Investing in Master Limited Partnerships (MLPs)

Transcription

1 January 2015 Investing in Master Limited Partnerships (MLPs) Version 1.1

2 MAI believes an allocation to MLPs is advantageous for investors who: Seek exposure to growing sectors of the energy business Desire a combination of growth and regular income payments Wish to use an asset class with low correlation to diversify a portfolio

3 CONTENT Table of Contents Defining MLPs What are MLPs? History of MLPs Four Fundamental MLP Businesses Future of MLPs U.S. Energy Renaissance New Energy Processing Opportunity New Frontiers Exports & Everyday Occurrences Benefits & Advantages Midstream Infrastructure Advantages Attractive Total Returns Low Correlation to Major Asset Classes & Commodities Inflation Protection Portfolio Fit Allocation to MLPs Portfolio Allocation Example MLP Portfolio on the Efficient Frontier Investing in MLPs Individual MLPs and Alternatives Basic Risks of Investing in MLPs RIC vs a C Corporation MAI Investment Management Page 3

4 MLPS EXPLAINED What are Master Limited Partnerships (MLPs)? MLPs (master limited partnerships) are publicly traded partnerships: limited partnerships which are traded on stock exchanges. A share in an MLP is called a unit, and owning MLP units makes you a limited partner. 1 Trade on a public exchange, providing better liquidity terms than traditional private partnerships Required to generate 90% or more of income from specific, qualified sources (historically energy*) Distribute more earnings to investors since they do not face double taxation Present a wide-range of exposure to cash flow risk and commodity prices 1 National Association of Publicly Traded Partnerships. Copyright *Historically dominated by energy and natural resources to achieve congressional goals MAI Investment Management Page 4

5 HISTORY MLPs have been around since the 1980s Apache Oil Company launched the first MLP in Purpose was to attract smaller investors interested in the tax benefits of partnerships and the security of a liquid vehicle. After the Tax Reform Act of 1986, an MLP treated as a partnership is not subject to corporate income tax; it must pass distribution on to unitholders instead, who are taxed at their applicable tax rate. The Current Energy MLP Universe Upstream Exploration & Production Midstream Transportation, processing, and storage Downstream Refining and distribution to the end user MAI Investment Management Page 5

6 ABOUT The Four Fundamental Energy MLP Businesses 1. Exploration and Production (E&P) E&P MLPs search for the raw product and bring it to the surface. 2. Transportation MLPs move oil and natural gas typically through a pipeline but may also move via railcar, ship, or truck. 3. Gathering & Processing Processing MLPs have facilities that transform raw product into a usable form. 4. Storage MLPs can also manage tanks, wells, and other storage facilities that hold the refined commodities. Natural Gas Natural Gas Energy Supply Chain Exploration & Production (Upstream) Natural Gas Gathering Pipelines Crude Oil Trucks Gas Processing Mixed Natural Gas Liquids (NGLs) Mixed NGLs Pipelines Natural Gas Pipelines NGL Fractionation Ethane Propane Butane Isobutane Nat. Gasoline Storage Storage Natural Gas Pipelines NGL Pipelines Vehicles Utilities End Users (Downstream) Barges Industry Barges Storage Storage Crude Oil Gathering Pipelines Crude Oil Refining Refined Products Pipelines Residential Graphic Source: MAI Capital Management MAI Investment Management Page 6

7 FUTURE The U.S. Energy Renaissance Shale oil and natural gas resources are found in shale formations that contain significant accumulations of natural gas and/or oil. Previously untapped shale reserves have caused a surge in production. As a result of this production surge, there are significant shale gas, crude oil, NGL midstream infrastructure needs. Graphic Source: EIA. 2011; U.S. Energy Mapping System. U.S. Energy Information Administration, Annual Energy Outlook 2013 MAI Investment Management Page 7

