, according to Thomson Reuters' Lipper.

Live, Die By The Yield

Now for the downside.

The tax reporting complexities are "certainly much more of a hassle than what investors typically have to deal with," said James Shelton, chief investment officer of Kanaly Trust, a Houston-based wealth management and financial planning company.

MLP investors must file a K-1 with their income tax returns, and the tax rules governing such vehicles tend to be complex.

MLP dividends are particularly attractive, paying up to 5.5%. But as with all investments that promote higher yields, including REITs and equity income funds, rising rates are a concern.

"Income-oriented investors, particularly when interest rates are so low, have found that to be a particularly appealing feature," said Mary Lyman, executive director of National Association of Publicly Traded Partnerships, an MLP trade group.

The Federal Reserve taper could push rates higher in 2014.

"Anytime you get a rise in interest rates, you get people walking away from equitylike yields to bondlike yields," said Tom Roseen, a senior analyst at Lipper.

MLPs also face heavy pressure to increase revenue and yields. When they do cut back on dividends, "their share prices have really suffered," Lyman said.

El Paso Pipeline Partners dived 10% on Dec. 4 after saying it intended to cut distributions by 2% in 2014. El Paso, which confirmed that payout plan Wednesday, has continued to drift lower.

MLPs rarely lower their distributions — even during downturns such as the Great Recession. Those MLPs that reduced distributions saw their unit prices drop in excess of 80%, according to a Standard & Poor's study last year.