NOTES is a portion of iMOBHQ's website where we post items that are important information to investors in understanding and learning the world of investing.  These are items that we came accross with during out 10 years of portfolio management research.

MLP stands for Master Limited Partnership.  MLPs is a business structure designed to pass through the bulk of it's income to shareholders.  This form of business provides some tax advantages to both the business and shareholders.  This type of business form is designed to not pay taxes at the corporate level thus making it's operating cost lower.  Companies that have MLP form of business generally has to earn 90% of its income through activities involving with the production or transportation of natural resources and/or commodities.  Some MLP's business activities may involve real estate, amusement parks, and death care business.  Firms that are suited for MLP structure are those that have steady, predictable cash flows.

Many of the opportunities in the MLP universe come in the form of pipeline and shipping companies that produce dependable cash flows. The key metric to look at is Distributable Cash Flow (DCF), which is the amount of cash available for distribution that an MLP generates. Net income isn't terribly important for many MLPs, as they can show net losses due to large depreciation expenses and still produce substantial DCF.

The MLP structure always consists of two business entities: the limited partner (LP) and the general partner (GP). The limited partner usually invests the capital into the business and owns the assets, while the general partner runs the MLP's operations and receives incentive distributions rights (IDRs). IDRs are determined when the MLP is formed, with the GP receiving a higher percentage of the cash distributions the better the LP performs, making it a pay-for-performance arrangement. This gives the GP a huge incentive to increase the payout to LP shareholders. IDRs are always capped at a certain percentage and can vary by company. The lower the IDR, the better it is usually for investors