June 2014 FREQUENTLY ASKED QUESTIONS INTRODUCING MASTER LIMITED PARTNERSHIPS (MLPs)

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1 June 2014 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

2 2 ETF SECURITIES 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. 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. How are cash distributions allocated between the GP and LPs? 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. 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 C- corporation are treated as dividends for US tax purposes. Table 1: Comparing MLP and C-corporation Structure comparison MLP 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 Source: ETF Securities How big is the MLP universe? There are 144 PTPs listed in the US, according to the trade group that represents public limited partnerships (the National Association of Publicly Traded Partnership or NAPTP), of which 116 are classified as MLPs. 1 Over the past 10 years, the development of energy infrastructure in the US has benefitted MLPs. According to the NAPTP, the market capitalisation of MLPs rose more than 10 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 as of 30 June 2014

3 3 ETF SECURITIES US$591 billion 2 in 2014 with 116 MLPs. How is the MLP universe structured? MLPs can be subdivided into two main groups: Commodity MLPs and Infrastructure MLPs. Commodity MLPs 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). Infrastructure MLPs 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). 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. 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. 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. 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. 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. 2 Source: Bloomberg, ETF Securities calculations as of 30 June 2014

4 4 ETF SECURITIES INVESTMENT CHARACTERISTICS OF MLPs How have MLPs performed compare to other asset classes? MLPs have outperformed major equity and bond benchmarks over the past five years posting an annual return of 32% compared to 19% for the S&P 500, 18% for the MSCI World and 5% for the global bond index. A closer look at the annual index performance shows that MLPs have been the best performer every year except in 2012 when energy commodities were performing poorly 3. 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%-7% 4. How correlated are MLPs to other asset classes? 5 MLPs tends to have medium to low correlation to most other asset classes, at 0.63 with equities, 0.66 with high yield bonds, 0.46 with real estate, 0.52 with a broad commodity basket, 0.53 with crude oil and 0.23 with natural gas. Although MLPs correlation to equities and commodities reached an elevated level between 2009 and 2013, these numbers have started to decline over the past year, recently standing around -0.1 on average. MLPs low correlation to bonds and other asset classes may provide useful diversification benefits. Do MLPs offer an attractive risk/return profile? While correlations to equities and commodities have been declining, MLPs volatility also reached a five year low at around 15% at the end of June MLPs volatility is one of the lowest relative to commodities and equities; hence MLPs have offered higher returns for the same level of risk, enhancing investors portfolio risk/return ratios. 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. 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. 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. 3 Proxied by the Solactive US Energy Infrastructure MLP Index TR based on simulated data from 30 June 2009 to 4 March 2014 and actual data from 5 March 2014 to 30 June Calculated as the difference between the Yorkville MLP Infrastructure Universe Index PR and the Yorkville MLP Infrastructure Universe Index TR based on simulated data from 31 December 1986 to 15 February 2012 and actual data from 16 February 2014 to 30 June Source: ETF Securities 5 Correlation, volatility and Sharpe ratio data is calculated over a five year period from July 2009 to June Solactive US Energy Infrastructure MLP Index TR based on simulated data from 30 June 2009 to 4 March 2014 and actual data from 5 March 2014 to 30 June 2014.

5 5 ETF SECURITIES 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 the National Association of Publicly Traded Partnerships (NAPTP). Its website ( contains a basic introduction to MLPs, a list of current MLPs and several industry reports. Another useful resource is the website 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.

6 6 ETF SECURITIES RISKS Regulation and Tax 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. 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. 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 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. Interest Rate 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. 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 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.

7 7 ETF SECURITIES 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$19.7 billion (as at June 2014) in global investor assets and employs nearly 100 people across Europe, the Americas and the Asia Pacific region. For more information please see Who is Solactive? Headquartered in Frankfurt, Solactive employs 16 people in Frankfurt and London and is fully owned by its current management. In just 8 years Solactive has become one of the key players in the indexing business, with a speciality in valueadded tailor-made indices. - US$20 billion is invested in products linked to Solactive calculated indices ETFs track their indices For more information please see 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 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 most recent distribution divided by the previous distribution. 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 with a 32% annual return compared to 28% for Morningstar MLP Composite Index and 27% for Alerian MLP Infrastructure Index 6. 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. Table 2: Product specification ETFS US Energy Infrastructure MLP GO UCITS ETF Dividend treatment Base currency Quarterly distribution USD TER 0.45% Swap fee 0.80% Reference index Bloomberg / Reuters UCITS compliant Domiciled Registered Table 3: Listing information Solactive US Energy Infrastructure MLP Index TR SOLEIMLP Index /.SOLEIMLP Yes Ireland Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Spain, Sweden, and United Kingdom Listings London Stock Exchange Deutsche Boerse Exchange code MLPI MLPX XMLP ISIN IE00BHZKHS06 IE00BHZKHS06 DE000A1XE2Q3 Bloomberg MLPI LN MLPX LN XMLP GY Reuters.MLPI.MLPX.XMLP Trading currency USD GBP EUR WKN - - A1XE2Q Tax status UK reporting status (pending) UK reporting status (pending) Listing date 19 May May May 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 6 Solactive US Energy Infrastructure MLP Index TR based on simulated data from 30 June 2009 to 4 March 2014 and actual data from 5 March 2014 to 30 June 2014.

8 June 2014 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 Plc (the "Issuer"), an open-ended investment company with variable capital having segregated liability between its sub-funds and is organised under the laws of Ireland as a public limited company. The Issuer has been authorised by the Central Bank of Ireland (the "Financial Regulator") as a UCITS pursuant to the European Communities (Undertaking for Collective Investment in Transferable Securities) Regulations, 2003 and shall issue a separate class of shares (the "Shares") representing each sub-fund. 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