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					                       Master Limited
                      Partnerships 101:                   NAPTPlogo300dpi.jpg




                    Understanding MLPs


© 2010 National Association of Publicly Traded Partnerships                     1
                            p
   Master Limited Partnerships 101

    I.
    I                What is an MLP and why should I
                     care?
    II.
    II               History of MLPs
    III.             MLPs Today
    IV.              How MLPs Work
    V.               Owning MLP Units
                          g
    VI.              For more information…


© 2010 National Association of Publicly Traded Partnerships   2
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   Master Limited Partnerships 101



        What is a Master Limited
         Partnership? (MLP)



© 2010 National Association of Publicly Traded Partnerships   3
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   Master Limited Partnerships 101

                        term,
    • A more accurate term and the one used
      in the tax code, is “publicly traded
      partnership.
      partnership ”

      Simply,        partnership,
    • Simply it is a partnership or an LLC that
      has chosen partnership taxation, that
                                   (NYSE,
      trades on a public exchange (NYSE
      NASDAQ, AMEX) or over the counter
      market.
      market
© 2010 National Association of Publicly Traded Partnerships   4
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   Master Limited Partnerships 101



          Why should I be interested in
          Master Limited Partnerships?




© 2010 National Association of Publicly Traded Partnerships   5
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   Master Limited Partnerships 101

   The two biggest reasons:
   • Income: In an environment of fluctuating
     share prices, income becomes more
     valuable
   • Tax Advantages: Because MLPs are
        t    hi    i    t      t       f the
     partnerships, investors get more of th
     income and pay less tax on it.

© 2010 National Association of Publicly Traded Partnerships   6
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   Master Limited Partnerships 101


                  Are master limited
               partnerships (MLPs) and
              publicly traded partnerships
                (PTPs) the same thing?


© 2010 National Association of Publicly Traded Partnerships   7
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   Master Limited Partnerships 101

         • Simple answer: For most purposes,
           yes. The two terms are used
                    g    y
           interchangeably.
         • Technical answer: Technically, no.
           An MLP is a partnership with a certain
           structure, not necessarily publicly traded
           (though most are). And some PTPs are
           (      g          )
           not MLPs, but publicly traded limited
           liability companies (LLCs) taxed as
                      hi
           partnerships.
© 2010 National Association of Publicly Traded Partnerships   8
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   Master Limited Partnerships 101


                               sto y o     s
                             History of MLPs
       Master limited partnerships have been
        around for almost three decades




© 2010 National Association of Publicly Traded Partnerships   9
                                  y
                            History of MLPs
         • The first MLP was launched in 1981:
           Apache Oil Company.
           Its              to i        it l f
         • It purpose was t raise capital from
           smaller investors by offering them a
               t    hi i     t    t in     ff d bl
           partnership investment i an affordable
           and liquid security.
         • Other oil and gas MLPs soon followed and
           were joined by real estate MLPs.

© 2010 National Association of Publicly Traded Partnerships   10
                                  y
                            History of MLPs
                              Rapid Growth in the 1980s
      • The number of MLPs grew to well over 100.
      • MLPs began to be used in other industries:
        hotels and motels, restaurants, cable TV,
                   advisors,
        investment advisors even amusement parks and
        the Boston Celtics.
      • Congress and tax officials worried about
        “disincorporation”--i.e., that large numbers of
        corporations would become MLPs to avoid
           p
        corporate tax.
© 2010 National Association of Publicly Traded Partnerships   11
                               History of MLPs
      In 1987 Congress passed legislation to define
             d limit   bli l t d d      t    hi
           and li it publicly traded partnerships

       t created Section 0 of the a                t g
    • It c eated Sect o 7704 o t e Tax Code, limiting
      partnership tax treatment to PTPs earning >90
      percent of their income from specific sources.
    • Existing PTPs with “bad” income were grand-
      fathered. Most gradually went private, were
      acquired or converted to other structures; only
      three remain today.

