Research: Investing Guide
I N PA RT N E R S H I P W I T H T H E
M ast e r L i M i t e d Pa rt n e r s h i P as s o c i at i o n
The Research Magazine Guide to
Master Limited
Partnerships
2016
Supplement to Research: Magazine
A DIVERSIFIED NATURAL RESOURCE COMPANY
Natural Resource Partners L.P.
www.nrplp.com
The Research Magazine Guide to
Master Limited
Partnerships
2016
3. MLPs in Today’s Investing Environment
By MaRy lyMan
MLPs have been — and remain — a sound, smart investment to consider
for a number of reason, and the United States remains in the midst of an
energy renaissance.
11. Looking Ahead
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MLP Investor Fact sheets
Quantity reQuested
By Ed McCaRThy, CFP
Several industry experts highlight what advisors and investors need to
know about master limited partnerships and how MLPs are poised to
prosper in the future.
▼
_____ Cheniere Partners CQP
_____ EQT Midstream Partners EQM, EQGP
_____ Magellan Midstream Partners MMP
22. ABCs of MLPs
Investing in the asset class entails a grasp of the different types of MLPs,
tax issues and related terminology.
23. List of Master Limited Partnerships
_____ Natural Resource Partners NRP
_____ NuStar Energy NS, NSH
_____ Summit Midstream Partners SMLP
_____ TC PipeLines TCP, TRP
MLP FUnD/etF Fact sheets
S i G n aT u R E ( R e q u i R e d )
d aT E ( R e q u i R e d )
Quantity reQuested
FiRST naME (Please PRint)
iniTial
TiTlE
CoMPany naME
laST naME
▼
_____ Advisory Research INFIX, INFRX,
CoMPany aREa CodE & TElEPhonE nuMBER
INFFX, INFEX, INFJX, INFKX
Fa x n u M B E R
C o M P a n y S T R E E T a d d R E S S u P S / F E d E x d E l i v E R y— n o h o M E a d d R E S S E S o R P. o . B o x E S P l E a S E
_____ Alerian MLP ETF AMLP
_____ Kayne Anderson Capital Advisors KYN,
KYE, KMF, KED
CiTy
S TaT E
E-Mail addRESS (RequiRed)
ZiP
_____ Tortoise Capital Advisors NTG, NDP,
TPZ, TTP, TYG, TYN
The following fact sheets are paid advertisements prepared by the subject companies. They have not been reviewed for accuracy by
Research Magazine, which does not endorse or recommend securities. Research receives a fee for distributing this investor Fact Sheet.
J u ly 2 0 1 6
The Research Guide to Master limited Partnerships
1
CHENIERE ENERGY PARTNERS, L.P.
Owns and operates the Sabine Pass LNG terminal
EXECUTING AN INDUSTRY-LEADING LNG PLATFORM
Cheniere Energy Partners, L.P is constructing and developing the Sabine Pass liquefaction facility
adjacent to the exiting regasification facilities in southwest Cameron Parish, Louisiana. We plan
to construct over time up to six liquefaction trains, which are in various stages of development
and construction. Train 1 achieved substantial completion in May 2016, Train 2 is undergoing
commissioning, Trains 3 through 5 are under construction and Train 6 is fully permitted.
Each liquefaction train is expected to have a nominal production capacity of approximately 4.5 mtpa
of LNG.
Cheniere Energy Partners, L.P.
NYSE MKT: CQP
713.375.5000
Cheniere.com
M a s t e
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M
i t e
d P
a
r
t
n
e
r
s
h
i
P
s
MLPs in Today’s
Investing
Environment
By MARy lyMAN, Executive Director, Master Limited Partnership Association
W
hen it comes to investing in the energy space,
most of the focus of late
has understandably been on the
commodity downturn that began
in 2015. As a short-term effect, the
drop in energy prices has resulted
in distribution reductions and restructuring for a small number of
master limited partnerships with
the greatest commodity price exposure, which is to be expected in any
industry facing fluctuating prices.
By and large, however, MLPs
have been — and remain — a sound, smart investment to consider for a
number of reasons. Chiefly, despite last year’s market downturn, the United
States is still in the midst of an energy renaissance of huge proportions,
J u ly 2 0 1 6
By and large, however,
MLPs have been — and
remain — a sound, smart
investment to consider
for a number of reasons.
Chiefly, despite last
year’s market downturn,
the United States is
still in the midst of an
energy renaissance of
huge proportions, thanks
largely to investment
and innovation that have
unlocked new domestic
energy supplies.
The Research Guide to Master limited Partnerships
3
ORGANIC GROWTH OPPORTUNITIES AND PREMIER
MIDSTREAM ACCESS FROM THE MARCELLUS AND UTICA
EQT Midstream Partners, LP (NYSE: EQM) is a growth-oriented limited partnership formed by natural gas
producer EQT Corporation to own, operate, acquire, and develop midstream assets in the Appalachian Basin. In
May 2015, EQT GP Holdings, LP (NYSE: EQGP) was formed to own EQT’s partnership interests, including
incentive distribution rights, in EQT Midstream Partners, LP.
Strategically located in the heart of the Marcellus and Utica Shale, the premier natural gas basin in the world,
EQT Midstream Partners (Partnership) provides natural gas transmission, storage, and gathering services to
EQT and multiple third parties in the region. The Partnership offers supply-to-market solutions through its
900 miles of FERC-regulated interstate pipelines that connect to five long-haul interstate pipelines and various
distribution companies serving the northeast and east coast markets. The transmission system is supported
by 14 natural gas storage reservoirs with 32 Bcf of working gas capacity. The Partnership also has more than
1,600 miles of high- and low- pressure gathering lines with multiple delivery interconnects.
With at least one major accretive asset acquisition from EQT over the past three years, the Partnership also
has plans for significant organic growth through pipeline extension projects that will provide access to
Midwest, Gulf Coast, and Southeast markets. EQT Midstream Partners offers a stable cash flow profile,
generating revenues primarily through fixed reservation fees under long-term contracts. Since its initial public
offering in June 2012, the Partnership has more than doubled its quarterly cash distribution; it projects a 20%
annual distribution growth target through 2017.
EQT Midstream Partners…your premier infrastructure resource for moving natural gas
from the Marcellus and Utica to multiple markets.
EQTMidstreamPartners.com
M a s t e
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thanks largely to investment and
innovation that have unlocked new
domestic energy supplies.
Amid all-time highs in production and growing energy consumption, there are questions about how
the nation can reach its full energy
potential, meet this demand, and
keep pace with the massive infrastructure investment needed to do
so. This signals that, as owners and
operators of a large portion of the
nation’s natural gas pipeline network, many MLPs will be attractive
investments for years to come.
So, is investing in an MLP right for
advisors and their investor clients?
To answer this question, it is
M
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n
MLPs combine the
liquidity of corporate
stocks and bonds with
the tax efficiency of
investing in a partnership.
They are publicly traded
on the New York Stock
Exchange, the NASDAQ
Stock market, and many
regional exchanges,
allowing access to a
broad base of investors
through the public equity
markets, a benefit most
partnerships do not enjoy.
important to have the full back-
e
r
s
h
i
P
s
to investors, along with offsetting
deductions, rather than taxed at
the entity level. MLPs combine the
liquidity of corporate stocks and
bonds with the tax efficiency of investing in a partnership. They are
publicly traded on the New York
Stock Exchange, the NASDAQ
Stock market, and many regional
exchanges, allowing access to a
broad base of investors through
the public equity markets, a benefit most partnerships do not enjoy.
MLPs are required by their partnership agreements to distribute
available cash flow to investors.
