Hello everyone and welcome to this month’s Ask the CFP segment. This month’s question is, “what are Master Limited Partnerships?” MLPs are a special type of business entity created by Congress in 1980s. They’re typically used with real estate or energy investments. We’ll focus on energy-related MLP funds today since many of our clients own them. More specifically, we’ll focus on what we call mid-stream energy.
Mid-stream MLPs focus on the transportation of natural resources, not exploration or production. This may resemble the toll-road business model where revenue is generated as resources are transported around the country. Since a mid-stream MLP fund may focus the transportation of energy, it may be less dependent on the price of the commodity it’s transporting.
One distinct feature of MLP funds is quarterly cash distributions. Many investors like the income stream offered by these investments, especially during low interest rate environments. Although not guaranteed, these income streams have been fairly stable as our country continues to demand oil and natural gas for industrial use, residential use and generating electricity. In fact, according to the US Energy Information Administration, over 100 coal-fired power plants have been replaced by natural gas since 20111.
Another unique feature of MLPs is their tax structure. Some are organized as limited partnerships while others are limited liability companies. Because of this, some MLPs issue a K-1 tax form for use when completing a tax return. K-1 forms can make tax returns more complicated, so some people elect to own MLPs inside a mutual fund that’s organized as a corporation. This is why some MLP mutual funds issue 1099 tax forms instead of K-1s.
Lastly, another unique feature of mid-stream MLPs is the depreciation that may occur on the assets they own. For example, if an MLP upgrades a pipeline system, it may be able to depreciate that asset using various accounting methods. This depreciation is generally passed on to investors and helps offset taxable distributions from the MLP. Keep in mind that the cost basis or the original price paid for the MLP fund may be reduced as this occurs, which means more capital gains may occur when it’s sold one day. This tax treatment is another unique part of MLP investing.
Overall, MLP funds may be volatile at times due to the energy markets, but they offer a unique way to add diversification and income to a portfolio. If you have a question about this topic or have a question for next month’s video, please send it to dtroyer@monetagroup.com. Thanks for watching and we’ll see you next month.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please speak with a qualified tax or legal professional before making any changes to your personal situation.
1Source: https://www.eia.gov/todayinenergy/detail.php?id=44636
