February 2016
FREQUENTLY ASKED QUESTIONS
INTRODUCING MASTER LIMITED PARTNERSHIPS (MLPs)
FOR INVESTMENT PROFESSIONAL USE ONLY, NOT FOR PUBLIC DISSEMINATION – PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE
ETF SECURITIES
2
THE BASICS OF MASTER LIMITED PARTNERSHIPS
What are Master Limited Partnerships?
Master Limited Partnerships (MLPs) are Publicly Traded
Partnerships (PTPs) that have activities primarily in the energy
industry and are tax-efficient. MLPs are listed on US exchanges
and are traded just like a stock. A share in an MLP is called a unit
and the shareholder, a unitholder.
How are MLPs structured?
MLPs typically have an ownership structure consisting of a
managing general partner (GP) and the public unitholders called
limited partners (LPs).
General Partner (GP)
A general partner or GP has the controlling interest in the MLP,
usually via a 2% ownership stake. The GP has the authority to
manage and operate the MLP. To reward the GP for increasing
the trajectory of the cash distributions over time to the limited
partners, they may receive incentive distribution rights (IDRs).
Limited Partner (LP)
A limited partner is like a shareholder of a stock. A LP only
provides the capital to the MLP and is not involved in the
operation and management decision-making process. A LP is
entitled to quarterly cash distributions, generally starting at a 98%
share, but this may decrease as the GP increase distributions
and receive a larger portion of the cash flow through their IDRs.
distributions are based on distributable cash flows. Generally, the
business will set aside funds for capital expenditure, servicing
debt and certain other outlays. So the distributable cash is
calculated as the net earnings plus depreciation including any
non-cash expenses, minus maintenance capital spending.
Unlike REITs, MLPs are not required to pay out a specific level of
their taxable income as distributions. In general, MLPs pays out
their distributable cash flow but at the GPs discretion.
What are the advantages of an MLP structure?
The MLP business model is geared towards generating
predictable cash flows based on long-lived, high-value physical
energy infrastructure assets.
An MLP is considered a “pass-through” entity that does not pay
tax at the partnership level if at least 90% of its income is derived
from qualifying sources. Taxes are instead paid by the unit
holders at their individual tax.
Unlike C-corporation entities which under US federal income tax
law are taxed separately from their owners, an MLP will generally
pay out quarterly cash distributions that are technically treated as
a return of capital, whereas distributions from earnings of a Ccorporation are treated as dividends for US tax purposes.
Table 1: Comparing MLP and C-corporation
Structure comparison
MLP
What about corporate governance?
The GP will manage and govern the MLP. Generally, the LPs do
not vote to elect members of the MLP board, but the major
exchanges require the presence of at least three independent
directors. The partnership agreement might outline circumstances
when the LPs might be entitled to vote on certain issues. There is
usually provision for LPs to enable them to vote to remove the
board with two-thirds voting approval.
C-corp
Corporate level tax
No
Yes
Unit/shareholder level tax
Yes
Yes
Distribution/dividend tax
No
Yes
Tax reporting
Form K-1
Form 1099
General partner
Yes
No
Incentive distribution rights (IDRs)
Yes
No
Voting rights
No
Yes
How are cash distributions allocated between the GP and
LPs?
Source: ETF Securities
The partnership agreement, which sets up the entity, will define a
framework for the split of the cash distributions between the GP
and the LPs. This agreement usually gives certain rights (IDRs) to
the GP entitling them to receive stepped increases in the cash
flow if targeted levels of distribution are met. At the outset, the GP
will usually receive only 2% of the partnership’s distribution
(typically subordinated for a period after the initial public offering),
but the GP could ultimately receive up to 50% of the marginal
cash flow if certain targets are met. The IDRs are set up to work
as an incentive for the GP to raise the cash distribution and grow
the business, which is also seen as ultimately benefiting the LPs.
How big is the MLP universe?
There are 150 PTPs listed in the US, according to the trade group
that represents public limited partnerships (the Master Limited
Partnership Association or MLPA), of which 119 are classified as
1
MLPs.
Over the past 10 years, the development of energy infrastructure
in the US has benefitted MLPs. According to the MLPA, the
market capitalisation of MLPs rose more than 14 times from
around US$42 billion in 2003 with 34 MLPs to approximately
Are MLP distributions guaranteed?
Usually, the partnership terms requires all available cash to be
distributed to the unitholders through quarterly payments. These
1
www.mlpassociation.org as of August 2015
FOR INVESTMENT PROFESSIONAL USE ONLY, NOT FOR PUBLIC DISSEMINATION – PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE
ETF SECURITIES
3
US$481 billion2 in 2015.