Millions of shares (or “units”)
are currently owned by investors
(or “unitholders”). The majority
ground on what MLPs are, why they’re important to
of these are individuals who benefit from the steady
both investment portfolios and the economy as a whole,
cash flow provided by quarterly distributions, similar
and what is on the horizon politically for the business
to dividends paid by corporations. Additionally, there
structure.
are several exchange traded funds, or ETFs — which
trade like a common stock — that exclusively track
MLP 101: How They Work
MLPs. It is these regular distributions that make MLPs
Activities: What are master limited partnerships?
a desirable income investment for retirees. In fact, in-
MLPs are publicly traded partnerships which operate
mostly in businesses related to oil and natural gas, with
some focused on other resources as well. As directed by
dustry research has shown that a majority of individual
investors are over the age of 50.
MLPs Today: What do MLPs look like now?
Congress, to qualify as an MLP, 90 percent of a com-
Today, there are roughly 140 MLPs. More than 80 per-
pany’s income must come from one of the following
cent are in energy and natural resources and, among
activities: exploration, development, mining or produc-
these, the majority operate in the midstream sector,
tion, processing, refining, transportation via pipeline,
which gathers and processes, transports, and stores oil,
terminalling and storage, or marketing. A few other
refined petroleum products, renewable fuels, natural
income sources also qualify — some related to similar
gas, and natural gas liquids.
natural-resource activities and others in real estate —
but these are currently a small minority of MLPs.
In addition to the MLPs that build and operate
energy infrastructure, a number of MLPs provide
Structure and Investing: Qualifying businesses can
consumers throughout the country with propane for
organize as partnerships rather than corporations,
home heating and other uses. Some MLPs refine oil
which means that taxable income is passed through
into fuels and other products, and some are whole-
J u ly 2 0 1 6
The Research Guide to Master limited Partnerships
5
Targeting Annual Distribution Growth
of 10% for 2016 and At Least 8% for 2017
NYSE: MMP
Magellan moves the fuel that keeps America going.
Magellan owns the longest refined products pipeline system in
the country. We can tap into more than 50% of the nation’s refining
capacity and store over 95 million barrels of petroleum products,
such as gasoline, diesel fuel and crude oil.
Annualized Cash Distributions
Declared per MMP Unit
$3.32
With Magellan, you are investing in the strength and stability
of an investment-grade company. Our investors benefit from
our primarily fee-based business, low-risk growth projects and
attractive quarterly cash distributions.
‘11
‘12
NYSE: MMP
‘13
‘14
‘15
‘16
Projected
www.magellanlp.com
Investor Relations
Paula Farrell • 877-934-6571 • [email protected]
Portions of this document constitute forward-looking statements as defined by federal law. Although we believe such statements are based on reasonable assumptions, actual outcomes may be materially different. Please refer to
the additional information about risks and issues that could lead to material changes in our performance contained in the partnership’s filings with the Securities and Exchange Commission available at www.sec.gov.
M a s t e
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sale distributors of gasoline and
heating oil; some natural resource
MLPs earn revenue from oil, gas,
and coal properties; some manufacture fertilizer; and a few own timber
properties either as a primary business or in addition to other natural
resource activities.
The Necessity of MLPs
Working as Intended: One of the
reasons MLPs can be a sound investment is that, regardless of
whether energy prices are high or
low, there will still be demand for
constructing the nation’s vital domestic energy infrastructure network. MLPs are busily (and with
private dollars) funding a large part
of that construction.
In the 1980s, Congress approved
the MLP tax structure when it faced
M
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d P
a
r
t
n
In fact, a recent report
by the global consulting
firm ICF International
concluded that the
United States and
Canada will require
a total investment of
up to $621 billion in
natural gas, crude oil,
and natural gas liquids
infrastructure by 2035 …
The fact that MLPs can
play a large role in this
construction, without
requiring any additional
government spending,
makes them an even
more stable, attractive
investment.
questions about meeting energy
e
r
s
h
i
P
s
supply chain linkage. The same
study also found that the midstream
MLP industry would support more
than 1.6 million jobs over the following five years, or an average of
about 330,000 per year, and would
pay cumulative wages totaling $147
billion over that period.
Looking Ahead: In addition to
working as intended for more than
a quarter century, the demand for
MLPs’ investment dollars should
grow with time. Meeting the country’s energy needs will require large
amounts of new investment each
year, for decades to come.
In fact, a recent report by the
global consulting firm ICF International concluded that the United
States and Canada will require a total investment of up to $621 billion
in natural gas, crude oil, and natural
gas liquids infrastructure by 2035.
needs. Back then, policymakers recognized the need
This infrastructure will be needed if we are to realize
for a way to stimulate financing for a capital-intensive
the full benefit of our energy resources. The fact that
industry, and MLPs were the answer. Fast forward
MLPs can play a large role in this construction, without
three decades, and the fact is MLPs have worked as
requiring any additional government spending, makes
intended, to a great deal of success.
them an even more stable, attractive investment.
MLPs today operate in every state, producing, processing, transporting, storing, and distributing energy
Public Policy and MLPs
products to meet the needs of American homes, busi-
Because MLPs are entities whose benefits derive largely
nesses, and communities. In fact, MLPs’ investment in
from a structure that has been sanctioned by Congress
energy infrastructure across the country totaled nearly
and is governed by the federal tax code, the investment
$157 billion between 2007 and 2014, with more than
environment can be affected by the political environ-
$29 billion in 2014 alone.
ment in Washington. Understanding the political en-
That continuous investment has been making a tan-
vironment for MLPs requires putting it in the context
gible impact on the economy at large. A study by the
of issues such as IRS regulations regarding “qualifying
economic consulting firm Quantria Strategies found
income,” partnership audit provisions, and Washing-
that midstream energy MLPs supported approximately
ton’s perennial discussions of tax reform.
323,000 U.S. jobs as of 2012, both directly and through
J u ly 2 0 1 6
With the leadership of the industry’s advocacy
The Research Guide to Master limited Partnerships
7
NuStar benefits from a high-quality, large and diverse asset footprint in strategic locations. NuStar is
NuStar
benefits from
a high-quality,
large
and diverse
assetinsulated
footprintfrom
in strategic
locations.
NuStar
well-balanced
between
storage and
pipelines
and partly
the impact
of crude
price is
well-balanced
between
storage
and
pipelines
and
partly
insulated
from
the
impact
of
crude
price
volatility, as all crude pipeline volumes are either demand-pull or are supported by minimum volume
volatility,
as
all
crude
pipeline
volumes
are
either
demand-pull
or
are
supported
by
minimum
volume
commitments. NuStar has a company-wide commitment to its distributable cash flow growth.
commitments. NuStar has a company-wide commitment to its distributable cash flow growth.
NUSTAR ENERGY L.P (NYSE: NS) is a master limited partnership with investment opportunites through internal
NUSTAR
ENERGY
L.P
(NYSE:acquisitions.
NS) is a master
with investment
opportunites
throughoperators
internal in
growth capital
projects and
synergistic
As onelimited
of the partnership
largest independent
liquids terminal
and pipeline
growth
capital
projects and
acquisitions.
As one
of the largest
terminal
and
pipeline
operators in
the nation,
we currently
havesynergistic
approximately
8,700 miles
of pipeline
and 79independent
terminal andliquids
storage
facilities
that
store and
the
nation,
we
currently
have
approximately
8,700
miles
of
pipeline
and
79
terminal
and
storage
facilities
that
store
and
distribute crude oil, refined products and specialty liquids. Our combined system has approximately 93 million barrels of
distribute
crude oil,
refined
products
and specialty
liquids.
combined
system has approximately 93 million barrels of
storage capacity
with
assets
spread across
the country
andOur
around
the globe.
storage capacity with assets spread across the country and around the globe.
