Let’s get back to basics and answer one of the enduring questions on this site: What is an MLP? In a nutshell, a Master Limited Partnership (MLP) is a legally recognized way of structuring a business (similar to a general partnership). Typically an MLP consists of a General Partner (GP) that runs the business and several Limited Partners (LPs) that have invested capital in the business. To qualify as an MLP a business must make 90% of its income from natural resources or real estate.
Best of Both Worlds
MLPs bring together some of the best parts of partnerships & corporations. Like a corporation, shares of an LP (called “units”) can be bought and sold on exchanges like stocks. Further, MLPs pay quarterly cash distributions similar to stock dividends to investors. However, like a regular partnership, they enjoy certain tax benefits that corporations do not. Specifically, earnings are only taxed once (when the MLP distributes earnings to LP unitholders) instead of being taxed also at the “entity” level like corporations. In addition, most taxes are deferred until the units are actually sold.
The majority of master limited partnerships today operate in the midstream energy sector. This includes pipelines which carry natural gas and other petroleum products from the source to markets where it is needed. These pipelines bill customers to transport the natural gas or oil, and as such are not as impacted by fluctuations in commodity prices. In addition, government regulations help MLPs hedge against the cost of inflation by allowing them to account for this in their billing rates.
The Natural Gas Boom
With the advent of new technology that allows for the economical extraction of natural gas from shale deposits – the US is on the brink of a natural gas revolution. The increased reserves of domestic gas will help reduce our dependence on foreign oil supplies and help drive economic growth.