How is the MLP universe structured?
MLPs can be subdivided into two main groups: Commodity MLPs
and Infrastructure MLPs.
Commodity MLPs
What are the key drivers of MLP revenues?
MLPs defined as Infrastructure MLPs focus on the midstream
segment of energy infrastructure, typically operate toll-road
business models. They receive a specified tariff for hauling a
product over a certain distance or storing the commodities. MLPs
have little balance sheet exposure as they do not take title to the
commodity.
The Commodity MLP segment consists of MLPs generating the
majority of their revenues from either upstream or downstream
assets. Compared to Infrastructure MLPs, Commodity MLPs are
more closely tied to economic cycles due to their higher
correlation to commodity prices. The Commodity MLP segment
can be broken into the following sub-segments: Marine
Transportation, Downstream, Energy Services, Natural
Resources, and Exploration & Production (E&P).
Contracts are often linked to the Producer Price Index (PPI)
index, which provides predictable growth and a built-in inflation
hedge. Barriers to entry are substantial, which generate attractive
organised investment opportunities.
Infrastructure MLPs
Unlike Infrastructure MLPs, Commodity MLPs, which operate in
the upstream and downstream of energy infrastructure, are more
closely tied to economic cycles due to their higher correlation to
commodity prices.
Infrastructure MLPs cover MLPs in the midstream sub-sector and
primarily receive a tariff or fee for moving a product over a certain
distance, or for storing a product; the revenue earned is often
considered similar to a toll-road charge.
The business fundamentals of Infrastructure MLPs are relatively
unaffected by commodity-price movements or the vagaries of the
economic cycle as they do not take ownership of the commodity
being moved. Pipelines or processing operations would fall under
this grouping.
Infrastructure MLPs have energy-infrastructure operations and
are primarily involved in: Refined Products Pipelines, Natural Gas
Pipelines, Crude Oil Pipelines, and Gathering & Processing.They
are assets that mainly connect the producers (upstream) to the
wholesale and retail distributional channels (downstream).
2
As a result, they are largely agnostic to the level of commodity
prices as underlying commodity prices do not enter the tariff
calculation and have no significant credit risk as commodity
prices increase.
What qualifies as an MLP?
Not all PTPs are Master Limited Partnerships. MLPs are
generally considered to be those PTPs that have active
operations, predominantly in the energy industry.
In 1987, US Congress defined and limited the operations of
PTPs, and these rules are still applied today. According to section
7704 of the Tax Code, qualifying MLPs must earn 90% or more of
their income from specified qualifying sources. Their activities can
include exploration, development and production, mining,
processing, refining, storage, transportation, and marketing of
minerals or natural resources. Retail sales do not count as
qualifying activities, except for the sale of propane. In 2008, the
qualifying definition was expanded to include the transportation
and storage of biofuels such as ethanol.
www.mlpassociation.org as of August 2015
FOR INVESTMENT PROFESSIONAL USE ONLY, NOT FOR PUBLIC DISSEMINATION – PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE
ETF SECURITIES
4
INVESTMENT CHARACTERISTICS OF MLPs
How have MLPs performed compared to other asset
classes?
Midstream energy infrastructure MLPs have sustained less losses
than oil and natural gas futures since oil hit a peak in September
20143. In the five-year run-up to peak-prices, total returns on
midstream energy infrastructure MLPs gained close to 280%
while natural gas prices fell and oil prices gained just over 5%4
(i.e. after factoring in roll costs).
What has been the historical distribution growth of MLPs?
MLPs’ distribution yields have often tended to be higher than the
distribution yields of other asset classes over the past five years.
Historically these have ranged between 4% and 14% and
currently stand at around 6.1%5.
How correlated are MLPs to other asset classes?6
MLPs’ tends to have medium to low correlation to most other
asset classes, at 0.60 with equities, 0.59 with high yield bonds,
0.37 with real estate, 0.53 with a broad commodity basket, 0.67
with crude oil and 0.01 with natural gas. MLPs’ low correlation to
bonds and other asset classes may provide useful diversification
benefits.
How did MLPs perform between 2007 and 2009?
MLPs underperformed the S&P 500 during the period from July
2007 to December 2008 by around 6% on a total return basis.
This was driven by a number of factors including limited access to
the financial market for funding, a relatively poor level of liquidity
compared to other assets, a higher cost of capital and some
funds forced selling.