NUSTAR GP HOLDINGS, LLC (NYSE: NSH) owns the general partner interest, a limited partner interest and the
NUSTAR
GP HOLDINGS,
LLC
(NYSE:
NSH)
owns
the general
interest,
a limited
partner
interest
and the
incentive distribution
rights in NuStar
Energy
L.P. While
NS has
historically
hadpartner
a higher
yield, an
investment
in NSH
provides
incentive
rights for
in NuStar
While
NStohas
had
a incentive
higher yield,
an investment
investors distribution
with the potential
greaterEnergy
capitalL.P.
returns
due
its historically
ownership of
the
distribution
rights in
in NSH
NS. provides
investors with the potential for greater capital returns due to its ownership of the incentive distribution rights in NS.
UNIT PERFORMANCE: NS has provided its unitholders with a 510% return1 since its IPO in 2001, while NSH has
1
UNIT PERFORMANCE:
NS has
provided
unitholders
with a NS
510%
since itsa IPO
in 2001,towhile
NSH hasat
1
provided
its unitholders with a 119%
return
sinceits
IPO
in 2006. Today,
andreturn
NSH provide
distribution
its investors
1
provided
its unitholders
with
a 119%
since As
IPOofinMay
2006.
provide
a and
distribution
to its
investors
at
yields currently
among the
highest
in return
the industry.
23,Today,
2016, NS
NS and
unitsNSH
yielded
8.9%
NSH units
yielded
8.6%.
yields currently among the highest in the industry. As of May 23, 2016, NS units yielded 8.9% and NSH units yielded 8.6%.
Resilient and Strong Core Operations,
Resilient
StrongofCore
Operations,
No
Matter and
the Price
a Barrel
of Crude
No Matter the Price of a Barrel of Crude
Key Facts:
Key Facts:
Storage segment
Storage segment
effectivity
full at > 90%
effectivity
utilization2full at > 90%
utilization2
95% of pipeline
95%
of pipeline
revenue
committed
revenue take
committed
through
or pay
through take
or pay
contracts
or structural
3 structural
contracts
exclusivityor
exclusivity3
Coverage Ratio (Trailing Twelve Months) vs Price of Crude
Coverage Ratio (April
(Trailing
Twelve
Months)
vs Price of Crude
2014
– March
2016)
(April 2014 – March 2016)
NUSTAR ENERGY L.P. NYSE: NS
NUSTAR
ENERGY L.P. NYSE: NS
WWW.NUSTARENERGY.COM
WWW.NUSTARENERGY.COM
NUSTAR GP HOLDINGS LLC. NYSE: NSH
NUSTAR
GP HOLDINGS LLC. NYSE: NSH
WWW.NUSTARGPHOLDINGS.COM
WWW.NUSTARGPHOLDINGS.COM
1-Source: Bloomberg (as of May 23, 2015) | 2-greater than 90% utilization as of March 31, 2016 (98% of leasable storage utilized) | 3-As of March 31, 2016
refining
competition)
1-Source: Bloomberg (as of May 23, 2015) | (uncommitted
2-greater thanlines
90%serving
utilization
as ofcustomers
March 31, with
2016no
(98%
of leasable storage utilized) | 3-As of March 31, 2016
(uncommitted lines serving refining customers with no competition)
M a s t e
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organization, the Master Limited
Partnership Association (MLPA),
the sector keeps a close eye on
any policy changes that may affect MLPs and protects their interests by focusing on the fact
that MLPs have not only worked
precisely as Congress intended
three decades ago, but have done
so with great success.
In 2015, a confluence of political gridlock over the debt ceiling
and highway funding, leadership
changes in Congress, and eyes already turning to the 2016 elections
led to very little in the way of meaningful legislation. Instead, the most
consequential policy issues facing
MLPs last year were the IRS’ pro-
M
i t e
d P
a
r
t
n
With the leadership of
the industry’s advocacy
organization, the Master
Limited Partnership
Association (MLPA), the
sector keeps a close eye
on any policy changes
that may affect MLPs
and protects their
interests by focusing
on the fact that MLPs
have not only worked
precisely as Congress
intended three decades
ago, but have done so
with great success.
posed regulations on qualifying
e
r
s
h
i
P
s
Second, the proposed regulations include a far too narrow
definition of qualifying income regarding processing and refining for
minerals and natural resources —
one that in some cases directly contradicts previous guidance. Many
other commenters shared MLPA’s
positions, as the proposed regulations have also prompted letters of
concern from a number of members
of the House Committee on Ways
and Means and from the Louisiana
congressional delegation. Final
regulations, which hopefully will
address MLPA’s concerns, are due
out in June 2016.
The introduction of the
Partnership Audit Simplification
Act in June presented another
income activity for MLPs and legislation aimed at re-
potential concern for MLPs. The legislation, as
forming the rules for IRS audits of large partnerships.
introduced, would have had the harmful consequence
With regard to the 2015 IRS proposal, MLPA and
of imposing joint and several liability on partners and
its members worked to firmly push back on certain
partnerships and forcing MLPs and other partnerships
portions of the regulations that are were inconsistent
to pay any additional tax owed after an audit at the
with the original legislation and congressional intent.
entity level. Again, MLPA, along with other interested
Submitting formal comments to the IRS and working
organizations, worked with lawmakers and staff,
with lawmakers, the association expressed how MLPs
pointing out the problems with the proposed legislation
have consistently operated as intended under section
and its harm to MLPs. Although some technical issues
7704 of the tax code for three decades; during that time,
remain to be resolved, the provisions as enacted are a
the IRS has provided workable guidance on qualifying
great improvement over the original bill. In particular,
income via private letter rulings (PLRs).
partners will not be jointly and severally liable for
The 2015 proposed regulations, however, run counter to both previous PLRs and congressional intent.
additional tax owed.
First, MLPA stated that the IRS’ proposal to create
More InforMatIon
exclusive lists of qualifying activities would not make
as advisors and clients consider an MLP investment,
MLPa’s website, MLPassociation.org, can serve as a
resource to you or your organization — with access
to annual reports, presentations, investor relations
materials, frequently asked questions, and more.
the regulations flexible enough to accommodate the
development of new technologies. In an innovative and
ever-shifting industry like energy, this risks the regulations being outdated by the time final rules are written.
J u ly 2 0 1 6
The Research Guide to Master limited Partnerships
9
aBOut Summit midStream
aBOut Summit midStream
WILLISTON BASIN
WILLISTON BASIN
Summit midStream
Summit midStream
PartnerS, LP (nYSe: SmLP)
PartnerS, LP (nYSe: SmLP)
NORTH DAKOTA
NORTH DAKOTA
is a growth-oriented gathering
is a growth-oriented gathering
and processing master limited
and processing master limited
partnership, headquartered in
partnership, headquartered in
The Woodlands, Texas, focused on
The Woodlands, Texas, focused on
developing, owning and operating
developing, owning and operating
midstream energy infrastructure
midstream energy infrastructure
assets that are strategically located
assets that are strategically located
in the core producing areas of six
in the core producing areas of six
unconventional resource basins,
unconventional resource basins,
primarily shale formations, in the
primarily shale formations, in the
continental United States.
continental United States.
UTAH
UTAH
OHIO
OHIO
DJ BASIN
DJ BASIN
PICEANCE BASIN
PICEANCE BASIN
MARCELLUS SHALE
MARCELLUS SHALE
COLORADO
COLORADO
TEXAS
TEXAS
PICEANCE / DJ BASINS
PICEANCE
/ DJ BASINS
Primarily fee-based natural gas gathering and
UTICA SHALE
UTICA
SHALE
Fee-based natural gas gathering and a 40% ownership
Fee-based natural gas gathering and a 40% ownership
interest in Ohio Gathering, a natural gas gathering
interest in Ohio Gathering, a natural gas gathering
system and a condensate stabilization facility in the
system and a condensate stabilization facility in the
Utica Shale.
Utica Shale.