© 2010 National Association of Publicly Traded Partnerships   12
                                  y
                            History of MLPs
        What kinds of income can a PTP earn?
      • Interest, dividends, and capital gains
              l           d       l       f       l
      • Rental income and capital gains from real estate
      • Income and capital gains from natural
                       ti iti
        resources activities
      • Income from commodity investments
      • Capital gains from sale of assets used to
        generate the above types of income

© 2010 National Association of Publicly Traded Partnerships   13
                                  y
                            History of MLPs
            Qualifying Natural Resources include:

  • Oil, gas, petroleum products
  • Coal and other minerals
  • Timber
  • Any other resource that is depletable under
    section 613 of the federal tax code
    Industrial so ce ca bon dio ide
  • Ind st ial source carbon dioxide (added in 2008)
  • Ethanol, biodiesel, and other alternative fuels-
    transportation and storage only (added in 2008)

© 2010 National Association of Publicly Traded Partnerships   14
                                  y
                            History of MLPs
      Qualifying Natural Resource Activities include:
      •    Exploration, development & production (E&P)
      •    Mining
      •    Gathering and processing
      •    Refining
      •    Compression
      •                   (pipeline ship,
           Transportation (pipeline, ship truck)
      •    Storage, marketing, distribution
      •    But not retail sales (no gas stations)
© 2010 National Association of Publicly Traded Partnerships   15
                                  y
                            History of MLPs
         g
    During the late 1980s and the 1990s:
    • Many of the original oil and gas MLPs left the
      market, unable to maintain distributions as oil and     “


      gas prices dropped.
    • Many of the original real estate MLPs disappeared
      during the real estate slump or converted to REITs.
    • Integrated energy companies began selling or
        i i     ff “ id t      ”      t (gathering,
      spinning off “midstream” assets ( th i
      processing, pipelines, distribution) to MLPs to
      pursue more profitable investments.
      p             p

© 2010 National Association of Publicly Traded Partnerships       16
                                     y
                               History of MLPs
       g
  During the 2000s:

  • The number of MLPs in oil and natural gas midstream
    businesses steadily increased. “
                      y
  • They were joined by MLPs engaged in marine transportation of
    petroleum products and in petroleum distribution.
  • Beginning in 2006 exploration and production MLPs began to
    make a comeback.
    Several general partners of MLP went public as MLP
  • S     l        l    t      f MLPs  t   bli     MLPs
    themselves in 2005 and 2006.
                                g                  g    p
  • Several investment managers turned their holding companies
    into PTPs (e.g., Blackstone).
© 2010 National Association of Publicly Traded Partnerships   17
                                  y
                            History of MLPs

    • In 2008 qualifying income was expanded
      by Congress for the first time since 1987.

    • Qualifying “natural resources activities” now
      include transportation and storage of
      biofuels such as ethanol and biodiesel.

         d    i l     b    di id       lf
    • Industrial carbon dioxide now qualifies as
      a “natural resource”.

© 2010 National Association of Publicly Traded Partnerships   18
                                  y
                            History of MLPs
    • Alternative fuels qualifying under the 2008
      addition include:
           – Ethanol and methanol and other alcohol fuels
             and fuel mixtures
           – Biodiesel fuels and biodiesel mixtures
           – Liquified petroleum gas
           – Liquified hydrogen
           – Liquified or compressed natural gas
           – Liquid fuels derived from coal
           – Liquid fuels derived from biomass
© 2010 National Association of Publicly Traded Partnerships   19
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   Master Limited Partnerships 101




      Master Limited Partnerships
                                                    Today


© 2010 National Association of Publicly Traded Partnerships   20
                                              y
                                     MLPs Today
     Currently,                                    NYSE
   • Currently there are roughly 90 MLPs traded on NYSE,
     AMEX, NASDAQ; more OTC and on pink sheets (exact count
     is hard to get).
   • Today’s MLPs primarily focus on energy-related industries
     and natural resources.
   • Most are in oil and gas midstream industries; others are in
     other oil and gas activities and coal.
   • A few remain in real estate; most of the rest are in
     investment/financial activities.
   • There are also a number of PTPs that are not active
     businesses but simply publicly traded commodity funds.
© 2010 National Association of Publicly Traded Partnerships    21
                                          MLPs Today
     Changes in Industry Concentration
         Industry (does not include commodity pools)          1990   2010
         Oil and Gas Midstream                                10%    46%
         Oil & Gas Exploration. & Production                  21%    11%
         O&G Marine Transportation                             1%     7%
         Propane & Heating Oil Distribution                    0%     8%
         Coal Leasing or Production                            0%     6%
         Other Mi  l Ti b
         Oth Minerals, Timber                                  5%     2%
         Real Estate-Income Properties                        14%     3%
         Real Estate- Developers, Homebuilders                 4%     0%
         Real Estate-Mortgage Securities                      13%     3%
         Hotels, Motels, Restaurants                          12%     0%
         I    t   t/Fi    i l
         Investment/Financial                                  6%     8%
         Other Businesses                                     15%     5%
                                                                            22
© 2010 National Association of Publicly Traded Partnerships
 MLPs Today: Changes in Industry Groups