8 FUTURE New Energy Production Opportunity Over the past decade, the combination of horizontal drilling and hydraulic fracturing ( fracking ) has provided access to large volumes of oil and natural gas that were previously uneconomic to produce from low permeability geological formations composed of shale, sandstone, and carbonate (e.g., limestone). 1 Horizontal drilling has actually been around since the early 20 th century and commercial fracking first took place in the 1940s. 2 Additional infrastructure is needed to support these processes; IHS analysis estimates that between $85 $90 billion of direct capital will go towards oil and gas infrastructure in 2014 and average more than $80 billion annually between 2014 and Horizontal Drilling *All costs are reported as real 2012$ values 1 EIA. Shale in the United States. September 4, GAO. GAO Shale Oil and Gas Development. History of Horizontal Drilling and Hydraulic Fracturing 3 IHS report for American Petroleum Institute. Oil & Natural Gas Transportation & Storage Infrastructure. December 2013 MAI Investment Management Page 8

9 FUTURE New Frontiers- Exporting Due to new drilling techniques and increased production, the U.S. has a growing supply of natural gas--excess gas is being flared or discarded in some regions. In 2012, the U.S. became a net exporter of liquefied petroleum gases (including NGLs) for the first time. As of December 2014, 9 liquefied natural gas export facilities have been approved, with an additional 17 proposed. 1 In 2011, the U.S. exported more petroleum products, than it imported for the first time since Flares in the Bakken Formation vs. City Lights 1 FERC. North American LNG Import/Export Terminals Approved & Proposed. January U.S. Energy Information Administration,. Annual Energy Outlook 2013 & Today in Energy, March 7, 2012 Graphic Source: October 2012 MAI Investment Management Page 9

10 FUTURE New Frontiers- Everyday Occurrences Additional Needs for Natural Gas The trucking industry, most notably large companies operating 18-wheel vehicles, has begun switching from petroleum to cleaner-burning natural gas. These companies are benefitting from the move because natural gas is currently less expensive. Additionally, various states and the federal government provide tax credits and grants for using natural gas vehicles. 1 Like many other cities, RTA board members in the City of Cleveland authorized the purchase of 240 natural gas-fueled buses to start in Gas prices reflect early winter weather at market locations across the country, most notably across the great lakes region and the deep south. 3 Stronger demand forces prices higher thus the need for additional infrastructure to move more gas to keep prices stable. 1 The New York Times. Diane Cardwell and Clifford Krauss. April 22, Cleveland Plain Dealer. Alison Grant. November 19, EIA. Natural Gas Update. Released November 20, 2014 MAI Investment Management Page 10

11 BENEFITS Midstream Infrastructure Advantages Toll takers with long-term contracts Counterparties are typically investment grade credits Often insulated from commodity price swings (equals less volatility) History of growing distributions paid out to investors Comprises approximately 45% of the 147 MLPs currently trading 1 1 National Association of Publicly Traded Partnerships, As of December 31, 2014 MAI Investment Management Page 11

12 BENEFITS Attractive Total Return MLPs have a history of attractive yield and growth. With the North American oil and gas production expanding, one of the really exciting things about master limited partnerships is not just what they ve done in the past, but the opportunity we see in their future. When looking at MLP strategies, some investors focus on yield which tends to create a higher yielding, but ultimately lower total return portfolio. However, sophisticated investors are looking for alternative niches that address their concerns about both yield and portfolio growth. Alerian MLP Infrastructure Index 100% Yield 80% 7% Index Growth 60% 7% 6% 40% 20% 0% 47% 8% -10% 47% 6% 17% 7% 2% 6% 29% 6% 5% 13% 78% 6% 29% 6% 11% 6% -2% 6% 24% 6% 2% -20% -52% -40% 12/31/01 12/31/02 12/31/03 12/31/04 12/30/05 12/29/06 12/31/07 12/31/08 12/31/09 12/31/10 12/30/11 12/31/12 12/31/13 12/31/14 Data Source: Alerian; Annual yield and index growth. Data as of December 31, 2014 The Alerian MLP Infrastructure Index is comprised of 25 energy infrastructure Master Limited Partnerships (MLPs) that provides investors with an unbiased, comprehensive benchmark for this emerging asset class. Investors cannot invest directly in an index. Past performance is not indicative of future results. MAI Investment Management Page 12

