The History of Master Limited Partnerships (MLPs)

Quick Definition: A Master Limited Partnership (MLP) is a publicly traded business structure that combines the tax benefits of a partnership with the liquidity of a stock, primarily focused on energy infrastructure and natural resources.

Think of MLPs like a hybrid between a regular stock and a partnership - you get the trading flexibility of a stock but the tax advantages of owning a piece of a business directly.

MLPs have been around for over 40 years, and their story is one of innovation, regulation, and adaptation. As someone who's spent decades dissecting complex systems, I find their evolution particularly interesting because they represent a clever solution to tax efficiency in capital-intensive industries.

The Early Days: Building the Foundation (Pre-1980s)

Before MLPs existed, limited partnerships were already a thing. Like the early days of computing - the basic components existed, but nobody had figured out how to make them work for the masses yet. Traditional partnerships let general partners run the business while limited partners provided money with capped liability.

The energy sector in the 1970s needed massive capital for exploration and infrastructure. Regular corporate structures meant double taxation - companies paid taxes, then investors paid taxes on dividends. This was like paying a toll twice on the same highway.

Table of Contents ⇡

The Birth of MLPs (1980s)

The first MLP launched in 1981 with Apache Oil Company Limited Partnership. This was groundbreaking - imagine being able to invest in oil exploration with the same ease as buying a regular stock.

The Tax Reform Act of 1986 changed everything. Congress essentially said, "You can keep this tax advantage, but only for specific industries." They restricted MLPs to businesses earning at least 90% of income from qualifying sources like oil, gas, real estate, or commodities.

Table of Contents ⇡

The Growth Years (1990s-2000s)

MLPs really took off in the midstream energy sector. These companies didn't drill for oil - they moved it, stored it, and processed it. Think of them as the highway system for energy.

Companies like Kinder Morgan Energy Partners and Enterprise Products Partners became household names among dividend investors. Their business model was brilliant - they charged fees for using their infrastructure, creating steady cash flows regardless of oil prices.

As a systems thinker, I appreciate this approach. It's like owning the toll roads instead of the trucks. The steady income stream appealed to investors seeking reliable distributions.

By the mid-2000s, MLPs were paying yields of 6-10%, which caught my attention when I started focusing on high-yield investing. The Alerian MLP Index launched in 2006, giving the sector legitimacy and benchmarking.

Table of Contents ⇡

Facing Challenges (2000s-2010s)

The 2008 financial crisis tested MLPs. The midstream MLPs with steady, fee-based revenues held up better than those tied to volatile oil exploration.

This reinforced my belief in understanding the underlying business model. Just like in software development, the systems with the most dependencies tend to break first under stress.

In 2018, FERC (Federal Energy Regulatory Commission) delivered a shock to the sector. They changed rules about how MLPs could include tax allowances in their rates, causing a sharp sell-off.

Some MLPs adapted by converting to regular corporations. Kinder Morgan did this in 2014, citing governance benefits and easier access to capital. It's similar to how some bands eventually incorporate as businesses - sometimes simplicity wins over tax advantages.

Table of Contents ⇡

The Modern Era (2020s-Present)

Today's MLP landscape looks different from the early days. The sector has consolidated significantly - it went from over 100 MLPs in the early 2010s to around 30-40 today.

ESG (Environmental, Social, Governance) investing has pressured fossil fuel-focused MLPs. Some are adapting by diversifying into renewable energy infrastructure. It's like how I had to adapt my software skills as technology evolved - you either evolve or become obsolete.

Please keep in mind that I’m not a professional or licensed financial advisor and this is not financial advice. I create all of my articles based on my personal experience and research. Check out our full disclaimer(s).

Table of Contents ⇡

Real-World Investor Scenarios

Here's how different investors might approach MLPs…

Table of Contents ⇡

Key Characteristics That Make MLPs Unique

Understanding MLPs is like understanding any complex system - you need to know the components…

Table of Contents ⇡

Notable MLPs That Shaped the Sector

Several MLPs have been game-changers…

These companies proved that the MLP structure could work for large-scale operations, not just small partnerships.

Table of Contents ⇡

Understanding the Risks and Rewards

Like any investment, MLPs come with trade-offs. The high yields are attractive, but they're not guaranteed. Economic downturns, regulatory changes, or energy market shifts can impact distributions.

The K-1 tax complexity is real - it's like choosing between a simple point-and-click interface and a command-line system. The command line gives you more power but requires more knowledge.

Interest rate sensitivity is another factor. When rates rise, high-yield assets like MLPs often face selling pressure as investors chase higher yields elsewhere.

Table of Contents ⇡

The Future of MLPs

Looking ahead, MLPs face both challenges and opportunities. The energy transition is pushing some to explore renewable infrastructure. Carbon capture systems, renewable fuel pipelines, and other clean energy projects could provide new growth avenues.

Consolidation will likely continue as smaller MLPs merge or convert to corporations. The survivors will be those with the strongest infrastructure assets and most adaptable business models.

Table of Contents ⇡

Did You Know? MLPs Once Owned a Professional Baseball Team

In one of the most unexpected turns in financial history, an MLP once owned a Major League Baseball team. In the early 1980s, the Houston Astros were briefly owned by a publicly traded limited partnership - making them possibly the only major sports franchise to ever be structured like an MLP.

The partnership allowed fans and investors to own a piece of the team on the stock market, combining America’s pastime with America’s capital markets. While the idea didn’t last (the team eventually changed hands), it showcased the extreme flexibility of the MLP structure - even outside the energy sector - before Congress restricted MLPs to natural resource-based businesses in 1986.

It’s a strange but true footnote in MLP history: for a brief moment, your baseball loyalty could also be part of your dividend strategy.

Table of Contents ⇡

Common FAQs About MLPs

Table of Contents ⇡

Getting Started with MLPs

For investors interested in MLPs, here's a practical approach…

Table of Contents ⇡

The Bottom Line

MLPs represent a unique corner of the investment world, offering high yields and exposure to essential infrastructure. Their 40-year history shows both innovation and adaptation through changing markets and regulations.

Like any specialized investment, MLPs work best as part of a diversified portfolio. They're not for everyone - the tax complexity and energy sector focus make them more suitable for investors comfortable with both.

The key is understanding what an investor is buying. MLPs aren't just high-yield stocks - they're ownership stakes in the infrastructure that powers our economy. For investors willing to handle the complexity, they can provide attractive income and portfolio diversification.

Whether MLPs fit into an investor's portfolio depends on their specific situation, risk tolerance, and willingness to deal with K-1 forms. But for those who understand the structure, MLPs continue to offer a unique way to participate in energy infrastructure while generating meaningful passive income.