Note on Master Limited Partnerships

21 Pages Posted: 1 Jun 2018

See all articles by Susan Chaplinsky

Susan Chaplinsky

University of Virginia - Darden School of Business

Betty J. Simkins

Oklahoma State University - Stillwater - Department of Finance

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Abstract

Master limited partnerships (MLPs) are limited partnerships that trade on public exchanges in the form of units, similar to common stock. MLPs have several advantages relative to traditional C corporations (C-corps) that have resulted in their frequent use to finance energy-infrastructure assets. The general partners (GPs) retain control of the assets placed in the MLP, can drop down assets to the MLP, often at advantageous prices, and receive incentive distribution rights (IDRs). IDRs increase the GPs' share of the distributions over time, which in turn affects the MLPs' cost of capital. MLPs do not pay taxes at the entity level, which increases the amount of cash that can be paid to GPs and unitholders. MLPs trade on the basis of their yield and the stability and growth of their distributions. This technical note provides a brief history of MLPs, a description of their key features and terms, and several approaches to valuing them.

Excerpt

UVA-F-1828

May 17, 2018

Note on Master Limited Partnerships

Master limited partnerships, referred to as MLPs, are limited partnerships that trade on public exchanges. Most MLPs are formed as limited partnerships and trade in the form of partnership units (referred to as common units, or simply units), comparable to the common stock of corporations. MLPs have different governance structures in terms of voting and control rights and are taxed differently than traditional corporations (referred to as C corporations [C-corps]), whose income is taxed at an entity level. This technical note provides a brief history of MLPs, a description of their key features and terms, and several approaches to valuing them.

MLPs are pass-through partnerships that are exempt from corporate taxes. This means that MLPs generally do not pay firm-level income tax; instead, their income passes through to the unitholders. The unitholders pay tax on their distributions at their individual tax rates, but the pass-through structure allows MLPs to avoid the double taxation of income. MLPs are also generally required by the partnership agreement to pay out all available cash to investors, and as a result, investors receive relatively high distributions. Because of these features, MLPs are valued for their yields and ability to maintain or grow distributions. For these reasons and others, assets housed within an MLP structure tend to trade at higher multiples than those that reside within a C-corp (Exhibit 1).

Since the mid-1990s, MLPs have grown significantly in terms of their numbers and market capitalization (Figure1). By one count, starting from six MLPs in 1994, there are 112 energy-related MLPs with, collectively, a total market value of approximately $ 400 billion in 2016. Their growth has been attributed to their attractive yields to investors and their role in financing energy and infrastructure assets.

. . .

Keywords: master limited partnerships, limited partnerships, MLPs, C corporations, C-corps

Suggested Citation

Chaplinsky, Susan and Simkins, Betty J. and Titman, Sheridan, Note on Master Limited Partnerships. Darden Case No. UVA-F-1828. Available at SSRN: https://ssrn.com/abstract=3185132

Susan Chaplinsky (Contact Author)

University of Virginia - Darden School of Business

Betty J. Simkins

Oklahoma State University - Stillwater - Department of Finance ( email )

336 Business Building
Stillwater, OK 74078-4011
United States
405-744-8625 (Phone)
405-744-5180 (Fax)

HOME PAGE: http://spears.okstate.edu/~simkins

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
3
Abstract Views
88
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information