WILLISTON BASIN
WILLISTON
BASIN
Primarily fee-based associated natural gas, crude
Primarily fee-based associated natural gas, crude
oil, and produced water gathering for customers
oil, and produced water gathering for customers
targeting crude oil production from the Bakken
targeting crude oil production from the Bakken
and Three Forks shale formations.
and Three Forks shale formations.
1.5
1.5 Bcf/d
Bcf/d
98%
98%
1Q 2016 OPERATED NATURAL GAS
1Q 2016 OPERATED NATURAL GAS
2016E FEE-BASED REVENUE
2016E FEE-BASED REVENUE
DISTRIBUTION PER LP UNIT
DISTRIBUTION PER LP UNIT
44% GROWTH
44%
GROWTH
OVER
MQD
OVER MQD
$2.300
$2.300
$2.30
$2.30
$1.900
$1.900
$1.795
$1.795
$1.700
$1.700
$1.600
$1.600
$1.500
$1.500
$1.600
$1.600
MQD
$1.640
$1.640
4Q 2012
4Q 2012
MQD
ANNUALIZED
ANNUALIZED
ANNUALIZED ANNUALIZED
2013
2013
2014
2014
2015
2015
BARNETT SHALE
BARNETT
SHALE
Fee-based natural gas gathering for customers
Fee-based natural gas gathering for customers
targeting natural gas production from the
targeting natural gas production from the
Barnett Shale.
Barnett Shale.
MARCELLUS SHALE
MARCELLUS
SHALE
Fee-based natural gas gathering in the rich-gas
Fee-based natural gas gathering in the rich-gas
window of the Marcellus Shale.
window of the Marcellus Shale.
1Q 2016 LIQUIDS THROUGHPUT
1Q 2016 LIQUIDS THROUGHPUT
ADJUSTED EBITDA 11
ADJUSTED EBITDA
$2.12
$2.12
$1.800
$1.800
Primarily fee-based natural gas gathering and
processing for customers targeting natural gas
processing for customers targeting natural gas
production from the Mesaverde, Mancos, Niobrara
production from the Mesaverde, Mancos, Niobrara
and Codell shale formations.
and Codell shale formations.
95
95 MBbl/d
MBbl/d
$ / UNIT
$ / UNIT
$2.285
$2.285
$2.200
$2.200
$2.100
$2.100
$2.000
$2.000
WEST
VIRGINIA
WEST
VIRGINIA
BARNETT SHALE
BARNETT SHALE
SmLP areaS OF OPeratiOn
SmLP areaS OF OPeratiOn
$2.400
$2.400
UTICA SHALE
UTICA SHALE
1Q 2016
1Q 2016
ANNUALIZED
ANNUALIZED
$225
$225
$200
$200
$175
$175
$150
$150
$125
$125
$100
$100
$75
$75
$50
$50
$25
$25
$0
$0
$205
$205
$ MM
$ MM
$210
$210
$165
$165
$106
$106
$70
$70
2012
2012
2013
2013
2014
2014
2015
2015
1Q 2016
1Q 2016
1. Adjusted EBITDA prior to 1Q 2016 is presented “as-reported” and does not include
1. Adjusted
EBITDA
prior
to 1Q
presented
“as-if pooled”
results
from
the2016
2016is Drop
Down.“as-reported” and does not include
“as-if pooled” results from the 2016 Drop Down.
For more information, visit WWW.SUMMITMIDSTREAM.COM or contact [email protected]
For more information, visit WWW.SUMMITMIDSTREAM.COM or contact [email protected]
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Looking Ahead
Several industry experts highlight what advisors and investors
need to know about master limited partnerships and how MLPs
are poised to prosper in the future.
By Ed McCARTHy
M
aster limited partnerships have rebounded this year, after a challenging 2015 that
included lower energy prices. The Alerian MLP Index has recovered significantly
from its lows earlier this year, and stabilizing energy prices could continue to boost
investor confidence in the sector.
We asked several industry experts for their energy-market insights and their outlooks for
the MLP sector. This year’s panel includes the following participants:
Kenny Feng, CFa
quinn t. Kiley
Matt sallee
President and Chief
Executive Officer
Managing director and
Senior Portfolio Manager
Managing director and
Portfolio Manager
Alerian
Advisory Research Inc.
Tortoise Capital Advisors llC
dallas, Texas
St. louis, Missouri
leawood, Kansas
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The Research Guide to Master limited Partnerships
11
Quality Driven Investing Since 1995
Since 1995, the Advisory Research MLP & Energy Infrastructure team has been a leader in MLP investment management. With the
longest MLP track record†, our experienced team manages over $4.1 billion in MLP and energy infrastructure assets, including the assets
of open-end mutual funds, closed-end funds, and separate accounts. Our highly disciplined investment philosophy focuses on delivering:
•
•
•
•
Current income and long-term capital appreciation opportunities
Low correlation to broad asset classes over a market cycle
High-quality midstream portfolios; our proprietary Quality Scorecard process seeks to screen out low-quality companies
Tax efficient investments
Advisory Research MLP Mutual Funds
Structured as Regulated Investment Companies (RICs), our funds are not taxed at the fund level, provide a 1099 at year-end, and do not
issue K-1s or unrelated business taxable income (UBTI).
Tickers
Security Types
Investment Objective
Investment Strategy
MLP & Energy Income Fund
INFIX, INFRX, INFFX
Equity and Debt
Current income and long-term capital appreciation
MLP & Equity Fund
INFEX, INFJX, INFKX
Equity
Total return
Invests across the capital structure of MLPs and energy
infrastructure companies with equity and debt exposure
Invests in equity of MLPs and other companies
focused in the energy infrastructure sector
For additional information, please visit www.advisoryresearchfunds.com
You should consider the Fund’s investment objectives, risks, charges, and expenses carefully before investing. For
a prospectus or summary prospectus, that contains this and other information about the Fund, call 1-888-665-1414.
Please read the prospectus carefully before investing.
Investment Considerations
The Funds primarily invest in MLPs (Master limited Partnerships) and other investments concentrated in the energy infrastructure sector. As nondiversified funds, the Funds may be subject to greater market risk than if its assets were diversified among the securities of a greater number of issuers.
Energy infrastructure companies are subject to risks specific to the industry, such as fluctuations in commodity prices, reduced volumes of natural gas
or other energy commodities, changes in the economy or the regulatory environment or extreme weather. MLPs may trade less frequently than larger
companies due to their smaller capitalizations which may result in erratic price movement or difficulty in buying or selling.
MLPs are subject to significant regulation and may be adversely affected by changes in the regulatory environment including the risk that an MLP could
lose its tax status as a partnership which could reduce the value and income produced from the Funds. An investment in the Funds does not offer the
tax benefits of a direct investment in an MLP. The Funds may invest in foreign securities including ADRs (American Depositary Receipts) which can
be more volatile because of economic and social conditions abroad, currency exchange rates, political and regulatory environments.
The Advisory Research MLP & Energy Income Fund will also invest in debt securities which involve interest rate risk, credit risk, and prepayment risk.
Generally, fixed income securities decrease in value if interest rates rise and vice versa. Investments in high yield securities and (junk) bonds are
speculative involving greater risk and less liquidity than investment grade securities. Certain transactions including the use of derivatives, may give rise
to a form of leverage which tends to exaggerate the effect of any increase or decrease in the Fund’s securities and may amplify volatility.
The Funds have elected to be, and intend to qualify each year, as a “regulated investment company” under the U.S. Internal Revenue Code of 1986
(the “Code”). To maintain qualification for federal income tax purposes as a regulated investment company under the Code, the Funds must meet
certain source-of income, asset diversification, and annual distribution requirements. If for any taxable year the Funds fail to qualify for the special
federal income tax treatment afforded to regulated investment companies, all taxable income will be subject to federal income tax and possibly state
and local income tax at regular corporate rates (without any deduction for distributions to shareholders) and any income available for distribution will
be reduced.