13 BENEFITS Low Correlation to Major Asset Classes It is worth examining the relationship between MLPs and other major asset classes to determine their ability to further diversify a balanced portfolio. Midstream MLPs have historically offered low correlation to other assets and have demonstrated modest to negative correlations to most major asset classes. In 2008 and in 2014, MLPs exhibited higher correlation to market pullbacks Correlation of Energy MLPs January 2005 December 2014 (Alerian MLP Infrastructure Index) To Equities To Fixed Income To REITs Past performance is not a guarantee of future similar results Source: Zephyr StyleADVISOR; Correlation of returns. Data for the period January 2005-December The S&P 500 Index is widely regarded as the best single gauge of large cap U.S. equities. 2 The Barclays U.S. Aggregate Bond Index is a broad-based bond index comprised of government, corporate, mortgage and asset-backed issues, rated investment grade or higher, and having at least one year to maturity. 3 The FTSE NAREIT All REITs Index is a headline index that consists of all publicly traded REITs in accordance with Rule It is not free float adjusted, and constituents are not required to meet minimum size and liquidity criteria MAI Investment Management Page 13

14 BENEFITS Low Correlation to Commodities Historically, prices of crude oil have low correlation to MLP returns. Midstream MLPs are typically insulated from short-term commodity prices due to long-term contracts. Large price bands in West Texas Intermediate ( WTI ) price in the last few years have had little to no effect on the Alerian MLP Index total return. (as of 12/31/2014) WTI High Price WTI Low Price WTI Average Price AMZ Total Return 35.63% 13.87% 4.39% 27.59% 4.80% Source: Bloomberg All figures in dollars unless otherwise noted. West Texas Intermediate ( WTI ) is a grade of crude oil used in benchmarking. WTI plays an important role in managing risk in the energy sector worldwide because the contract has the: Most liquidity, Most customers, Most transparency. Alerian MLP Index ( AMZ ) is the leading gauge of large- and mid-cap energy Master Limited Partnerships (MLPs). MAI Investment Management Page 14

15 BENEFITS Inflation Protection From a correlation perspective, MLPs continue to show a promising relationship with inflation. 1 MLP pipeline assets are governed by the Federal Energy Regulatory Commission (FERC). The commission s regulations include a methodology for oil pipelines to change their rates through use of an index system that establishes ceiling levels. Most pipeline MLPs are able to increase their tariffs annually at PPI-FG plus a pre-established multiplier. This regulation may provide a built-in inflation hedge (see chart below). Producer Price Index for Finished Goods (PPI-FG), plus 2.65 percent adjustment for July 1, 2011 through July Multiplier to Establish Ceiling Levels of Tariffs Wilshire Associates Incorporated. MLP Update: October 23, Chart Data Source: Federal Energy Regulatory Commission FERC. Oil Pipeline Index MAI Investment Management Page 15

16 PORTFOLIO FIT Portfolio Allocation Where do MLPs fit? MLPs can be used in many different ways. Many investors use MLPs in their income sleeve, their real asset sleeve, or their equity sleeve. Energy and Utilities, which are before and after midstream MLPs on the energy value chain, comprise 8.4% and 3.2%, respectively, of the S&P 500 s index weight. 1 Allocation to Equities 40% 5% 5% 7.50% MLPs Equities 7.50% 35% Other Specialized Equities Fixed Income Equities Fixed Income Alternatives Cash Alternatives Cash Allocation to Income 25% 5% 5% 7.50% MLPs 50% 7.50% Other Specialized Fixed Income Equities Fixed Income MLPs Other Specialized FI Alternatives Cash 1 FactSet. S&P 500 weightings as of December 31, Allocation Source: MAI Capital Management MAI Investment Management Page 16

17 PORTFOLIO FIT Portfolio Allocation with MLPs An Example The potential impact of implementing a 7.5% MLP allocation to an existing traditional 60/40 stock & bond portfolio is shown below. Replacing 7.5% of the equity allocation with MLPs would have a significant impact including: Increased Returns Reduction in portfolio volatility Lower maximum drawdowns & higher sharpe ratio Portfolio Comparison January 2005 December 2014 Traditional 60/40 Portfolio Portfolio with 7.5% MLP Allocation Return 7.52% 7.71% Standard Deviation 14.04% 9.44% Maximum Drawdown % % Sharpe Ratio Source: Zephyr StyleADVISOR. Past performance is not indicative of future similar results. Equity Proxy: The S&P 500 Index Bond Proxy: The Barclays U.S. Treasury: 1-3 year Cash Proxy: Citi 3-month Treasury Bill index MLP Proxy: Alerian MLP Index MAI Investment Management Page 17

