• For most investors, the biggest advantage of investing in MLPs is the quarterly cash distribution, which provides high current and tax-deferred income. MLP investors typically enjoy a yield that is hard to find in corporate stocks: the median yield for energy MLPs as of September 30, 2008 was 9.5%. In addition, many MLPs make it a policy to increase distributions as often as possible. From 2003 through 2007, the energy MLPs increased distributions have increased at a median five-year compound annual growth rate of 8.6%, with a one-year distribution growth in 2007 of 11.5%.

• MLPs are a tax-advantaged investment. While investors are responsible for paying tax on their share of the partnership’s income, their taxable income is considerably lowered by their share of the partnership’s deductions (such as depreciation) and losses. Moreover, the distributions are not taxed as current income but are considered a return of capital and are not taxed until the partnership units are sold. Typically, taxable income will equal 10%-20% of the distribution.

• As with other securities, PTP units may be left to the owners’ heirs, whose basis in the units will be stepped up to market value at the testator’s death. Thus, if unitholders retain their units until death, neither they nor their heirs will pay the deferred tax on the pre-death cash distributions.

• MLPs provide diversification. While they are concentrated within the energy sector, they cover a wide range of businesses within that sector. Moreover, with the exception of this year’s market crisis, which no asset class escaped, the movements in MLP prices have tended not been highly correlated with changes in the broader stock market, interest rates, and commodity prices.

• The natural resource MLPs are in industries that are the backbone of America. They help produce, gather, process, and transport the oil, gas, and coal products that America relies on for energy independence. Those in the midstream sector earn their revenue through contracts for processing and transporting oil and gas that are not affected by fluctuations in energy prices.

• MLPs are also poised to be part of the future of alternative energy sources. Legislation was recently enacted that expands current law to allow mlps to transport and store alternative fuels such as ethanol and biodiesel. Pipelines to transport these fuels will be vitally needed and do not yet exist. It will be MLPs that build them.

What's the Downside?

There's no getting around it--MLPs are more complex than other investments. As with their benefits, many of their complexities derive from their tax status:

• Ownership of MLP units creates a more complex tax situation for the investor. Instead of a 1099, investors recieve a K-1 form detailing the various types and amounts of income, deductions, gains, losses, and credits that the MLP is passing through to them, and have to enter the amounts in the appropriate places on their own tax returns. Moreover, the investors' basis in its units fluctuates, adjusted upwards for the net taxable income and downwards for cas distributions. For sophisticated investors who already use accounting services to prepare their returns, this may be a less daunting prospect than for some others.

• Investors may be subject to tax in more than one state. Because of the passthrough nature of an MLP, investors are subject to state tax wherever an MLP earns income. By the time MLP income is divided up among all states and all investors, the resulting amount for one investor in one state will usually be too small for any tax to be owed. However, investors, especially those with large holdings, will need to be aware of the potential obligation.

• For the most part, MLPs are not an appropriate investment for retirement funds and tax-exempt institutions. This is because when a tax-exempt entity is a limited partner, its share of MLP income is considered unrelated business income, as if the entity had earned it directly, and subjects the entity to unrelated business income tax (UBIT) on amounts over $1,000. A few MLPs earn income that falls into one of the types exempted from UBIT, such as royalties.

One way of avoiding these issues while still enjoying many of the benefits of MLPs is to invest through a closed-end fund. There are several such funds which invest mostly or exclusively in MLPs and deal with the complexities of being a limited partner, allowing their investors to receive the familiar 1099 and to avoid UBIT and state tax hassles.

Where can i find out more about MLPs?

Visit the website of their trade association, the National Association of Publicly Traded Partnerships (NAPTP) . There you will find information including a list of currently trading MLPs, investor relations contacts, and answers to additional questions.