                                 MLPs by Industry Group-1990
                                                              Energy and
                                                              E         d
                                                                Natural
                   Other                                      Resources
                   32%                                           37%




                                   Real Estate (incl.
                                      mortgage
                                     securities)
                                         31%

© 2010 National Association of Publicly Traded Partnerships                 23
 MLPs Today: Changes in Industry Groups

                                y        y     p     y
                          MLPs by Industry Group Today
                                                              Energy and Natural
                                                                  Resources
                                                                     80%




        Other Businesses
               5%




            Investment
                8%



                           Real Estate
                               7%




© 2010 National Association of Publicly Traded Partnerships                        24
       MLPs Today: Changes in Industry
                                       MLPs by Industry - 1990
                 Other Businesses                                              Oil and Gas
                       15%                                                    Exploration &
         Investment/                                                           Production
           Financial                                                               21%
              5%



                                                                                     Oil and Gas
                                                                                     Midstream
        Hotel, Motel,
                                                                                         10%
        Restaurant
           12%


                                                                                    Oil and Gas Marine
                                                                                      Transportation
                                                                                            1%
                                                                                 Minerals and Timber
        Real estate-                                                                     5%
     mortgage securities                          Real Estate-
            13%                                                  Real estate-income
                                                  Developers,
                                                                     properties
                                                 Homebuilders
                                                                        14%
                                                      4%


© 2010 National Association of Publicly Traded Partnerships                                              25
       MLPs Today: Changes in Industry
                            Master Limited Partnerships by Industry-2010
                                                                               O& G Midstream
                                                                                 Operations
                                                                                    46%
                        Other Businesses
                               5%

          Investment/Financial
                  8%


      Real Estate - Mortgage
            Securities
                3%



   Real Estate Properties
            3%

         Other Minerals, Timber
                  2%                                                               Marine Transportation
                                                                                            7%
                                  Coal
                                   6%
                                                                      Propane & Heating Oil
                                                      Oil & Gas E&P
                                                            G                 8%
                                                           12%



© 2010 National Association of Publicly Traded Partnerships                                                26
              MLPs Today: Changes in Industry

                            1990                                                       2010




                                                              Oil & Gas Midstream      Marine Transportation
                                                              Propane & Heating Oil    Oil and Gas & Production
                                                              Coal                     Other Minerals, Timber
                                                              Real Estate-Properties   Real Estate-Mortgage Securities
                                                              Investment/Financial     Other Businesses




© 2010 National Association of Publicly Traded Partnerships                                                        27
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   Master Limited Partnerships 101




           HOW MLPs WORK


© 2010 National Association of Publicly Traded Partnerships   28
                             How MLPs Work
                         p         p
   MLPs that are limited partnerships have:
   • One or More General Partners (GPs)
         – GP Manages Partnership
         – Generally has ~2% ownership stake in partnership
         – Has incentive distribution rights (IDRs)
     Thousands of Li i d Partners (LPs)/Unitholders
   • Th     d f Limited P         (LP )/U i h ld
         –    Unitholders = LPs holding publicly traded units
         –    Provide capital
         –    Have no role in partnership’s operations or management
         –    Receive quarterly cash distributions

© 2010 National Association of Publicly Traded Partnerships       29
                       How MLPs Work
              yp                       p
             Typical Limited Partnership Structure
                                                         Corporate
                                                       Parent or Other
                                                           Owners

                           Pipeline GP LLC
                                                              LP Interest     Unitholders-
                           General Partner
                                (2%)                                        Limited Partners
                                               2% GP
                 LP Interest                  Interest




                                                p         ,
                                              Pipeline MLP, L.P.

                                                          100% Owned

                                                               LP)
                                    Pipeline Operating LLC (or L.P.)


                                            Operating Subsidiaries

© 2010 National Association of Publicly Traded Partnerships                                    30
                             How PTPs Work
                                        y
                       MLP  With Publicly Traded GP
         Corporate
       Parent or Other                                                            Pipeline Unitholders-
                                                                                  Public GP Holdings, L.P.
           Owners                                                                  Limited Partners
                                                      Holdings L.P
                                          Pipeline GP Holdings, L P.
                    LP Interest

                                        100% Membership
                                            Interest
                                                                                Unitholders
                                                                         Public Unitholders-
                                               Pipeline GP LLC            Limited Partners
                                               General Partner
                                                              <2% GP
                                                              Interest



                                              Pipeline MLP, L.P.


                                    Pipeline Operating LLC (or L.P.)

                                            Operating Subsidiaries
© 2010 National Association of Publicly Traded Partnerships                                                  31
                              How PTPs Work
                                   Structure
                              MLP St    t
       Incentive Distribution Rights (IDR)
       • The IDR is a share of cash distributions paid to GP.
         It generally starts at 2% (vs. 98% to LPs).
            g       y              (               )
       • As quarterly distribution to LPs goes up, and
         targeted distribution levels achieved, IDRs to GP
         increase with each marginal increase in
         distributions.
       IDR Rationale
       • Incentive for General Partner to grow the business.
            p
       • Compensation for unit subordination.

© 2010 National Association of Publicly Traded Partnerships   32
                                How MLPs Work
                                 MLP Structure
                          p
                      Example: Incentive Distribution Tiers
                                                                         LP
                                                                    distribution
                                            LP %              GP%      up to

        Tier 1                                98%             2%       $
                                                                       $2.00

        Tier 2                                85%             15%      $2.50

        Tier 3                                75%             25%      $3.00

        Tier 4                                50%             50%   Above $3.00
© 2010 National Association of Publicly Traded Partnerships                       33
                             How MLPs Work
                                  LLCs
                                  LLC
                                   MLPs That Are LLCs:
      • Have members rather than partners – thousands
        of public unitholders own membership interests
        rather than LP interests
      • Have no GP. Management owns same
        membership interests as unitholders
      • Have no IDRs
      • All members, including public unitholders, have
        voting rights
             g g

© 2010 National Association of Publicly Traded Partnerships   34
                          How MLPs Work
                        Typical LLC Structure
                                                    Public Unitholders     Other Owners
                  Management
                                                       (Members)           (Members)




                                                    Co.,
                                             Energy Co LLC



                                                  Operating Subsidiaries



© 2010 National Association of Publicly Traded Partnerships                               35
                             How MLPs Work

       In both Limited Partnerships and LLCs:
      • Lower-level entities, not the MLP, own the
        assets and conduct operations
      • Taxation is on a pass-through basis
         – There is no corporate or other entity-level
           tax
         – All tax items flow through to the LPs or
                      ,     p y
           members, who pay tax at their own rates
© 2010 National Association of Publicly Traded Partnerships   36
                             How MLPs Work
         Characteristic                             MLP       LLC      Corporation
      T bl at entity l
      Taxable t tit level
                        l                             No
                                                      N       No
                                                              N                  Yes
                                                                                 Y
      Tax Items Flow                                  Yes     Yes                 No
      Through
      Tax Deferral on                                 Yes     Yes                 No
      Distributions
      Tax Reporting                                   K-1     K-1          DIV-1099
      General Partner                                 Yes     No                  No
      IDRs                                            Yes     No                  No
      Investor Voting Rights                          No      Yes                Yes

© 2010 National Association of Publicly Traded Partnerships         Source: Wachovia   37
                          How MLPs s Work
      Benefits of Operating as an MLP:
      • Pass-through tax structure (no double taxation) means
        lower cost of capital, providing advantage in acquiring
                        g
        and maintaining assets
      • Can own rate-regulated assets and still give investors an
        attractive rate of return
        Public t di      ll         t   i f d f        b d
      • P bli trading allows MLP to raise funds from broader
        range of investors than non-traded partnership
          p      g                             p         g
      • Operating as an MLP rather than a corporation gives
        management greater control
      • Lack of entity-level tax leaves more cash to distribute to
        investors

© 2010 National Association of Publicly Traded Partnerships      38
                             How MLPs Work

