AMLP: 7.79% Yield From Your Favorite MLPs Without The K-1 (NYSEARCA:AMLP)

Master Limited Partnerships, otherwise known as MLPs, are common income-producing investments for investors seeking large yields. In the 80s, Congress limited the MLP structure to real estate and natural resource sectors due to lost corporate tax revenue. MLPs are treated as limited partnerships for tax purposes that have a pass or flow-through tax structure. All profits and losses are passed through to the limited partners as the actual MLP isn’t responsible for corporate taxes on their revenue. If you invest in an MLP, you are considered a unitholder of the MLP and become personally liable for income taxes on your portion of the MLPs earnings.

If your familiar with companies such as Energy Transfer (ET), Enterprise Products Partners (EPD), Cheniere Energy Partners (CQP), Plains All American Pipeline (PAA), or MPLX LP (MPLX), these are all classified as MLPs. I have frequently written about ET and EPD on Seeking Alpha and are two of the favorites among many of the contributors. These companies are Midstream Energy Infrastructure companies that connect the upstream and downstream segments of the energy sector. These companies are responsible for transporting, processing, fractionation, and storing fossil fuels. The Alerian MLP ETF (AMLP) is a dedicated ETF to the MLP industry. In addition to providing diversification across the industry, owning AMLP instead of MLPs has what some investors may consider advantages such as not having to file a K-1, and the income generated is classified as either qualified dividends or return of capital rather than a distribution. Many energy infrastructure companies took a beating when oil crashed in 2015, and some never recovered, yet the income generated is still top-notch. AMLP provides an interesting opportunity today as commodity prices are increasing and increased red tape is put on building new energy infrastructure projects domestically.

What are the benefits of investing in AMLP rather than MLPs directly?

I am not an accountant, and prior to making any investments in energy infrastructure companies, you should understand the tax implications. Please do your own research and consult with a tax specialist so you can make an educated decision about how investing in MLPs directly can impact your tax return.

Some investors will argue that holding an MLP in a taxable account will allow you to benefit from certain tax advantages. Nothing is perfect, and everything is about perspective. MLPs offer steady cash flows which are paid through cash distributions to their unitholders. For many MLPs, 80 – 90% of their distributions are tax-deferred, which is how they can establish distributions that have larger yields than many investments in the market. MLPs can become complicated because, unlike traditional investments such as investing in Altria Group (MO), MLPs utilize tax basis accounting. Just as any investment, your tax basis is represented by the value of your initial investment, but when investing in MLPs, your tax basis decreases throughout your duration of ownership as you receive cash distributions. To make things more complicated, your basis increases by your portion of an MLPs taxable income, or it can also decrease by your share of the losses.

MLPs send out a Schedule K-1 package which needs to be filed with your personal income taxes. Each K-1 package includes a Schedule K-1, an ownership schedule, a sales schedule, and a state schedule. Often the state schedule makes investors cringe because it lists all the states in which the MLP operates and the limited partner’s share of income attributed to each state. There is a chance you will be required to file tax returns in the states that the MLP which you hold units in operates.

Once again, investing in MLPs isn’t as clean as a dividend investment, such as MO where you can just print out a 1099 from your brokerage account at the end of the year. I am not an accountant, and if you own MLPs or are interested in investing in one such as ET, you should speak to a tax professional and understand how the MLP status may affect your taxes.

Investing in AMLP instead of direct MLPs has potential fund advantages, once again it’s all about perspective and how you look at taxes. AMLP does not issue a K-1 rather it reports on a 1099 for taxes. AMLP also provides qualified dividends, and a portion of distributions are tax-deferred. One of the most sought-after benefits of a 1099 rather than a K-1 is that this should mitigate generating unrelated business taxable income (UBTI). AMLP has provided a whitepaper on the tax advantages of owning AMLP, which can be read here. Distributions from AMLP are either considered a qualified dividend or a return of capital. Qualified dividends are taxed at long-term capital gains rates, while any portion of the distribution that is a return of capital is tax-deferred. Return of capital distributions reduce an investor’s cost basis in AMLP, and the investor does not have to pay taxes on that portion of the distribution until the investor sells their interest in AMLP.

From my personal experience, investing in AMLP provides a clean way to gain exposure to the MLP sector without dealing with Schedule K-1s. You will find investors that think K-1s are a burden and others that don’t mind them. This is a personal opinion that each investor needs to make. As many of you know, I am invested in AMLP in addition to individual MLPs such as ET. I am agnostic since my accountant deals with the paperwork, but investors should know what they are getting themselves into and seek professional guidance. There is no correct or incorrect answer as to which style is better, but if you’re looking for less work, I have found that AMLP is less paperwork than owning MLPs directly.

AMLP’s fund details

AMLP is one of the largest MLP ETFs with $5.58 billion in assets under management. AMLP has a total management fee of 0.90% and currently generates a $2.83 dividend per share which is a forward yield of 7.79%. AMLP will normally invest at least 90% of its total assets in securities that comprise the Underlying Index which it created. The Underlying Index is comprised of energy infrastructure MLPs that earn most of their cash flow from the transportation, storage, and processing of energy commodities. By staying within these parameters, MLPs units can trade on public securities exchanges exactly like the shares of a corporation, without entity-level taxation. MLPs build, own, and operate energy infrastructure assets such as pipelines, storage facilities, and processing plants. These assets play a vital role in connecting domestic energy production with local and global demand. AMLP has 15 holdings which represent petroleum pipelines, gathering & processing, natural gas pipelines, and liquefaction.