In January 2009, MLPs were back at the July 2007 levels, while
the S&P 500 was still trailing by about 22%. As midstream MLPs
have their revenues based on long-term contract models, the
fundamentals of midstream MLPs remained strong with the asset
class recovering at a faster pace than equities.
How are MLPs exposed to commodity prices?
MLPs have benefitted from the boom in energy supply as the
surge in energy production from shale significantly alters the
energy landscape in the US. Although the increase in energy
production has been weighing on the commodity prices, the
midstream MLPs do not take title to the commodity they are
transporting and are therefore less exposed to the volatility of the
underlying resource. In addition, Infrastructure MLPs charge a
toll-road-like fee for using the pipeline or the storage facility
negotiated based on inflation and regulated rates.
Do MLPs offer an attractive risk/return profile?
Total returns on midstream energy infrastructure MLPs have
been less volatile than total returns on WTI oil, Brent oil, natural
gas or petroleum over the past five years.7
What are the key drivers of MLP growth?
The US energy landscape has altered dramatically in recent
years as technological advances have allowed access to
previously unrecoverable shale oil and gas, and oil-sand
reserves. This has led to a boom in domestic production, as new
supply comes on-stream and reduces the dependence of the US
on imported energy.
To bring this new supply to the end markets, a very significant
build-out of US energy infrastructure has been necessary as the
new production sites are often far from existing networks, or the
existing infrastructure does not have the capacity to cope with the
growth. As energy production in the US grows over the coming
years, there is huge expected growth in infrastructure spending
ahead.
3
MLPs fell 54%, natural gas fell 63% and oil fell 75% between 01 September 2014
and 25 January 2016. MLPs proxied by the Solactive US Energy Infrastructure MLP
Index TR . Natural gas prices measured by the Bloomberg WTI Crude Oil Subindex
Total Return. Oil measured by the Bloomberg WTI Crude Oil Subindex Total Return.
4
MLPs rose 278%, natural gas fell 73% and oil rose 6% between 01 September
2009 and 01 September 2014. MLPs proxied by the Solactive US Energy
Infrastructure MLP Index TR based on simulated data from 01 September 2009 to 4
March 2014 and actual data from 5 March 2014 to 01 September 2014. Natural gas
prices measured by the Bloomberg WTI Crude Oil Subindex Total Return. Oil
measured by the Bloomberg WTI Crude Oil Subindex Total Return.
5
Calculated as the twelve months distribution yield of Solactive US Energy
Infrastructure MLP Index TR as at 31 December 2015
6
Correlation, volatility and Sharpe ratio data is calculated over a one year period
from January 2015 to January 2016. Solactive US Energy Infrastructure MLP Index
TR based on simulated data from 30 September 2009 to 4 March 2014 and actual
data from 5 March 2014 to 31 January 2016. Source: ETF Securities
7
Five year volatility between 31 January 2011 and 31 January 2016 of Solactive US
Energy Infrastructure MLP Index TR was 20.4% while the five year volatility of
Bloomberg WTI Crude Oil Subindex Total Return, Bloomberg Brent Crude Oil
Subindex Total Return, Bloomberg Natural Gas Subindex Total Return, Bloomberg
Petroleum Subindex Total Return was 30.1%, 29.4%, 31.0% and 27.9%
respectively. MLPs proxied by the Solactive US Energy Infrastructure MLP Index TR
based on simulated data from 31 January 2011 to 4 March 2014 and actual data
from 5 March 2014 to 31 January 2016.
In March 2014, the Interstate Natural Gas Association of America
(INGAA) estimated that new investments of $641 billion in US
infrastructure assets is needed between 2014 to 2035 to support
rising gas production from shale gas.
In addition, US population growth and other structural changes in
the US energy market, such as increasing power generation
capacity and further penetration of natural gas in the
transportation sector are expected to contribute further to MLPs
growth.
FOR INVESTMENT PROFESSIONAL USE ONLY, NOT FOR PUBLIC DISSEMINATION – PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE
ETF SECURITIES
5
HOW TO INVEST IN MLPs
How can a European investor invest in MLPs?
Investing in US MLPs is not considered as optimal for European
investors from a tax perspective, as some of the tax benefits US
investors receive do not apply i.e. tax deferrals.
European-domiciled MLP investment vehicles (including ETFs,
mutual funds and structured notes) are relatively new. If they are
structured synthetically through equity swaps, they may possess
some tax benefits to physically replicated funds as US dividend
withholding tax is not applicable.
How can a non-US investor benefit from MLP tax
advantages?