† Based on a survey of MLP products sourced from eVestment, a third party/consultant database.
Advisory Research Funds are distributed by IMST Distributors, LLC.
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Research: Can you tell us
which sectors and areas of the
MLP universe or which MLP
trends you focus on?
all-time high on Aug. 29, 2014, and
Kenny Feng, Alerian: As part of
the bar, we certainly expect the up-
our mission to equip investors to
coming 18 months to clear it. How
make informed decisions about
much clearance there is depends on
MLPs and the energy infrastruc-
your view of commodity prices over
ture, Alerian covers all energy
the period.
its local trough on Feb. 11, 2016,
the AMZ fell more than 58 percent
on a total-return basis. So if that’s
MLPs and their trends in the pub-
We are cautiously optimistic
lication of its indices, analytics and
and, accordingly, expect MLPs
research content.
to move higher, albeit with some
The two Alerian composites that
volatility. Our conversations with
have been adopted by industry
investors reflect a similar out-
stakeholders as sector benchmarks
look. While their questions are
are the Alerian MLP Index (AMZ),
which is the leading gauge of
energy MLPs, and the Alerian
MLP Infrastructure Index (AMZI),
which is a composed of energyinfrastructure MLPs.
Quinn T. Kiley, Advisor y
Research: We focus primarily
on those companies focused on
owning and operating midstream
assets.
Matt Sallee, Tortoise Capital
Advisors: We are an investment
manager specializing in energy investments across the energy value
chain. A significant portion of our
managed assets are in investment
grade, long-lived and, in our view,
lower-risk midstream MLP assets.
Kenny Feng
Alerian
We are cautiously
optimistic and,
accordingly, expect MLPs
to move higher, albeit
with some volatility.
Our conversations with
investors reflect a similar
outlook. While their
questions are still largely
centered on risks to the
North American energyinfrastructure buildout
thesis, the tone of
questioning has changed.
still largely centered on risks to
the North American energy-infrastructure buildout thesis, the tone
of questioning has changed.
Prior to the trough, investors
that held MLP positions wanted
to know what other shoes could or
would drop, so they could make an
informed decision about whether
or not to sell. Now, investors that
are on the sidelines want to make
sure they aren’t blindsided before
(re)committing capital to MLPs,
whether that’s tomorrow or 12
months from now.
Uncertainty is the enemy
of premium valuations; so as
MLPs continue to quantify and/
or address concerns about the
supply/demand imbalance, excess
What is your overall outlook for MLPs in late2016 and in 2017 compared with how they did
in 2015 and early-2016?
Feng: During the 17 and a-half months between its
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leverage, limited capital markets access and exposure
to weak counterparties, investor sentiment will
improve as well.
Kiley: Our view has been relatively consistent over
The Research Guide to Master limited Partnerships
13
Get what you really want.
Nobody knows MLPs like Alerian. With 150 MLPs in the market today, the Alerian MLP ETF (NYSE: AMLP) delivers
exposure to the sweet spot: energy infrastructure MLPs. These companies operate toll-road business models and can
offer greater stability and tax-deferred income compared to other MLP investments. With continuous liquidity and no
K-1s or state tax filings—AMLP can be an essential part of a well-balanced portfolio.
The sweet choice is AMLP.
Visit www.alpsfunds.com/amlp
Investors should carefully consider the investment objectives, risk, charges and expenses of any exchange traded fund (ETF) prior to investing. For a
prospectus containing this and other information, please visit www.alpsfunds.com/amlp or call 1-877-398-8461. Please read the prospectus carefully
before investing.
The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of its underlying index, the Alerian
MLP Infrastructure Index. An investment in the Fund involves risk, including loss of principal. Infrastructure master limited partnerships (MLPs) are subject to risks
specific to the industry they serve including, but not limited to: reduced volumes of commodities for transporting; changes in regulation; and extreme weather.
The ETF is not required to make distributions or make distributions that are equal to the distribution rate of the underlying partnership programs. The Fund is
taxed as a regular corporation for federal income purposes. The Fund will accrue deferred income taxes for any future tax liability associated with (i) that portion
of MLP distributions considered to be a tax-deferred return of capital as well as (ii) capital appreciation of its investments, based on the federal income tax rate
applicable to corporations currently 35% and an assumed rate attributable to state taxes. This differs from most investment companies, which elect to be treated
as “regulated investment companies” to avoid paying entity level income taxes. The NAV of Fund Shares will also be reduced by the accrual of any deferred tax
liabilities. The Fund’s after tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked. Depending
on the taxes paid by the fund as a result of income and/or gains from investments and/or the sale of MLP interests, the return on an investment in the Fund will
be reduced. A portion of the Fund’s distributions are expected to be treated as a return of capital for tax purposes. Returns of capital distribution are not taxable
income to you but reduce your tax basis in your Fund Shares. If any MLPs owned by the Fund were treated as corporations for US federal income tax purposes, it
could result in lower income and a reduction in the value of your investment in the Fund.
AMLP Shares are not individually redeemable. Investors buy and sell shares of the AMLP on a secondary market. Only market makers or “authorized
participants” may trade directly with the Fund, typically in blocks of 50,000 shares.
ETFs are considered to have continuous liquidity because they allow for an individual to trade throughout the day. Fund distributed by ALPS Portfolio Solutions Distributors, Inc.
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the past six months: We expect
opportunities across the energy value
2016 will end the year with double-
chain, including midstream MLPs.
digit returns, but the path to that
end point will be volatile.
based upon improving and stable
What is your 18-month outlook
for any of the specific MLP
sectors that you follow?
commodity prices, and from there
Feng: If commodity prices have
we think investors will realize the
bottomed and we’re in the early
value opportunity in MLPs present-
stages of a recovery, then com-
ed by the energy crisis.
modity-price-sensitive MLPs, i.e.,
Future returns are going to be
As companies demonstrate
the companies that got hit the hard-
they can operate in a lower-price,
est in the downturn, are likely to
lower-growth environment, MLPs
outperform on an absolute basis,
should post high single-digit re-
assuming they’re still financially
turns on an annualized basis going
viable.
forward.
Sallee: We feel the tide is finally turning for the energy sector,
with the recent commodity cycle
ending when oil prices bottomed
out in February. That long, painful cycle lasted 568 days from peak
to trough and will go down as the
second-longest commodity cycle in
history, with oil prices falling by 76
percent from a peak of $107.62 on
July 23, 2014, to a trough of $26.21
on Feb. 11, 2016.
Weathering this cycle, midstream MLP company fundamentals remain solid, and technical
pressures are beginning to ease.
We anticipate the supply/demand
equation will continue to improve
in 2016, and that in 2017 the U.S.
could become the swing producer to
quinn t. Kiley
Advisory Research
Those assets tied to
the import/export of
crude oil and refined
products should be well
positioned. Additionally,
infrastructure near
demand centers
(refineries, power plants
and population centers)
should also see relatively
stable volumes. The
next 18 months will be a
period of adjustment, for
issuers and investors, but
we are optimistic that the
worst is behind us.
provide the supply needed to meet
MLP performance over the next
18 months will not be primarily divided along sector lines. The
names that are best positioned for
medium-term outperformance
are those with the lowest degree
of uncertainty and highest margin for error, i.e., (1) growth visibility, (2) low leverage, (3) high
distribution coverage, (4) an investment-grade credit rating, (5)
a supportive sponsor, (6) favorable
contract structures and/or (7) asset, counterparty and geographic
diversification.
That can come in the form of a
mid-cap refinery logistics MLP with
a clear path to multi-year, doubledigit distribution growth; a smallcap gathering and processing MLP
with a well-capitalized upstream
sponsor in a low-cost basin; or a large-cap diversified
increasing global demand.
We are optimistic that such a scenario will create many
J u ly 2 0 1 6
On a risk-adjusted basis,
MLP with limited financing requirements.
The Research Guide to Master limited Partnerships
15
Experience matters –
Finding opportunities in
a changing market
Our team of investment professionals is extremely
well positioned to navigate the current energy
markets and to capitalize on attractive investment
opportunities.
We manage four publicly traded closed-end
funds (KYN, KYE, KMF and KED) as well as
private funds and separately managed accounts
that provide investors with exposure to MLPs
and other income-producing energy securities.
For more information about our funds, visit
www.kaynefunds.com1 or call 1-877-657-3863.
1
You should consider the investment objectives, risks, charges, and expenses of each fund
before investing. Each fund’s prospectus and SEC filings contain this and other information
about the fund; the prospectus and SEC filings should be read carefully before investing.
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Kiley: We think there is a chance
On the natural gas side, we’re
for continued produced volume
closely monitoring key demand
weakness over the new few quar-
drivers. Demand points, liquefied
ters, perhaps bottoming in 2016
natural gas (or LNG) exports, ex-
and then recovering somewhat
ports to Mexico and natural-gas-
in 2017 and beyond. Those assets
fired power generation are key, and
tied to the import/export of crude
they are all starting to gain more
oil and refined products should be
traction as we enter the back half
well positioned.
of the decade.
Additionally, infrastructure
To emphasize the importance of
near demand centers (refineries,
exports, propane inventory levels
power plants and population
went from being massively over-
centers) should also see relatively
supplied at the beginning of the
stable volumes.
year to almost within the five-year
The next 18 months will be a period of adjustment, for issuers and
investors, but we are optimistic that
the worst is behind us.
Sallee: Our traditional threeyear growth outlook for 2016-2018
is approximately $120 billion for
C-corp pipelines and MLPs combined, which is reduced from our
2015-2017 estimates due to supply
push-project delays to align with
producer expectations. We continue to expect potential rationalization or joint ventures of some
existing projects to more efficiently
allocate capital.
We continue to expect 5-7 percent distribution growth for the
broad MLP sector and 6-8 percent
for the midstream sector. We expect the median growth rate to tick
range at the top end within just a
Matt sallee
Tortoise Capital Advisors
We are optimistic that
we’ll see crude oil at $50$60 per barrel at the end
of the year. We expect
some volatility as crude
oil will be influenced by
macro news, commentary
and geopolitical events;
but keep in mind, the
cash flow growth of
the investment grade
midstream companies
in which we invest is not
reflective of the stock price
decline that we’ve seen.
down, while the weighted average
short three months, despite a very
mild winter domestically. That was
directly tied to a surge in exports,
which reached a peak in January
2016. More capacity is expected to
come on later in the year as well,
providing increased ability to solve
domestic propane oversupply.
What factors are likely to most
influence the performance of
MLPs in general over the next
year or so, and why?
Feng: The prices of hydrocarbons
and the paths that those prices take
will continue to exert the most influence on the performance of MLPs
over the next 12 months. Volatility
equals uncertainty, and as stated
earlier, uncertainty is the enemy
of premium valuations.
remains in the 5-7 percent range, highlighting the fact
If oil averages $50 but swings wildly, MLP investors
that midstream companies, and pipeline companies
are likely to remain skittish. On the other hand, stability
specifically, remain the best positioned to grow.
at $50 or higher will likely push MLP unit prices higher.
J u ly 2 0 1 6
The Research Guide to Master limited Partnerships
17
Investing across the
energy value chain
Tortoise is a leading energy investment manager. From
upstream producers, to midstream pipeline companies
that transport product, to the downstream end users.
Learn more at www.tortoiseadvisors.com
We manage approximately $14.1 billion* in energy investments, across listed
closed-end funds, mutual funds, private funds and separate accounts.
*As of 4/30/2016
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Other traditional downside catalysts — distribution
cuts, project deferrals and cancelations, and a lack of
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exceeding global supply, the oil market moves from
being oversupplied to being undersupplied.
access to public capital at a reasonable price — have
This would require a decline in both U.S. and global
shown themselves to be relatively less significant in
oil inventories to balance the oil markets. One key as-
this downturn.
sumption is that OPEC production volumes remain
We also believe that interest rates will remain low
flat at current levels.
in light of global economic conditions and thus are
In terms of counterparty risk, there have been con-
unlikely to play any sort of meaningful role in dictat-
cerns about counterparty risk relating to the repricing
ing MLP unit price movements in the medium term.
of rates charged by pipeline companies in bankruptcy
Kiley: We need stability in commodity prices and a
proceedings. We are not broadly concerned about pipe-
futures curve in contango. Without those, uncertainty
line rate repricing fees, because the pipeline companies
is likely to remain, and investors will stay on the
we generally focus on typically charge a market rate,
sidelines.
not above market, and therefore are not targets for
We think investors can get comfortable with a lower
rerating by the courts in our view.
commodity price regime if they understand the out-
Looking at the potential for distribution cuts, we
look. Today, short-term volatility in crude oil pricing
have seen a few midstream companies cut distribu-
is driving investor sentiment, for good or bad, and we
tions, but the vast majority of distribution cuts have
need a backdrop that provides more certainty.
come from the upstream and downstream MLPs. Im-
Sallee: As for crude oil supply/demand, we
believe lower U.S. crude oil production is necessary
portantly, this is not widespread, but in certain company-specific cases, it’s not out of the question.
to rebalance the global supply and demand markets,
The key issue is not so much the 2016/2017 cover-
and the decline in U.S. oil production has been
age outlook but rather the ratings agencies and their
accelerating.
threat of a downgrade to high yield, which would force
We remain confident that U.S. oil production will
otherwise stable midstream companies to elect to tem-
continue to decline in 2016 and possibly into 2017 due
porarily reduce distributions in defense of investment
to the continued decline in the U.S. rig count, which
grade credit ratings.
has fallen by more than 77 percent since the 2014 peak
and is at its lowest level this century.
When looking beyond the immediate trading impact
to a cut, we continue to see attractive long-term value
The U.S. Energy Information Agency (EIA) forecasts
if some companies were to cut distributions, especially
U.S. crude oil production to average around 8.6 mil-
for the general partners who may choose to cut to sup-
lion barrels per day in 2016, which is approximately
port the ratings at their limited partners.
800,000 barrels per day lower than the average production in 2015.
With OPEC producing near its maximum capacity,
How optimistic are you that the current upswing
in energy prices will continue?
the global supply and demand balance could become
Feng: We’re cautiously optimistic. We expect contin-
out of balance in the second half of 2016.
ued volatility; and we could see one or more corrections
Assuming a 1.2 million barrel per day increase in
global oil demand coupled with an 800,000 barrel per
day decline in U.S. production results in global demand
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before moving higher, but we do not believe that energy
prices will retest February lows.
The thesis of energy consultants and large-cap MLP
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executives that the ramp-up of production will be slow-
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find current prices appealing.
er and less efficient than the ramp-down is convincing.
We expect return dispersion to remain wide, so we
While the amount of crude oil sitting in storage tanks
continue to recommend a portfolio-oriented approach
and drilled uncompleted wells is certainly regarded
to investing in MLPs, whether that’s through direct
as bearish, we believe this reserve largely limits the
ownership or choosing an investment product.
magnitude of price spikes triggered by supply disrup-
Kiley: The answer to this question depends on an
tions rather than the ability of crude oil prices to inch
investor’s risk tolerance and his or her investment
higher over time.
horizon. For those with a longer-term view, today is a
Kiley: We have come very far, very fast. We are
very attractive entry point if an investor can handle the
confident that commodity prices will be higher a year
shorter-term volatility we expect. While it is true we
or more out.
have risen almost 50 percent from the February lows
However, the recent disruptions in production from
around the world, declining activity in the U.S., the
to the end of May, we are still below the 2014 peak by
over 40 percent.
reemergence of Iran to the global market and histori-
The history of MLPs has been a recovery to past
cally high storage levels for crude oil, natural gas and
highs after a bear market. This time might be different,
refined products makes us less confident over the
but we still see the need for existing infrastructure and
shorter term.
in certain regions a dire need for new infrastructure
Sallee: We are optimistic that we’ll see crude oil at
to be built.
