The Nine Best Natural Gas, Oil Pipelines for Income and Capital Gains

Seeking Alpha ^ | 15 Sep 09 | Joseph L. Shaefer

[shove_it]

This concludes my trilogy of articles discussing why natural gas & why now, which exploration firms I think offer the best opportunity, and, below, the pipeline, gathering, storage, and processing firms I believe are poised to profit most.

Most natural gas pipeline companies are organized as MLPs – Master Limited Partnerships. MLPs are a little like REITs -- Real Estate Investment Trusts -- since they don’t pay income taxes directly. Instead, income is allocated among all partners (that would be you and me as shareholders) in proportion to the number of shares we own. Typically, there will be a general partner, whose responsibility it is to actually run the business, and we shareholders are the limited partners.

To qualify for the tax advantage, the IRS demands that 90% of an MLP’s income come from real estate, commodities, or natural resources -- mining, timber or energy. MLPs typically provide a tax advantage because much of their distribution is classified as a return of investment instead of income and is thus tax-deferred. Some people shy away from MLPs because they are a pain in the neck at tax time.

Personally, I’d rather put up with that pain in the neck once a year and sleep soundly the other 364 nights, but your mileage may vary. The MLP’s general partner will mail individualized “K-1” tax forms to each shareholder (technically, since you are a partner, “unit-holder”) in March of each year that specifies the tax treatment of the prior year's payouts.

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[Vaduz]

Income and Capital Gains will be a thing of history by the time Obama & Co. are done.