Brief Information About Master Limited Partnership


An MLP or a Master Limited Partnership is also known as Publicly Traded Partnership (PTP). A Master Limited Partnership (MLP) combines the tax benefits of a limited partnership with the liquidity value of the share of a company. The Master Limited Partnership has the structure of a proper limited partnership, but produces units, which are traded on a common exchange (just like shares of a company). In order to qualify for an enterprise to issue Master Limited Partnerships it needs to earn 90% of its profits through activities related to natural resources, real estate or commodities.

Master Limited Partnerships became popular during the late 70s and early 80s, where initially they were used for asset securitization financing for real estate based businesses. Usually, many smaller limited partnerships were combined to form a Master Limited Partnership, with the limited partners receiving MLP units (formally known as quarterly rendered distributions) in exchange for their partnership interests. The appearance soon became well-received among massive weight oil and gas exploration and development companies and MLPs were basically adopted by a wide limit of industries - both in the U.S. and in Canada, where the format is known as the Royalty Trust.

Numerous Master Limited Partnerships, however, started failing during the 1980s. The format of a Master Limited Partnership was being used by businesses in cyclical industries or with depleting assets (e.g., exploration, development, retail, and consumer goods). These industries had a few things in common. All of them did not have two characteristics vital to the prosperity of an MLP: 1) mature assets and 2) durable cash stream. It should be noted here (as above mentioned); the logic behind setting a law for qualifying for an MLP is steady cash flow. Any firm which has a main link with the oil and common gas industry will usually have a substantial stream of cash, and thus be skilled to pay the quarterly rendered distributions (QRD). Failure to pay the QRD results in the business to be considered as in default.

The Tax Reform Act of 1986 and Revenue Act of 1987 put in place restrictions that effectively eliminate preferential tax treatment for all MLPs except those with incomes derived from many "natural resource" activities, such as oil and gas exploration, production, transportation, and so on. Presently, about 55 MLPs have been trading on public exchanges or over the counter, resembling stocks. Most consist especially of midstream energy allocation, transportation, and closing assets. As of mid-2005, total market capitalization for all MLPs had reached $37 billion.

MLPs are mainly bought by separate investors. As really few particular persons grasp the full working method and complex configuration of an MLP, normally they are purchased by client wealth managers. As long as the guy gets to perceive the statements and the accurate manipulation of monetary distributions, this class of investments is perfect for over the counter income (liquidity advantages) and the tax benefits that come with it. And there in lies the private to good fortune of an MLP.

By: Jim Knight