If you invested in energy infrastructure a decade ago, you probably remember Master Limited Partnerships. MLPs were everywhere. Financial advisors recommended them for their eye-catching yields. CNBC segments praised their tax-deferred distributions. Between 2001 and 2014, more than 130 MLPs went public. That’s roughly one new offering every five weeks during the peak years.
Today? Fewer than 40 publicly traded MLPs remain. What happened?
A brief history
Congress created MLPs in 1981 to encourage investment in energy infrastructure. The structure combined the tax treatment of a partnership (where income passes through to investors without corporate-level taxation) with the liquidity of publicly traded securities. You could buy and sell units through your brokerage account, but for tax purposes, you were a partner in a business.
The structure took off in the energy sector because pipeline companies have enormous capital requirements. Building infrastructure to move oil and gas across the country costs billions. MLPs could raise that capital from public investors while avoiding the double taxation that regular corporations face.
For decades, MLPs remained a relatively obscure corner of the market. Then the shale boom changed everything. As domestic energy production surged in the 2000s, the need for pipeline capacity exploded. Wall Street was happy to oblige with new MLP offerings, and yield-hungry investors lined up to buy them.
Why the yields looked so attractive
MLP yields routinely ran 6%, 7%, even 8% or higher. In a low-interest-rate environment, that kind of income was hard to find elsewhere. But those headline yields were somewhat misleading.
Unlike dividends from regular corporations, MLP distributions were largely treated as return of capital. This meant you weren’t paying taxes on the income in the year you received it. Instead, the distribution reduced your cost basis in the investment. You’d eventually owe taxes when you sold, or when your basis hit zero, but in the meantime, you could reinvest the full amount.
This tax deferral was real and valuable, but it also made yields look higher than they actually were on an apples-to-apples basis. A 7% MLP distribution wasn’t directly comparable to a 4% dividend from a regular stock, because the MLP distribution was partly a return of your own capital. The comparison required adjusting for the deferred tax liability you were accumulating.
There was also the question of where those high yields came from. MLPs were required to distribute most of their cash flow to unitholders, which left little money for growth or cushion against downturns. To fund expansion, they had to keep returning to capital markets, issuing new units (diluting existing holders) or taking on debt. This model worked beautifully when unit prices were high and credit was cheap. It fell apart quickly when conditions changed.
Then the conversions started
In August 2014, Kinder Morgan changed everything. The largest pipeline company in North America announced it would absorb its MLP subsidiaries and convert to a traditional C-corporation. The company had simply outgrown the MLP structure. Nearly half of its cash flow was being siphoned to the general partner through incentive distribution rights, making the cost of capital unsustainable.
Others followed. Enbridge, Dominion Energy, and a wave of smaller players either converted to C-corps or were absorbed by their parent companies. The 2014 oil price crash accelerated things. MLP unit prices fell so sharply that the equity-issuance model these partnerships relied on for growth simply stopped working.
The Alerian MLP Index dropped 38% in 2015 alone. Many investors who’d bought for stable income watched their principal erode far more than any distribution could offset.
The practical hassles
Market performance wasn’t the only issue. MLPs came with practical complications that quietly pushed many investors away.
Every MLP investor receives a Schedule K-1 instead of a simple 1099. These forms arrive late, often in March just before tax deadlines, and they’re complicated. Your share of the partnership’s income, deductions, and credits flows through to your personal return, requiring careful handling that most tax software doesn’t accommodate well.
Because MLPs operate pipelines across many states, unitholders may technically owe taxes in each state where the partnership earns income. Your K-1 package includes a state-by-state allocation. For small amounts, most investors ignore this, but it creates a compliance question and, technically, an obligation to file returns in states you’ve never visited.
And here’s something many investors learned the hard way: holding MLPs in an IRA can actually trigger taxes. The IRS treats your IRA as a partner in the MLP, and the partnership’s business income counts as “unrelated business taxable income.” If UBTI exceeds $1,000, your retirement account must file Form 990-T and pay taxes at the highest trust rate, currently 37%. Your tax-deferred account suddenly owes taxes, and your custodian may sell holdings to cover the bill. The same UBTI rules make MLPs problematic for university endowments, foundations, and charitable organizations.
Do MLPs still make sense for anyone?
A few dozen MLPs survive, and some investors still find them useful. The remaining partnerships tend to be larger, better capitalized, and more conservatively managed than the boom-era offerings.
For investors in higher tax brackets who hold MLPs in taxable accounts (not retirement accounts), the tax deferral can still be valuable. You’re essentially getting an interest-free loan from the government until you sell. If you hold until death, the step-up in basis may eliminate the deferred tax entirely.
But the investor profile for MLPs has narrowed considerably. If you’re investing through a retirement account, a non-profit, or if you don’t want to deal with K-1s and potential multi-state filings, they’re likely not appropriate for you.
Whether an MLP fits your situation depends on your tax bracket, account types, estate planning goals, and tolerance for administrative complexity. These are exactly the kinds of questions where professional guidance makes a real difference. A qualified advisor or tax professional can help you weigh whether the benefits justify the hassles in your specific case.
The takeaway
MLPs haven’t disappeared entirely, but they’ve returned to being a niche investment for specific situations. The broad appeal that drove 130 IPOs in a decade is gone. What remains is a smaller universe of partnerships that may work for certain taxable accounts, but come with enough complexity that they warrant careful consideration before buying, and professional advice if you already own them.
If you’re holding MLPs from the boom years and wondering whether they still fit your situation, we can help you think through it. Answer 4 quick questions to see if we’re a good fit.
