If growth is a good thing, then master limited partnerships (MLPs) must be doing great right now.

Analysts and investors packed the house at a recent annual investor conference sponsored by the National Association of Publicly Traded Partnerships (NAPTP). The organization counted 1,100 attendees at its 2013 meeting; an increase of more than one-third from last year’s turnout and nearly double the attendance from two years ago.

Wunderlich Securities said it “thought the vibe of the conference was quite positive” in an analyst report on the Stamford, Connecticut, session. “Given that the sector [investment] has increased more than 20% year-to-date, this was not unexpected.”

The thriving crowd also caught the attention of Global Hunter Securities, which reported a change in emphasis as attendance has swelled. “The discourse has become more about the fundamentals as a portion of the attendees are new to the segment,” compared to prior-year programs, it found.

All the MLP newcomers are no surprise as yieldhungry investors seek better returns in a market offering few opportunities for appreciable investor income. Interest rates may be creeping up but investments, overall, have a long way to go before matching most current MLP yields of 6% or better.

The MLP structure combines the tax benefits of a limited partnership with the liquidity of a publicly traded security. The partnerships pay no corporate income tax and pass through substantially all income to partners. Congress approved publicly traded partnerships for natural resource companies in the 1980s and a series of Internal Revenue Service (IRS) decisions has stepped up their usage to a growing number of industries. The structure has become common for midstream operators with an increasing number of upstream oil and gas producers also opting to become partnerships.

The Arlington, Virginia-based NAPTP has played a crucial role in explaining what MLPs are to government officials and the public.

During its conference, three panel discussions on MLP structure, money flows and tax issues added to formal presentations, breakouts and one-on-one sessions hosted by 61 partnerships.

Structure

There are MLPs—and then there are MLPs. A panel of three attorneys, David Oelman, capital markets practice group leader at Vinson & Elkins; Bill Cooper, partner with Andrews Kurth; and Joshua Davidson, partner with Baker Botts, discussed the differing legal structures and terminology of MLPs and how they can best be used to meet the needs of partnerships and investors.

Limited partners, general partners, variable rate MLPs, incentive distribution rights, subordinated units—it can confuse investors accustomed to the corporate model.

Oelman noted that “it’s not all midstream” in the MLP universe anymore. “It’s 80% midstream but there are lots of different kinds of businesses that are MLPs now.” That impacts the exact legal structure a partnership adopts.

He added that investors may take the view that structure isn’t important—as long as unit payouts keep coming. But it’s important to understand structure when things change.

“In a down business cycle, is this the same business with or without subordination, could it matter to investors?” Oelman said. “Sure, and these are things in an absolute sense that do have economic value.”

Davidson noted custom and legal obligations aren’t always the same.

“Sometimes people ask if there’s a legal requirement for MLPs to distribute cash like there is for real estate investment trusts (REITs). There is not. It is a market-created phenomenon,” he said. “We say that MLPs have to distribute all their available cash—but that’s after reserves.”

MLPs see changes under way in money flows, according to a second panel. Greg Reid, managing partner with Salient Partners; David Schulte, managing director with Corridor InfraTrust Management and chief executive at CorEnergy; and Rob Chisholm, senior portfolio manager with Center Coast Capital; participated.

Reid called MLPs “a fairly new asset class that’s just getting accepted institutionally,” adding the class has grown rapidly and that energy MLPs alone now have a market capitalization of $420 billion—rivaling the better-known REITs in size.

Schulte agreed, pointing out half of MLP investors are individuals seeking income, adding “it’s still an individual-driven market” as opposed to the institutions that dominate conventional corporation investing. He discussed the importance of infrastructure to investors and pointed out midstream MLPs are all about infrastructure. “Global capital is flowing into the sector in ways that are benefitting every investor in the sector,” he added.

The tax panel, featuring C. Timothy Fenn, partner with Latham & Watkins LLP; Thomas Ford Jr., partner with Andrews Kurth LLP; and Rob Baldwin with Pricewaterhous Coopers LLP; provoked laughter in a lively question-and-answer session.

Much of their discussion centered on the often-maligned, highly detailed IRS Schedule K-1, required for MLP investors’ income tax returns. The form is much more involved than the smaller, more-straightforward Form 1099 used to report ordinary income.

Baldwin said MLPs are making greater use of websites and call centers to help individual investors break down the form’s multiple lines of information—as well as related questions concerning unit sales, gifts and other investor moves. “I guess the key here is we spend a lot of time trying to demystify the K-1,” he added.

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