$50-$60 per barrel at the end of the year. We expect
We think this bodes wells for investment in MLPs
some volatility as crude oil will be influenced by macro
over the long term. Those investors who are risk averse
news, commentary and geopolitical events; but keep
or with shorter investment horizons, given the recent
in mind, the cash flow growth of the investment grade
market move higher and expected volatility, might find
midstream companies in which we invest is not reflec-
MLPs less attractive today.
tive of the stock price decline that we’ve seen.
Sallee: Yes, with the energy sector poised for a re-
We believe we can get to the sweet spot where it
covery, we believe MLPs are an attractive allocation
can be a win-win. Energy costs can stay low, which
for patient investors. Midstream company valuations
benefits the consumer, and the producers can have
remain attractive, and we feel investors will be re-
oil and natural gas prices that are adequate for them
warded in the long term as fundamentals strengthen
to earn an appropriate rate of return on their capital.
throughout 2016 and into 2017.
And with the U.S. expected to become the swing
Is now a good time to invest, given recent price
improvements in energy prices and MLPs? Why
or why not?
producer to provide the supply needed to meet in-
Feng: Whether or not now, or any given moment,
energy value chain.
creasing global demand, we are optimistic that such
a scenario will create many opportunities across the
is a good time to invest depends on an individual
or organization’s investment objectives and risk
double-digit returns and participation in the build-
What new developments could push MLPs in
new directions over the next year or two? And
how about in the immediate and long term?
out of North American energy infrastructure may
Feng: We continue to observe with interest the evo-
tolerance. Longer-term investors seeking low-
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lution of the Northeast from a natural gas demand
consumers around the world, and the U.S. is expected
center into a prolific source of supply. These new
to be a critical supplier of energy to the rest of the world
volumes will need to go to Mexico, on carriers for
for years to come.
export as LNG, to domestic power plants and to new
ethane crackers built by foreign-domiciled petro-
frastructure to connect the wellhead to the end user.
Are there any additional trends that could
benefit MLP investors, which you would like to
highlight as important for the industry’s future
success?
We also expect technological advances upstream to
Feng: We’ve already seen some merger and acquisi-
continue to lower breakeven costs for producers, in-
tion activity in the first half of 2016, and we expect it
directly providing volume and cash flow support for
to continue.
chemical companies.
We expect MLPs to again provide the necessary in-
There are several illiquid, small-cap MLPs with un-
fee-based midstream assets.
Kiley: Over the next couple of years, commodity
tenable costs of capital and private-equity sponsors
prices are key. MLPs remain a primarily retail invest-
who did not sign up for a volatile macro environment
ment, and sentiment is important.
and post-IPO cash investments at the limited partner
Over the three- to five-year window, we think that
energy infrastructure companies will lower distri-
level. We expect well-capitalized MLPs to buy some of
these companies.
bution growth expectations. This will reflect their
These transactions will allow the target’s investors
reduced capital expenditures, allow them to reduce
to recoup some of their losses and to own a name with
debt levels and build higher distribution coverage
a better growth platform, while giving the acquirer an
over time.
opportunity to pick up assets at a discount.
If the industry moves in that direction, the asset
It should also be noted that a significant amount of
class will be a safer and less-volatile investment, and in
private-equity capital remains on the sidelines — both
the future, companies will be better able to withstand
for providing alternative financing to public MLPs and
future downturns. Over the long term, there is clearly
for backing new management teams of private ones —
policy risk for those MLPs involved in the extraction
and should be supportive to overall asset valuations.
of commodities, and we have seen them challenged
recently by lower commodity prices.
Sallee: We expect 2016 will be a milestone year for
U.S. energy exports, as [the industry] stands to become
Kiley: In our view the interest rate environment will
remain low for a long period of time, despite the stated
intent of the Federal Reserve to raise the benchmark
rate as the economy improves.
a relevant supplier of low-cost energy to the rest of the
In an environment with low rates and low, steady
world. For the first time in 40 years, U.S. crude oil has
economic growth, MLPs offer investors an attractive
been exported.
mix for income and value.
The first LNG shipment also was exported earlier
Despite multiple examples of MLPs moving higher
this year. And in March, the U.S. began shipping some
after recent decisions by management teams to cut or
natural gas liquids (or NGLs), such as ethane, which
suspend their distributions, we think ultimately those
is widely used in manufacturing and is enjoying rising
MLPs that can demonstrate strong coverage of their
global and domestic demand.
current and future distributions with modest growth
Effectively, the U.S. has lowered the cost of energy to
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should be rewarded by the market.
The Research Guide to Master limited Partnerships
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ABCs of MLPs
Investing in the asset class requires an understanding of different terms,
types, sub-sectors, investment vehicles, taxation issues and correlations.
Key Concepts
Master limited Partnerships: MlPs are
limited partnerships that are publicly
traded on stock exchanges. unlike corporations, MlPs do not pay federal income tax. Rather, they pass their income
to their unitholders, who may be subject
to income tax on the distributions.
Congress limited the formation of
MlPs in 1987 to companies where at
least 90% of their income was considered “qualified income,” which includes
income and gains from the exploration,
development, mining, production, processing, refining, transportation or marketing of natural resources.
In 1995, there were 16 publicly traded
MlPs. Today, there are more than 130
publicly traded MlPs, with a market capitalization near $600 million.
types of energy MlPs
MlPs are typically placed into three major categories, each of which has a different set of characteristics.
upstream MlPs: Involved in the exploration, recovery and production of crude oil
and natural gas.
Midstream MlPs: Involved in the gathering, processing, storage and transportation of oil and gas.
downstream MlPs: Involved in the distribution of fuels to end customers, including residential, industrial and agricultural
entities.
sub-sectors of energy MlPs
MlPs are also segmented into several
sub-sectors, as listed below.
Pipeline and terminating: Includes
pipeline assets that transport crude oil,
natural gas and refined petroleum products. Income is generated through tariffs
that are tied to the quantity and distance
22
transported. They are not directly exposed to fluctuating commodity prices.
gathering and Processing: owns and
operates infrastructure that aggregates
natural gas from multiple wells and delivers it to a processing plant that removes
natural gas liquids and impurities.
exploration and Production: Typically
owns long-lived reserves with low well
decline rates and focuses more on production than exploration.
Marine transportation: Transports refined products by waterborne vessels,
which are a critical link for liquefied natural gas (lNG).
Coal: Generates royalty revenues from
coal production.
Propane: Contains wholesale and retail
distribution networks that sell propane
for heating, crop drying and cooling. Also
transports to rural areas where natural
gas in not available.
MlP investment Vehicles and their
Pros & Cons
Today, investors have many options to gain
or increase their access to the asset class.
MlPs. distributions are tax-advantaged,
allowing investors to postpone tax payments until the shares are sold, thus becoming eligible for lower capital gains
taxes. Investors receive 1099s for tax
reporting. The funds are subject to corporate-level taxes. Strategies with higher
portfolio turnover may create larger potential tax liabilities for shareholders.
exchange-traded Funds: ETFs provide
easy and diversified access to MLPs. Investors receive 1099s for tax reporting.
The ETFs are subject to corporate-level
taxes. They must rebalance portfolio
holdings whenever the underlying index
constituents change, regardless of the
long-term investment potential. Rebalancing creates potential taxes.
exchange-traded notes: The entity does
not pay corporate tax. Investors receive
1099s for tax reporting. Investors must
pay ordinary income tax on the entirety
of the coupon income distributed by the
ETN. Investors take on credit risk associated with bank that is backing the note.