AMLP has two of my favorite MLPs within its portfolio. EPD represents 10.15% of the fund, while ET makes up 9.36%. EPD operates 50,000 miles of natural gas, NGL, crude oil, refined products, and petrochemical pipelines. They have 260 million barrels of refined products and crude storage capacity and 14 billion cubic feet of natural gas storage capacity. EPD operates 22 natural as processing plants, 23 NGL, and propylene fractionators, and has a large import/export business with 18 deepwater ship docks that can facilitate multiple products. In 2021 EPD generated $40.81 billion in revenue as they transported 3,412MBPD of NGLs, had 1,253MBPD of NGL fractionation volumes, and 2,088MBPD of crude transportation volumes. EPD’s infrastructure is critical to America’s way of life.

ET operates 114,000 miles of natural gas, crude oil, NGL, and products pipelines. ET’s infrastructure spans the country and provides natural gas gathering, compression, treating, transportation, storage, and marketing services for natural gas. ET operates roughly 69,000 miles of pipeline, 150 Bcf of working storage capacity, and more than 60 natural gas processing and treating facilities. On the crude side, ET operates approximately 10,850 miles of pipelines are located across 16 states which are combined with approximately 64 million barrels of storage capacity. In 2021 ET transported 12,644BBtu/d of natural gas through their intrastate pipelines and 11,912BBtu/d through their interstate pipelines. In 2021 ET generated $67.42 billion in revenue, $13.05 billion in adjusted EBITDA, and $9.63 billion in distributable cash flow (DCF).

Why now may be a great time to invest in energy infrastructure

Traditional energy investments have become polarizing as an emphasis on ESG and Climate Change has crossed over into investing. FERC or the Federal Energy Regulatory Commission just implemented its first policy update since 1999 to begin considering how proposed gas projects could affect climate change, how they would affect local communities seen as most subject to pollution, and whether such projects are even in the public interest. Any new project that’s expected to emit 100K metric tons/year of CO2 equivalent emissions is expected to be deemed to have a significant impact on climate change. FERC just increased the amount of red tape on building new energy infrastructure products, which is bad for the country and good for existing infrastructure, which is what AMLP invests in. This could make existing pipelines more valuable as they are now even harder to build.

People need to look past the headlines and stop listening to teenagers or anyone who hasn’t done the actual research about future energy projections. America isn’t in a position to decrease energy output from fossil fuels. If this were to occur, dire economic implications would occur in communities built around the energy sector, for families whose livelihood depends on the energy sector, and for the nations abroad who depend on importing American energy. This would also be a major blow to America on the global stage as one of our main exports would be decreased, and we would lose influence.

The U.S Energy Information Administration, which is part of the current administration, is publishing contradicting information than what is being portrayed from political figures and news outlets. I would rather believe what the EIA is projecting than opinions from people who have either dismissed these reports due to personal bias or never actually read them. The EIA is projecting that the global use of energy will increase by close to 50% by 2050. In 2020, renewables accounted for 12% of the domestic energy mix based on the primary energy by consumption. On a global scale, the EIA projected renewables to reach roughly 25% of the entire global energy mix by 2050. The EIA is projecting that renewables will experience the largest amount of growth in the next three decades but won’t overtake natural gas until roughly 2038, and in 2050 petroleum and other liquids will still be the largest primary energy source by consumption. Natural gas and petroleum, and other liquids are expected to grow over the next three decades.

I am pro-renewables, and I am invested in renewable energy companies such as Clearway Energy (CWEN). I would like to believe that nobody is against generating energy from renewable sources. The facts are that renewables won’t displace fossil fuels anytime soon. Renewables can’t overtake fossil fuels today, and they won’t overtake them as the global energy demand increases. Energy infrastructure companies such as the ones AMLP invests in are critical to the domestic energy infrastructure and the global energy demand. Now could be a great time to invest in AMLP because the additional red tape will constrict new pipelines from being built and place more demand on the doorstep of the companies within AMLPs portfolio.

Conclusion

I am a fan of energy infrastructure companies, and AMLP provides a basket of investments within the MLP sector. By investing in AMLP, investors are able to circumvent the dreaded schedule K-1 form as AMLP issues a 1099 come tax season. Good old American energy isn’t disappearing into the night, and the EIA is projecting that it will continuously grow for the next 3 decades. FERC just came out with new legislation that will add increased red tape to new infrastructure projects, which will put existing infrastructure front and center to connect upstream and downstream segments in the energy sector. AMLP is yielding close to 8%, and now could be a great time to invest. As I stated in the article, please consult with a tax professional about the tax implications of investing in an MLP directly or AMLP. I am long American energy, even if it’s not popular, because the reality is that it will play an important role for decades to come.