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July 20, 2011

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What are MLPs?

This is a question I have to address almost every day by virtue of where I live in Boston, as opposed to an MLP-aware place like Dallas.  This question comes up not just with prospects, but in general when someone asks me what I do for a living.  As to that question (what do you do?), I typically will say something like: “I’m an equity portfolio manager for a small money management I started a few years ago.  My investment focus is on master limited partnerships, or MLPs.”  At this point, the conversation can go one of two ways: either (1) there is a look of recognition on their face when I say MLPs or (2) blank stare or question (a master what?).  And probably 9 times out of 10, it’s the latter.

So, what’s the best way to get across the myriad unique aspects of MLPs and their investment worthiness in just a few sentences?  Let’s go to our google machine and see what we can find.
National Association of Publicly-Traded Partnerships

 Publicly traded partnerships are limited partnerships or limited liability companies (LLCs) choosing partnership taxation which are traded on public exchanges. A share in a PTP is called a “unit,” and PTP shareholders are known as “unitholders.” PTPs can be found on the New York, American, and NASDAQ exchanges, as well as many regional exchanges.”

MLPs (master limited partnerships) are publicly traded partnerships:  limited partnerships which are traded on stock exchanges.  A share in an MLP is called a “unit,” and owning MLP units makes you a limited partner.  Sometimes an MLP is technically not a partnership but a publicly traded limited liability company (LLC) which has chosen partnership taxation.  There are some differences between the two, but for tax purposes they are the same.

That’s a bit too wordy and a too legalese-y for me to use.  Also, there is no mention whatsoever as to what businesses these PTPs or MLPs are in.  How about the place where earth’s inhabitants have decided to store our collective knowledge, Wikipedia.
Wikipedia on MLPs 

Master limited partnership (MLP) is a limited partnership that is publicly traded on a securities exchange. It combines the tax benefits of a limited partnership with the liquidity of publicly traded securities.

Master Limited Partnerships are limited by US Code to only apply to enterprises that engage in certain businesses, mostly pertaining to the use of natural resources, such as petroleum and natural gas extraction and transportation. Some real estate enterprises may also qualify as MLPs. To qualify for MLP status, a partnership must generate at least 90 percent of its income from what the Internal Revenue Service (IRS) deems “qualifying” sources. For many MLPs, these include all manner of activities related to the production, processing or transportation of oil, natural gas and coal.

Ok, getting closer, discusses what assets can be in MLPs, but still wordy.
The best two MLP descriptions I found were from other MLP investors Swank and Steelpath
Swank Capital:

Master Limited Partnerships (MLPs) are integral to basic energy activities: the extraction, storage and transportation of oil and natural gas. They are publicly traded companies that own pipelines, storage facilities and other energy infrastructure assets. Operationally, they represent the midstream segment of the energy supply chain, linking production with consumption.


Master Limited Partnerships, or MLPs, are engaged in the transportation, storage, processing, refining, marketing, exploration, production, or mining, of any mineral or natural resource. By confining their operations to these specific activities, their interests, or units, are able to trade on public securities exchanges exactly like the shares of a corporation, without entity level taxation.  Thematically, an investment in an energy infrastructure MLP is an investment in the build-out of US energy infrastructure over the next decade.

Anyone else have a good way they like to describe MLPs to people?
MLP 101 Presentation
MLP Basics Posts
Disclosure: The information in this article is not meant to be financial advice, we are not your financial advisor and I am posting my comments for informational purposes only.

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