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Terms Of The Trade: Master Limited Partnerships

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Terms Of The Trade: Master Limited Partnerships
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Energy Transfer Partners LP (NYSE: ETP) is one of the largest master limited partnerships and is valued at more than $20 billion. The company is engaged in natural gas operations, including natural gas midstream and intrastate transportation and storage.

Wait a second — Energy Transfer Partners is a what?

A master limited partnership (MLP) is simply a limited partnership company that is publicly traded. The limited partner is the group that supplies capital to the MLP and, in exchange, receives distributions, mostly in the form of dividends, from the MLP's cash flow.

Related Link: First Trust New Opportunities MLP & Energy Fund Declares Monthly Common Share Distribution

The general partner, on the other hand, handles the MLP's affairs and, in return, receives a form of compensation.

Not every company can be an MLP. In fact, one of the criteria is that the partnership must drive approximately 90 percent of its total cash flows from selling natural resources and/or commodities.

MLPs also must operate a business involved in at least one of the following:

    1. Exploration & Production (E&P): As the name implies, searching for crude oil or other commodities.
    2. Processing: The transformation of raw energy commodities into a form that can be used by clients.
    3. Storage: The storage of energy either in its raw form or processed.
    4. Transportation: The process of moving commodities from one place to another.

MLPs also come with tremendous tax benefits as the partnership is not required to pay any taxes from the profit it receives. Unit holders who receive a dividend do however pay taxes.

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