Many ETNs trade at a premium.
separate account: These accounts receive pass-through taxation status to
avoid double taxation. Investors are responsible for the taxes on gains received.
Correlations
MlPs have historically exhibited not only
low correlation with u.S. equities (0.4), but
also u.S. REITs (less than 0.4) and u.S. utilities (less than 0.5), according to data from
october 1999 through december 2014.
Moreover, MlPs have exhibited very little correlation with commodities such as
oil (under 0.3) and natural gas (less than
0.2), and practically no correlation with
U.S. fixed-income investments.
Thus, MlPs can be used to diversify a
wide range of existing portfolios—whether they are more geared toward capital
growth or income production—and provide exposure to real assets.
Open-end Mutual Funds: These funds
provide easy and diversified access to
Source: Invesco, “Why the Long-Term Case for
MLPs Transcends Oil Price Fluctuations,” April 2015.
individual Ownership: This method is
tax efficient. The majority of the revenue
is tax-deferred. Taxable investors do not
pay taxes until they sell. Tax reporting is
complex. Investors receive Schedule K-1s.
Investors must file state income taxes in
each state where the MlP operates.
The Research Guide to Master limited Partnerships
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Master LiMited PartnershiP association MeMbers
Höegh LNG Partners LP
Alliance Resource Partners LP/Alliance Holdings GP, LP
Holly Energy Partners, LP
American Midstream Partners LP
JP Energy Partners LP
Antero Midstream Partners LP
KNOT Offshore Partners LP
Arc Logistics Partners LP
Landmark Infrastructure Partners LP
Archrock Partners LP
Linn Energy LLC
Atlas Energy Group LLC/Atlas Resource Partners LP
Magellan Midstream Partners LP
Azure Midstream Partners LP
Martin Midstream Partners LP
Black Stone Minerals LP
Memorial Production Partners LP
Blueknight Energy Partners LP
Midcoast Energy Partners LP
Boardwalk Pipeline Partners LP
MPLX LP
BreitBurn Energy Partners LP
Natural Resource Partners LP
Buckeye Partners LP
Navios Maritime Partners LP
Calumet Specialty Products Partners LP
Navios Maritime Midstream Partners LP
Capital Product Partners LP
NGL Energy Partners LP
CEBA Midstream LP (not yet trading)
Northern Tier Energy LP
Ciner Resources LP
NuStar Energy LP/NuStar GP Holdings LLC
Cheniere Energy Partners LP
ONEOK Partners LP
Columbia Pipeline Partners LP
PBF Logistics LP
CONE Midstream Partners LP
PennTex Midstream Partners LP
Crestwood Equity Partners LP
Phillips 66 Partners LP
CrossAmerica Partners LP
Plains All American Pipeline LP
CVR Partners LP
Plains GP Holdings LP
CVR Refining LP
Rice Midstream Partners LP
Cypress Energy Partners LP
Rose Rock Midstream LP
DCP Midstream Partners LP
Sanchez Production Partners LP
Delek Logistics Partners LP
Sempra Energy
Dominion Midstream Partners LP
Shell Midstream Partners LP
Dorchester Minerals LP
Southcross Energy Partners LP
Emerge Energy Services LP
Spectra Energy Partners LP
Enable Midstream Partners LP
Sprague Resources LP
Enbridge Energy Partners LP
StoneMor Partners LP
EnLink Midstream Partners LP/Enlink Midstream LLC
Suburban Propane Partners LP
Enterprise Products Partners LP
Summit Midstream Partners LP
Enviva Partners LP
SunCoke Energy Partners LP
EQT Midstream Partners LP
Tallgrass Energy Partners LP
EV Energy Partners LP
TC PipeLines LP
Ferrellgas Partners LP
Teekay LNG Partners LP
GasLog Partners LP
Teekay Offshore Partners LP
Genesis Energy LP
Tesoro Logistics LP
Global Partners LP
TransMontaigne Partners LP
Green Plains Partners LP
Transocean Partners LLC
Hi-Crush Partners LP
USA Compression Partners LP
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USD Partners LP
Robert W. Baird & Co.
Valero Energy Partners LP
Sidley Austin LLP
Vanguard Natural Resources LLC
Simmons & Company International
VTTI Energy Partners LP
Suntrust Robinson Humphrey
Western Gas Partners LP/Western Gas Equity Partners LP
Thompson & Knight LLP
Western Refining Logistics LP
Tudor, Pickering & Co., LLC
Westlake Chemical Partners LP
UBS
Westmoreland Resource Partners LP
Valuation Research Corp.
Williams Partners LP
Vinson & Elkins LLP
World Point Terminals LP
Wells Fargo Securities LLC
service coMPany MeMbers
associate MeMbers
Akin Gump Strauss Hauer & Feld LLP
Advisory Research Inc.
Andrews Kurth LLP
Alerian
Baker Botts LLP
AllianceBernstein Holding LP
Bank of America Merrill Lynch
American Infrastructure MLP Fund
BDO USA LLP
Atlantic Trust Company
Bracewell & Giuliani LLP
CBRE Clarion Securities
Chubb Group of Insurance Companies
Center Coast Capital Advisors LP
Citi
Clearbridge Investments LLC
Credit Suisse
Cohen & Steers Capital Management
Deloitte Tax LLP
Conley Capital LLC
Deutsche Bank
Eagle Global Advisors LLC
Ernst and Young
Energy Income Partners LLC
Goldman Sachs
Harvest Fund Advisors LLC
Holland & Hart LLP
Kayne Anderson MLP Investment Company
J. P. Morgan
Locust Wood Capital Advisers LLC
Janney Montgomery Scott LLC
Magnetar Capital LLC
Jefferies LLC
MLP Data LLC
KPMG LLP
Neuberger Berman
Latham & Watkins LLP
New Salem Investment Capital LLC
Locke Lord LLP
OFI SteelPath Inc.
McGuireWoods LLP
Parker Global Strategies LLC
Miller & Chevalier Chartered
RR Advisors LLC
Morgan Stanley
Salient Capital Advisors LLC
Orrick, Herrington & Sutcliffe LLP
Swank Capital LLC
Paul Hastings LLP
Tortoise Capital Advisors LLC
The PNC Financial Services Group
U. S. Capital Advisors LLC
PricewaterhouseCoopers LLP
Wise Interests
Raymond James
Wunderlich Securities
RBC Capital Markets
Yorkville Capital Management LLC
Regions Securities LLC
Source: Master Limited Partnership Association; see www.mlpassociation.org/about-us/current-members
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The Research Guide to Master limited Partnerships
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Stability &
Reliability
TC PipeLines, LP
Investment Highlights
98% Growth in Annual Cash Distributions
Paid per Common Unit Since Inception
$3.56
• Attractive 6.4% yield as of May 31, 2016
• 16 year track record of stable and growing
cash distributions
• Diversified asset portfolio consists of seven
low risk natural gas pipelines
• Solid financial position; investment grade
credit ratings
• Master Limited Partnership of industry leader,
TransCanada Corporation
TC PipeLines, LP has interests in approx. 5,900 miles
of federally regulated interstate natural gas pipelines with a
combined total deliverable capacity of 9.1 billion cubic feet
per day. Our assets are essential infrastructure that supply
approximately 15 per cent of the average daily North American
natural gas demand and are well interconnected to the key
markets that they serve. Our general partner is a whollyowned subsidiary of TransCanada Corporation (NYSE:TRP),
a leading North American energy infrastructure company
$1.80
‘99* ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16**
*Pro-rated for full year
**First quarter distribution on an annualized basis
with approx. $65 billion in assets involved in the responsible
development and reliable operation of natural gas and oil
pipelines, power generation and natural gas storage facilities.
For more information
1.877.290.2772
[email protected]
www.tcpipelineslp.com
NYSE: TCP