In recent times, Master Limited Partnerships or MLPs have started to gain popularity owing to their steady returns, even during recessionary times. Even as the stock markets tanked in the wake of the sub-prime mortgage crisis, MLPs continued to deliver healthy returns. This is owing to the commodity nature of their business, dealing primarily with oil and gas and not subject to short-term variations. In other words, even during times of recession, people will buy gas and that ensures MLPs will deliver returns. And then there are the tax incentives.
Before embarking on the history of the Master Limited Partnership, let's first define what it is. As its name suggests, it is a limited partnership. It combines the tax benefits of a limited partnership with the liquidity value of the tradable stock. 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 assets, real estate or commodities.
The first MLP to be launched was one by the Apache Oil Company in 1981. Its aim was to tap smaller investors for capital while allowing them to become partners. This was soon followed by other oil and gas companies following suit, with real estate companies joining in as well. Legislators became concerned with the meteoric rise in MLPs, with restaurants, hotels, amusement parks and even the Boston Celtics going down this route in order to save on corporate tax.
As a result, new tax laws were formulated. The Tax Reform Act of 1986 and Revenue Act of 1987 put in place restrictions that adequately eliminated preferential tax treatment for all MLPs except those with 90% of their incomes derived from various natural resource activities, such as oil and gas exploration, production, transportation, and so on.
Consequently, many of the earlier MLPs ceased to exist, transforming themselves back to corporations. As of today, there are around 55 MLPs trading on American markets. Most of them deal with midstream energy distribution, transportation, and terminal assets. Some of the newer ones deal with industrial source carbon dioxide (include in the tax code in 2008), and the transportation and storage of ethanol, biodiesel and other alternative fuels (also added in 2008).
Like the S&P 500 and Dow Jones Industrial Average that track stock performance, MLP performances are tracked by the Alerian MLP index or AMZ. Alerian was founded in 2004 by Gabriel Hammond as an MLP asset manager. The AMZ was born on June 6, 2006, when JP Morgan formally announced its operation. The index is distributed everyday through ticker AMZX and is present on Alerian's website. In addition, S&P calculates 10 years of historical index data on both a charge and total return basis.
Some of the larger MLPs, by market capitalization, are Enterprise Product Partners (Ticker: EPD), Kinder Morgan Energy Partners (KMP), Williams Partners (WPZ), Energy Transfer Partners (ETP) and Plains All American Pipeline (PAA). The last year has also seen the launch of MLP mutual funds that have further opened up this sector.