If non-US investors invest in MLPs via a fund which uses
synthetic replication through a total return swap i.e. ETFS US
Energy Infrastructure GO UCITS MLP ETF, the fund is contracted
to receive 100% of the index performance from the swap provider
(less any fees and/or expenses) and the fund itself is not subject
to US dividend withholding tax. Please note that non-US
investors will still be liable for their usual income and/or capital
gains tax (where applicable) as per any other of their investments
in securities.
If an investor or fund invests directly in MLPs, US dividend
withholding tax will be applicable at the highest marginal tax rate.
Where can I find more information about MLPs?
The trading body representing MLPs/PTPs is Master Limited
Partnership Association or MLPA). Its website
(www.mlpassociation.org) contains a basic introduction to MLPs,
a list of current MLPs and several industry reports.
Another useful resource is the website www.mlpdata.com, which
provides a wide range of MLP information of both single MLPs
and MLP funds including performance statistics, flow data and
latest news.
When is it best to trade MLPs?
As MLPs are listed on US markets, they trade during normal US
exchange hours. European investors should take note that the
spread (the difference between the bid and offer prices) for
European-listed MLP ETFs will likely trade in a narrower range
when the US exchanges are open, i.e. after 2:30pm (GMT). This
is the case for any ETF where the underlying exposure is to US
equities, not just MLP ETFs.
FOR INVESTMENT PROFESSIONAL USE ONLY, NOT FOR PUBLIC DISSEMINATION – PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE
ETF SECURITIES
6
RISKS
Regulation and Tax
Interest Rate
There is currently no plan in the US to change the tax-advantage
that MLPs are benefitting. An alteration to the current tax
environment not in favour of MLPs would certainly weigh on the
performance of MLPs.
MLPs are dependent on the equity and debt markets to fund
growth. An increase in interest rate would increase the cost of the
MLP’s debt and reduce margins and also cut the amount of cash
flows that can be distributed.
Regulation is in place across a wide range of the industries that
MLPs operate in. The Federal Energy Commission (FERC)
regulates interstate pipelines. The safety of pipelines is overseen
by the Pipeline and Hazardous Materials Safety Administration
(PHMSA). And the coal industry is subject to a number of
regulations at the Federal and State level. Changes to legislation
in the oil and gas industry could also have a negative impact.
Commodity Prices
MLPs involved in the midstream sector have less exposure to
commodity prices than upstream and downstream focused MLPs.
However, they do have some exposure when undertaking new
projects or renegotiating contracts upon expiration.
Environmental Risks
Economic Environment
An economic downturn could negatively affect the environment
for energy and commodities, as demand for these is linked to the
overall health of the economy. This could also affect the
performance of MLPs.
A freeze of capital markets, for example, as we saw in 2008–
2009 might have an adverse effect on MLPs, given their reliance
on raising funds to finance existing and future projects and
operations.
As MLPs need to access the debt market to finance growth, an
environment of increasing interest rates could damage
performance.
Extreme weather – for example hurricanes in the Gulf Coast
region – might damage facilities or stall production. Adverse
weather can affect MLPs’ operations; for example, unseasonably
warm weather could reduce demand for certain energy-related
products.
Governance Risk
The LPs have ownership of the bulk of the assets, but control lies
with the GP. There are mitigations to this structure, but in general
LPs do not have the same rights as a shareholder of a public
corporation.
FOR INVESTMENT PROFESSIONAL USE ONLY, NOT FOR PUBLIC DISSEMINATION – PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE
ETF SECURITIES
7
ETFS US ENERGY INFRASTRUCTURE MLP GO UCITS ETF
Who is ETF Securities?
ETF Securities is the world's leading, independent exchangetraded product provider and a pioneer in commodities. Dedicated
to developing liquid, transparent investment solutions that can be
traded on world stock exchanges, ETF Securities currently
manages approximately US$16.8 billion (as at 25 February 2016)
in global investor assets and employs nearly 100 people across
Europe, the Americas and the Asia Pacific region.
For more information please see www.etfsecurities.com.
Who is Solactive?
Headquartered in Frankfurt, Solactive employs 16 people in
Frankfurt and London and is fully owned by its current
management. In just 9 years Solactive has become one of the
key players in the indexing business, with a speciality in valueadded tailor-made indices.
How is the index doing compared to competitor indices?
Infrastructure MLPs have historically provided better risk/return
ratios than Commodity MLPs as they tend to offer a relatively
higher return for lower volatility, improving the Sharpe ratios.
Within the index space, the Solactive US Energy Infrastructure
MLP Index also outperformed its peers over the past 5 years by
15.2% compared against the Morningstar MLP Composite Index8.
How do I buy the ETFS US Energy Infrastructure MLP GO
UCITS ETF?