      Disadvantages of MLP Structure
      • Qualifying income restrictions—limited to certain
        types of businesses
      • Tax complexity and expense
        Few etained earnings—must aise
      • Fe retained ea nings m st raise debt o   or
        equity for expansion or acquisition
                          investors—K-1 s,
      • Disincentives for investors K 1’s state taxes
      • Limited investor pool because of tax laws
        applying to institutional investors
© 2010 National Association of Publicly Traded Partnerships   39
    Master Limited Partnerships
                101


                             Being an MLP
                             B i
                                Investor


© 2010 National Association of Publicly Traded Partnerships   40
                         g
                     Being an MLP Investor

      Being an MLP unitholder is different
       from being a corporate stockholder:
                   f
      • Taxation of your investment is very
        different and usually more favorable
      • Depending on the structure, you may not
        have voting rights (limited partners
        generally don’t; LLC members do)

© 2010 National Association of Publicly Traded Partnerships   41
                     Being an MLP Investor
                            Taxation
                 Partnership Tax Basics: Income
      • An MLP is a pass-though entity which pays no
        tax itself.
      • The unitholder is treated for tax purposes as if
        he is directly earning the MLP’s income.
                     y       g
      • Each unitholder is allocated on paper a share of
        the MLP’s income, gain, deductions, losses, and
        credits. This is reported annually on the K-1.
      • The unitholder calculates his share of taxable
        income and pays tax on it at his own tax rate.
© 2010 National Association of Publicly Traded Partnerships   42
                     Being an MLP Investor
                                  Taxation Example
            Amount per share / unit:
            Amount per share / unit:                          Corporation   PTP
           Gross Income                                          $4.00      $4.00
           Deductions                                           ‐$3.00      ‐$3.00
           Taxable Income                                        $1.00      $1.00
           Federal corporate tax                                ‐$0.35      $0.00
           State tax (assumes 5%  rate)
           State tax (assumes 5% rate)                           $0 05
                                                                ‐$0.05      $0.00
                                                                            $0 00
           Entityʹs net income                                   $0.60      $1.00
                                     (   )
           Shareholderʹs federal tax (28%)                       $
                                                                ‐$0.17       $
                                                                            ‐$0.28
           Shareholderʹs state tax (5%)                         ‐$0.03      ‐$0.05
           Net income to shareholder                             $0.40      $0.67


© 2010 National Association of Publicly Traded Partnerships                          43
                     Being an MLP Investor
                            Taxation
                            Tax Basics: Distributions
 • You will receive quarterly cash distributions, which
   are not the same as your share of the MLP’s income.
 • Distributions are based not on income but on
   distributable cash flow (DCF), which is:
    – Net earnings, plus
       – Depreciation (which is subtracted from income in the
         earnings calculation but is not a cash expense) minus
                                                expense),
       – Maintenance Cap Ex (the amount needed for
         maintainance and repair of assets used in producing
         income)
© 2010 National Association of Publicly Traded Partnerships   44
                     Being an MLP Investor
                            Taxation
                            Tax Basics: Distributions
 • Under the tax code, the distributions are a return
                                      received.
   of capital and are not taxed when received
 • Your basis in your partnership units (the amount
   you paid + adjustments) is lowered by the
   amount of the distribution.
    Thus,                     units
 • Thus when you sell your units, your taxable
   gain (sales price minus adjusted basis) is
               y
   increased by the amount of the distributions.
© 2010 National Association of Publicly Traded Partnerships   45
                          Being an MLP Investor
                                 Taxation
      Corporations - Dividends
        Corporation pays tax on earnings
      • C       i                   i
      • After-tax earnings paid to shareholder as dividend
      • Shareholder pays tax on dividend


      Partnerships - Distributions
      • Partnership does not pay tax; income and deductions flow
        through to partners
      • Partners pay tax on net earnings (regardless of cash
        received)

      • Cash distribution treated as tax deferred return of capital

© 2010 National Association of Publicly Traded Partnerships           46
                     Being an MLP Investor
                            Taxation
                                        Basis Adjustments
   Your basis is adjusted not only by
                        y
    distributions but by tax items:
   • Your share of partnership income each year adjusts
     the basis upwards.
                p
   • Your share of deductions like depreciation adjusts it
     downwards.
   • The idea is that all income you receive from the
     partnership is taxed once and only once—either in
     the year you receive it, or when you sell your units
© 2010 National Association of Publicly Traded Partnerships   47
              Being an MLP Investor - Taxation
                     j                 p
                  Adjusted Basis Example
      Year 1: 1,000 units purchased @
                                                              $30,000
      $30.00. Basis is:
      Investor receives total cash
                                                              - $2,500
      distributions of $2.50/unit
      Investor is allocated and pays tax on
                                                              + $ 500
      net taxable income of $.50/unit

      Adjusted Basis                                          $28,000

      Year 2: All units sold @ $32.00                         $32,000

                      $32.00 $28.00
      Gain per unit - $32 00 - $28 00                           4 000
                                                              $ 4,000
© 2010 National Association of Publicly Traded Partnerships              48
                 Being an MLP Investor
                        Taxation
                        T   ti
      Important Note:
      Not all of the gain when units are sold is taxed at
        capital gains rates.
      • The gain resulting from basis reductions due to
        depreciation is taxed at ordinary income rates—
           p                            y
        this is called “recapture.”
      • Gain attributable to your share of some types of
        assets—substantially appreciated inventory and
        unrealized receivables—is also taxed as ordinary
        income.
© 2010 National Association of Publicly Traded Partnerships   49
                     Being an MLP Investor
                            Taxation

      • Often you will hear someone say that “80%
        of the MLP’s distribution is tax-deferred.”
      • In reality, 100% of the distribution (in our
        example, all $2.50 per unit) is tax-deferred
      • What they really mean is that the unitholder’s
                                          ($.50
        allocated share of taxable income ($ 50 per
        unit in the example) equals only 20% of the
        distribution.

© 2010 National Association of Publicly Traded Partnerships   50
                    Being an MLP Investor
                         Advantages
                         Ad antages
      • Income:
             – MLPs pay out earnings not needed for current
               operations and maintenance of capital assets to their
               unitholders in the form of quarterly cash distributions.
             – Most MLPs strive to increase their distributions as
                                        prudent
               often as is possible and prudent.
      • Tax benefits: no double taxation, sheltering of
        income, tax deferral on distributions
      • Liquidity—MLPs provide the tax benefits of
        p         p           y g py              y
        partnerships without tying up your money for
        years.
© 2010 National Association of Publicly Traded Partnerships          51
                    Being an MLP Investor
                         Advantages
                         Ad antages
           y
  • MLPs may be suitable for investors:
        – Looking for a source of regular income payments
        – Motivated by yield
        – Seeking a combination of income and growth
        – Wanting to reduce/defer taxes on their investments
        – Interested in estate planning: as with other securities,
          the basis in PTP units is stepped up to fair market value
          at death—the heir receives a fresh start with no taxation
          of previous distributions

© 2010 National Association of Publicly Traded Partnerships     52
                    Being an MLP Investor
                          Challenges
           we’ve
      • As we ve seen, tax reporting for an MLP
        investment is more complex than for shares in a
        corporation.

             – Investor receives a K-1 instead of a 1099
             – The K-1 reports investor’s share of all MLP tax items,
               which investor must enter on his/her own return
                                                  possible.
             – MLPs make the process as easy as possible Many
               post K-1s online, and they can be downloaded into
               Turbotax.

© 2010 National Association of Publicly Traded Partnerships         53
                     Being an MLP Investor
                          Challenges
      • State tax issues:
             – Technically, partners owe tax on their share of
               income allocable to each state in which PTP operates
                                                               p
             – Practically, after PTP income is divided among all
               partners and all states, and depreciation and other
               deductions applied, each unitholder’s income in each
               d d ti           li d    h ith ld ’ i           i    h
               state will generally be too small to tax, except for
               those with large holdings.
      • PTPs don’t lend themselves well to investment
        through retirement plans or mutual funds
             g             p

