MLPs are pass-through entities and have been able to pay consistent distributions due to steady demand and federally regulated prices.
Kenny Feng is president and CEO of Alerian. I spoke with him about master limited partnerships and the Alerian MLP exchange-traded fund (AMLP), which is held in our Model ETF Portfolio.
Charles Rotblut (CR): Could you explain what a master limited partnership (MLP) is and how it differs from a traditional corporation?
Kenny Feng (KF): Sure. Energy master limited partnerships are engaged in four primary businesses, which are the exploration and production, transportation, storage and processing of natural resources and minerals. By confining themselves to these specific activities, MLPs are not subject to entity-level taxation as a traditional C-corporation would be. They are, however, subject to the same reporting requirements (annual reports, filing 10-Ks, filing 10-Qs, filing notices of material changes and complying with the Sarbanes-Oxley act) as publicly traded corporations. It is also worth mentioning that they trade on the public exchanges; about two-thirds of the energy MLPs trade on the New York Stock Exchange and a vast majority of the remaining one-third trade on the NASDAQ.
CR: And with their structure, the earnings flow through, correct?
KF: Exactly. They are pass-through entities.
CR: I know that creates different tax issues for investors than investing in a traditional corporation.
KF: Exactly. If you were to invest in IBM (IBM) or any other publicly traded corporation that pays a dividend, you would get a Form 1099, and you would report the payments as dividend income.