The ETFS US Energy Infrastructure MLP GO UCITS ETF is the
first European-listed MLP ETF that tracks an index solely focused
on MLPs defined as Infrastructure MLPs. The ETF is listed on
both the London Stock Exchange and Deutsche Boerse (Xetra)
and product specifications are as follow.
-
US$25 billion is invested in products linked to Solactive
calculated indices
Table 2: Product specification
-
170 ETFs track their indices
Dividend treatment
Quarterly distributions
Base Curreny
USD
TER
0.25%
Swap Fee
0.65%
Reference Index
Solactive US Energy Infrastructure MLP Index TR
Bloomberg/ Reuters
SOLEIMLP Index / .SOLEIMLP
UCITS Compliant
Yes
Domiciled
Ireland
Registered countries
Austria, Denmark, Finland, France, Germany, Ireland,
Italy, Luxembourg, Netherlands, Norway, Spain,
Sweden, Switzerland, United Kingdom
For more information please see www.solactive.com.
What is the Solactive US Energy Infrastructure MLP Index TR
doing?
The objective of the Solactive US Energy Infrastructure MLP
Index is to provide diversified exposure to the ‘midstream’
segment of the MLP universe by only including MLPs defined as
Infrastructure MLPs (see page 3). The index was launched 5
March 2014 with historical back-tested data available since 30
September 2008.
What is the index selection methodology?
The index uses a two-tier selection process to select the
underlying constituents from the eligible selection pool.
First, it ranks all eligible securities by two separate criteria:
(1)
‘Forward looking Distribution Yield’: the ratio of the forward
looking distribution derived from Thomson Reuters IBES
data, divided by the current share price.
(2)
‘Distribution Stability’: the ratio of the forward looking
distribution derived from Thomson Reuters IBES data,
divided by the most recent distribution (annualised).
ETFS US Energy Infrastructure MLP GO UCITS ETF
Table 3: Listing information
Listings
London Stock Exchange
Deutsche
Börse
SIX Swiss
Exchange
Borsa
Italiana
Exchange code
MLPI
MLPX
XMLP
MLPI
MLPI
ISIN
IE00BHZKHS06
IE00BHZKHS06
DE000A1XE2Q3
IE00BHZKHS06
IE00BHZKHS06
Bloomberg
MLPI LN
MLPX LN
XMLP GY
MLPI SW
MLPI IM
Reuters
MLPI.L
MLPX.L
XMLP.DE
MLPI.S
MLPI.MI
Trading currency
USD
GBP
EUR
CHF
EUR
WKN / Valor
-
-
A1XE2Q
24401719
-
Tax status
UK reporting
status
UK reporting
status
-
-
-
Listing date
19-May-14
19-May-14
19-May-14
08-Sep-14
11-Sep-14
Second, the index selects the top 25 ranked MLPs with an equal
weight of 4%.
For full information on the index methodology please see the
guideline on www.etfsecurities.com.
8
Five year return between 31 January 2011 and 29 January 2016 of Solactive US
Energy Infrastructure MLP Index TR. Solactive US Energy Infrastructure MLP Index
TR based on simulated data from 31 January 2011 to 4 March 2014 and actual data
from 5 March 2014 to 29 January 2016.
FOR INVESTMENT PROFESSIONAL USE ONLY, NOT FOR PUBLIC DISSEMINATION – PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE
February 2016
FREQUENTLY ASKED QUESTIONS
INTRODUCING MASTER LIMITED PARTNERSHIPS (MLPs)
Important information
This financial promotion has been issued and approved for the purpose of section 21 of the
Financial Services and Markets Act 2000 by ETF Securities (UK) Limited ("ETFS UK")
which is authorized and regulated by the United Kingdom Financial Conduct Authority
(“FCA”). The products discussed in this document are issued by GO UCITS ETF Solutions
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United States information: This document is not, and under no circumstances is to be
construed as, an advertisement or any other step in furtherance of a public offering of
shares in the United States or any province or territory thereof, where none of the Issuer or
the Shares are authorised or registered for distribution and where no prospectus of the
Issuer has been filed with any securities commission or regulatory authority. Neither this
document nor any copy hereof should be taken, transmitted or distributed (directly or
indirectly) into the United States. Neither the Issuer nor any securities issued by it have
been or will be registered under the United States Securities Act of 1933 or the Investment
Company Act of 1940 or qualified under any applicable state securities statutes.
FOR INVESTMENT PROFESSIONAL USE ONLY, NOT FOR PUBLIC DISSEMINATION – PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE