Hello, I see that for US boys, MLP distributions are first netted by "return of capital" and then such net distributions offset the cost basis, s.t. the tax is deferred until sold. Now, the question is how does this tax work out for a MLP ETF. When the ETF pays the distributions from underlying MLPs, are they treated the same as receipts from MLPs or dividends as stocks? If treated as MLP-payments, what's the point of ETF having to pay tax at company-level? If treated as stock-dividend, what's the point of ETF since tax deferral is gone? Now for non-US boys, I read MLP gross distributions would be withheld at crazy rates then we need to get tax refund by US tax filing. How about MLP ETF?
There was a good explanation of MLP and MLP ETF taxation in a long Barron's piece last weekend. Google is your friend.
Can you be my friend and post that very link? I have seen many articles but most are not into details
Yes, $1/week -- burdensome for "elite" "traders"? The article is MLPs Look Attractive Again, and Yield as Much as 8%.
MLPs Look Attractive Again, and Yield as Much as 8% By Daren Fonda April 21, 2018 PHOTO: DENIS CARRIER The recent spike in crude-oil prices to a three-year high of $68 a barrel has sent energy stocks up 11% in the past month. But the news has barely registered among investors in pipeline companies and other energy-infrastructure firms structured as master limited partnerships. They can be forgiven for feeling burned by MLPs, but it’s time to take another look. MLPs suffer so much from a “fool me once…” investor mentality that even with yields of 8.2%, they remain out of favor. The Alerian MLP Index is down 4.7% this year, and has fallen nearly 40% from its 2014 peak on a total return basis. What’s more, investors in exchange-traded funds such as the Alerian MLP ETF (ticker: AMLP) have seen their distributions fall by 26% over the past four years due to distribution cuts by MLPs. Things weren’t supposed to turn out like this. Energy MLPs, which mostly hold infrastructure assets such as pipelines and storage facilities, had long touted themselves as insulated from commodity-price swings. They are the industry’s toll roads, collecting steady fees based on volumes of oil and gas. Their main appeal, though, was their structure: As pass-through entities, they distribute nearly all of their cash flow, after expenses, to unit holders (the MLP equivalent of shareholders). These distributions come with significant tax advantages to unit holders. The model worked beautifully during the shale-oil boom. Firms invested heavily in new pipelines, borrowed a lot of money, and issued tons of equity to fund capital expenditures while still increasing their distributions—an unofficial requirement. But as oil prices crashed, the model collapsed. Hardly any firms had retained earnings, and most found themselves strapped for cash. Distributions dwindled, external sources of financing dried up, and investors who had owned MLPs for their chart-topping yields and perceived stability sold in droves. “Investors who expected stable payouts have been disappointed,” says Ethan Bellamy, an MLP analyst with Baird. “The industry burned a lot of bridges.” Yet the industry is rebuilding and rebounding. MLP valuations appear cheap, and U.S. energy production is thriving, lifting cash flows for pipeline firms. Domestic oil production recently hit a record high of 10.5 million barrels a day. Natural-gas production is also booming, thanks to strong demand from utilities, petrochemical companies, and foreign nations. Meanwhile, MLPs are now self-funding more capital expenditures and scrapping byzantine ownership structures. Several have converted to C corporations that pay standard dividends. The changes could attract more pension funds, mutual funds, and other big investors to replace individual investors, analysts say. “The fundamentals look great,” says Simon Lack, an energy investor and head of the investment firm SL Advisors. Lack doesn’t expect sentiment to revive overnight, but calls it the missing ingredient that could jump-start the stocks. “The only reason to pause,” he says, “is the fear that sentiment will remain bad and other investors won’t want to buy.” Investors should reap the rewards as MLP earnings and distributions start to rise. Distributable cash flow—an industry measure of cash available for distributions—rose by 4.8% in the fourth quarter, compared with a year earlier, according to Cushing Asset Management. Analysts expect MLP distributions and dividends paid by midstream C corporations to rise 10% in 2018. That would mark a huge comeback, after dozens of payout cuts in 2015-18. “The water-torture of distribution cuts has presented a major obstacle to the stocks,” says Bellamy. “We’re not done with the cuts yet, but we see the finish line.” If Energy Transfer Equity (ETE) and Energy Transfer Partners (ETP) consolidate over the next year, as Bellamy expects and as other MLP families have done, payouts might shrink. But that should mark the nadir for industry dividend cuts. MLPs are taking other steps to win back investors. They’re pledging to finance more capital expenditures internally, although that will probably lead to slower distribution growth. Enterprise Products Partners(EPD), for instance, plans to increase distributions 3% this year, less than its prior growth rate, and others are following suit. Yet self-funding should lower the cost of capital dramatically, says Libby Toudouze, an MLP portfolio manager with Cushing. It might also create more shareholder value, crucial to luring pension funds and other big investors. “Institutional investors want internal funding,” she says. “They don’t care as much about distribution growth.” The trend of MLPs converting to C corporations and/or merging with their general partners could also draw more institutional investors. It has led to MLPs eliminating the much-hated practice of cash payments called “incentive distribution rights,” which MLPs shelled out to their GPs. IDRs drained MLPs’ and unit holders’ cash, soaking up about a third of total distributions paid by firms such as Energy Transfer Partners, Phillips 66 Partners (PSXP), and Western Gas Partners (WES). NEWSLETTER SIGN-UP MLPs do look cheap. Based on price to distributable cash flow, a traditional way to value MLPs, the stocks trade at an average of nine times DCF, versus a 10-year average of 12, according to Cushing. At more than five percentage points above the 2.9% yield of the 10-year Treasury note, MLP yields exceed the historical “spread” of four points. The stocks yield more than bonds issued by the same firms. And recent buyouts of private MLPs have occurred at an average of 15 times enterprise value to earnings before interest, taxes, depreciation, and amortization—well above the 10 times EV/Ebitda ratio of the Alerian index. Granted, MLPs face new regulatory hurdles. Reversing policy, the Federal Energy Regulatory Commission ended a tax allowance that firms with interstate natural-gas and oil pipelines had used to charge customers higher rates. MLPs slumped after the March ruling, especially Enbridge Energy Partners (EEP) and Spectra Energy Partners (SEP), which run large interstate natural-gas pipelines. But most MLPs won’t be affected by the ruling, since they run pipelines within states, outside the FERC’s purview, and negotiate rates directly with customers, says Darin Turner, an MLP fund manager with Invesco. The longer-term concern is that FERC plans to review tax breaks for some refined products, with a decision likely by 2020. That could deal a bigger blow to the industry, although longer term it would probably just encourage more MLPs to convert to C corporations, or put a “C-corp wrapper” around the partnership to maintain the tax allowance, says Matthew Sallee, an MLP fund manager with Tortoise. He says the FERC’s ruling doesn’t change the industry’s strong fundamentals. Mutual funds typically can’t hold more than 25% of their assets in MLPs. There are a few exchange-traded fund options, such as the Alerian MLP, which has an annualized yield of 8.2% and offers investors the advantage of simpler tax filing than holding individual MLPs. But simplifying also means forgoing some of the biggest tax benefits of MLPs; most investors would be better off with a few large, well-diversified MLPs. Enterprise Products is an industry leader with an integrated network of pipelines, processing plants, and storage encompassing virtually every energy product. The firm has one of the industry’s strongest balance sheets and credit ratings, and raised its distributions for 55 consecutive quarters. It now yields 6.4%. Enterprise is well positioned to benefit from strong demand for natural gas from petrochemical firms on the Gulf Coast, says Sallee. It doesn’t expect to issue equity, and could grow earnings by 17% in 2018, based on consensus estimates. Magellan Midstream Partners (MMP) owns the longest refined-product pipeline system in the U.S., at 9,700 miles. Pipeline volumes rose 8% in 2017, and the firm expects volume growth of 7% in 2018. Investors punished the stock on fears that the FERC would lower Magellan’s refined-product tariffs, but analysts estimate that its average pipeline tariffs would grow by 1% less if the FERC takes away the tax allowance, starting in 2021. The firm also recently renegotiated favorable contracts for its Longhorn crude-oil pipeline in Texas, where production thrives. Magellan doesn’t plan to issue equity this year and expects to grow its distribution by 8%; it is now at 5.6%. “It’s the best-run MLP,” says John Musgrave, an MLP portfolio manager with Cushing in Dallas, “with a prudent management team that is focused on returns on investment.” MPLX (MPLX) runs pipelines for its corporate parent, Marathon Petroleum (MPC). MPLX expects to self-fund $2.2 billion in capex this year and recently bought out Marathon’s IDRs. MPLX owns top-shelf pipelines in the Marcellus shale region, where gas production is rising, thanks to a new export terminal in Philadelphia and strong demand from utilities in the Northeast. President Michael Hennigan has a “great track record,” says Musgrave. MPLX says the FERC ruling will have a negligible impact on earnings, and expects to grow its distribution by 10% in 2018. Its current distribution is 5.6%. Plains All American Pipeline (PAA) has tested investors’ patience. It cut distributions twice in the past two years, as cash flows plunged in its volatile energy trading and marketing business. But Plains has eliminated IDRs to its corporate affiliate, Plains GP Holdings (PAGP), which owns the MLP’s units. It has also slashed its distribution so much that it is now covered by 1.7 times cash flow. The best part, says Sallee, is that the firm is heavily exposed to the Permian, “the best shale-oil basin in the world.” Pipeline capacity there is so tight that Plains might raise prices. Plains is on track to pay $1.20 per unit in 2018; it yields 4.9%. Says Sallee: “Plains is set to execute on growth strategies, and start playing offense.” MLPs: Tax Advantages and Headaches The tax headaches of owning MLPs didn’t disappear with this year’s new tax legislation, but some provisions could ease the burden. As pass-through entities, MLPs issue cumbersome K-1 forms that report an investor’s share of the partnership’s income, gains, tax basis, and other items. Investors can now deduct 20% of income from pass-through entities such as MLPs. That should be a tax break, but in practice offers little benefit, since MLP distributions mostly consist of return of capital that isn’t taxed when it’s received. (The tax bill on distributions eventually comes due when an investor sells the shares.) MLPs and other firms can now deduct 100% of their capital expenditures, too, shielding more income and distributions from taxation. Investors may reap a bigger tax break in ETFs and mutual funds dedicated to MLPs. Such funds issue 1099 forms and distributions that consist mainly (or entirely) of return of capital. But funds with more than 25% of their assets in MLPs are taxed as C corporations, dragging down their returns. With the corporate rate dropping from 35% to 21%, MLP-dedicated funds will be more tax-efficient. That should help funds such as the Alerian MLP ETF (ticker: AMLP) narrow a wide performance gap with its benchmark index; it has trailed by an annualized 2.5 percentage points since the ETF’s inception in 2010.
If you want analysis that has some basis in fact, i.e. not ZH, you pretty much have to pay for it. I haven't found a free equivalent to what you can get from one of Barrons, FT, WSJ, IBD, although if such a unicorn exists I'd love to hear about it.
This article is much better than many others. Thanks. To avoid excessive complexity, lets focus on US-retail-boys which this article refers to in taxation. "Investors may reap a bigger tax break in ETFs and mutual funds dedicated to MLPs. Such funds issue 1099 forms and distributions that consist mainly (or entirely) of return of capital" How does it work. The underlying MLPs pay $100 out of distributable CF, of which $80 treated as return-of-capital and $20 as dividend. At the ETF-level, how come the 20% taxable non-return-of-capital disappear? For a retail boy, that $20 from MLP is deducted from cost basis and taxed when units sold; how is the non-return-of-capital portion of ETF treated then? "But funds with more than 25% of their assets in MLPs are taxed as C corporations, dragging down their returns. With the corporate rate dropping from 35% to 21%, MLP-dedicated funds will be more tax-efficient. " So MLP-ETF is taxed as C-corp at 21%ish. What is taxed at the c-corp (ETF)? 100% distribution, or the netted 20%? By mentioning tax-efficiency, the article seems to suggest the latter, so 20% is taxed at 21%, so 4% goes to the uncle and 96% goes to unitholders, of which almost all comprise return-of-capital so not subject to tax? Doesn't make sense. If 100% distribution is taxed at 21%, then where is the tax-efficiency?