Introduction to MLPs

Master Limited Partnerships (MLPs) are publicly listed limited partnerships that trade much like the shares of a public corporation. MLPs are flow through entities whose income stream is taxed in the hands of its unitholders and as such, are not subject to state or federal income tax at the partnership level. They operate in asset intensive businesses that typically produce cash flow in excess of GAAP earnings due to substantial noncash expense items (such as depreciation) that are generated at the operating entity level. MLP ownership is divided between the limited partners and the general partner (GP). Collectively, limited partners generally have a 98% ownership stake in the partnership, provide the capital necessary to operate the partnership, but are effectively passive investors since they have no role in the day-to-day operations of the underlying business. Conversely, the general partner manages the business of the partnership and typically has a 2% ownership stake in the partnership. General and limited partners are entitled to their pro-rata share of partnership distributions; however, the general partner is also entitled to receive incentive distributions in return for delivering growth in cash flow to LP unitholders.

Some issuers in the MLP sector are structured as limited liability corporations (LLCs). These structures are hybrids between the corporate and partnership form and generally provide investors with the same advantages as MLPs, but do not have a GP or incentive distribution plans.

To retain its MLP status, a partnership must derive 90% of its income from qualified sources which include interest income, dividends, real property rents and income (and gains) from the exploration, development, mining, production, processing refining, transportation or marketing of any minerals or natural resources.

As of April 30, 2008, the MLP sector exhibited the following industry breakdown:

Source: Citi Investment Research

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