© 2010 National Association of Publicly Traded Partnerships         54
                   Being an MLP Investor
                      Retirement
                      Reti ement Plans
       Think carefully before investing your
        IRA, 401(k), or other retirement plan in
        MLPs.
        MLPs
      • These plans are tax-exempt already, so don’t
                      advantages.
        need the tax advantages
      • More importantly, the plan’s share of net
                                    $1,000
        partnership income over $1 000 (not the
        distributions) is likely to be subject to
         unrelated                         (UBIT)”
        “unrelated business income tax (UBIT) .
© 2010 National Association of Publicly Traded Partnerships   55
                   Being an MLP Investor
                      Retirement
                      Reti ement Plans
                           tax-exempt
   • UBIT is imposed on tax exempt entities (including
     retirement plans) that earn income from a business
     that is not related to the purpose of their tax
     exemption.
                         p         g          ,
   • Because MLPs are pass-through entities, tax-
     exempt partners (e.g., your IRA) are treated as
     directly “earning” the MLP’s business income and
     are taxed on it.
   • Investment income like interest, dividends, and
     royalties is not taxed.
© 2010 National Association of Publicly Traded Partnerships   56
                   Being an MLP Investor
                      Retirement
                      Reti ement Plans
   Some analysts feel MLPs are still a good investment
     for IRAs and other retirement funds, because:
                                        g
   • The tax is on net income. Passthrough of
     depreciation and other deductions means net
     income may be below $1,000.
   • Even if tax is owed, the income may be sufficient to
     produce a very good return.
   • If your IRA or 401(k) does owe UBIT, it, not you,
     owes the tax. The plan custodian should file a
                        p
     return and pay tax from the plan’s funds.
© 2010 National Association of Publicly Traded Partnerships   57
                     Being an MLP Investor
                         Mutual Funds

      • Since the American Jobs Creation Act of
        2004 (AJCA), MLPs have been a qualifying
              (     ),                  q    y g
        source of investment income for mutual
        funds.

      • Before then, mutual funds were limited to
                                         d h
        10% gross investment in MLPs and other
        “nonqualifying” income sources.

© 2010 National Association of Publicly Traded Partnerships   58
                    Being an MLP Investor:
                        Mutual Funds

      There are still some limitations:
      • No more than 25% of a mutual fund’s
        assets can be invested in MLPs
      • A fund cannot own more than 10% of
        any MLP


© 2010 National Association of Publicly Traded Partnerships   59
                    Being an MLP Investor:
                        Mutual Funds

      • The fund is the limited partner, is allocated the
        taxable income and receives the K-1
      • The fund also receives cash distributions
      • If the fund passes on at least 90% of its income
        as dividends, it is not taxed on its share of
        partnership income
      • The fund’s MLP income is included in the regular
        dividends paid to shareholders
                  p

© 2010 National Association of Publicly Traded Partnerships   60
                    Being an MLP Investor:
         Investing Through M t l F d
         I    ti   Th    h Mutual Funds
              Advantages                                         Disadvantages
   • Simplicity: You get a                                    • Loss of tax benefits:
                     1099
     dividend and a 1099,                                       Income not offset by
     no state tax issues                                        losses; no deferral of
                                                                distributions
     Suitable f
   • S it bl for
     retirement plans:                                        • Few options available
     dividends are not                                          at present time: Few
     subject to UBIT.                                           mutual funds currently
                                                                invest in MLPs, although
                                                                this is slowly changing.
© 2010 National Association of Publicly Traded Partnerships                         61
                     Being an MLP Investor:
                    Other Forms of Ownership
    • Closed-end funds – like regular mutual funds, resolve
      the tax difficulties of ownership but at the cost of some of
      the tax benefits. Unlike regular funds, may invest entirely
      in MLPs. A good solution for IRAs and 401(k)s.
       – Fiduciary / Claymore MLP Opportunity Fund
       – Energy Income & Growth Fund
                      p          (     gy p ,
       – Tortoise Capital funds (Energy Capital, Energygy
          Infrastructure, etc.)
       – Kayne Anderson Energy Total Return, MLP Investment
          funds
    • I-Shares: Kinder Morgan and Enbridge offer investment
      in their MLPs through a publicly traded LLC taxed as a
      corporation which manages and owns shares of the MLP.  MLP
      Distributions are paid in the form of additional shares.
© 2010 National Association of Publicly Traded Partnerships     62
         y                  p
  Publicly Traded Partnerships 101



                 How can I find out more
                     about MLPs?




© 2010 National Association of Publicly Traded Partnerships   63
                  Visit the NAPTP website




                                           www.naptp.org

© 2010 National Association of Publicly Traded Partnerships   64
                           Contact Information
                                            y y
                                         Mary Lyman
                                  Executive Director, NAPTP
                                     1801 K Street, NW
                                          Suite 500
                                   Washington, D.C. 20006
                                                  973 4515
                                            (202) 973-4515
                                          mlyman@naptp.org




© 2010 National Association of Publicly Traded Partnerships   65

				
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Description: Simple Primer on a poorly understood investment vehicle.