18 PORTFOLIO FIT Portfolio Allocation with MLPs The Efficient Frontier When viewing multiple portfolios with differing allocations to MLPs, it s easy to draw performance comparisons by viewing each portfolio on the efficient frontier. Example Portfolio 1 Portfolio 2 Portfolio 3 Stocks 60% 57% 52.5% Bonds 40% 40% 40% MLPs - 3% 7.5% January 2005 December % MLP 7.5% 7% MLP 0% 6% MLP 3% Return 5% 4% 3% 2% 1% Cash Portfolio 3: MLP 7.5% Portfolio 2: MLP 3% Portfolio 1: 60/40 split S&P 500 0% 0% 2% 4% 6% 8% 10% 12% 14% 16% Standard Deviation Note: Colored frontier dotted lines are not representative of any particular portfolio but should only be viewed as a visual aid for each portfolio relative to the other portfolios. Source: Zephyr StyleADVISOR. Past performance is not indicative of future similar results. Equity Proxy:The S&P 500 Index; Bond Proxy: The Barclays U.S. Treasury: 1-3 year; Cash Proxy: Citi 3-month Treasury Bill index; MLP Proxy: Alerian MLP Index MAI Investment Management Page 18

19 STRUCTURE Buying Individual MLPs MLPs can be a great investment but there are certain aspects to them that the investor should be made aware of before purchasing an MLP for the first time: Benefits MLPs can be more tax efficient due to their pass-through structure They may be more suitable for investors in a taxable account Considerations Investors receive and file K-1s (as opposed to 1099s) in addition to filing taxes in any associated state They may not be suitable for tax-exempt organizations and/or retirement accounts because under the current U.S. tax code, they must pay tax on their unrelated business taxable income (UBTI) 1 Note: A partner in an MLP, the IRA or other account is considered to be earning its share of the MLP s business income (which is typically not related to the IRA or tax-exempt s purpose) Holders of the MLP will typically receive trade or business income/(loss) in addition to receiving other income or expense items on the K-1 MLPs are traded on a public exchange Positive items, like your share of taxable partnership income each year, will generally increase an investor s basis while negative items, including distributions, will generally reduce an investor s basis With MLPs being an emerging asset class, trading volume may be lower than a typical equity 1 NAPTP. MLPs and Retirement Accounts and IRS Publication 598. Tax on Unrelated Business Income. 01/2015 MLP Structure Considerations MLPs have general partners (GPs); GPs manage the partnership s operations and receive Incentive Distribution Rights (IDRs); some GPs are publicly traded Example of MLP Structure IDRs Cash distribution, partnership income General Partner Management Master Limited Partnership Capital Limited Partners 2% Economic Stake 98% Economic Stake Operating Company MAI Investment Management Page 19

20 RISKS Some Risks of Individual MLPs Like most investments, there are risks associated with investing in MLPs. These range anywhere from industry specific risk to interest rate risk to even legislative risk (tax code). The risks outlined below are not exhaustive, but are an example of some of the primary risks involved. A more extensive list can be found at the end of this presentation. MLP Unit Risk. An investment in MLP units involves risks in addition to the risks associated with a similar investment in equity securities, such as common stock, of a corporation. As compared to common shareholders of a corporation, holders of MLP units have more limited control and limited rights to vote on matters affecting the partnership. Legislative (Tax Code). MLPs are currently being treated as partnerships for U.S. federal income tax purposes. If an MLP does not meet current legal requirements to maintain partnership status, or if there is a change in current U.S. tax law, it would be taxed as a corporation and there could be a material decrease in the value of its securities. Commodity Price. Fluctuations in energy commodity prices would directly impact companies that own such energy commodities and could indirectly impact MLP companies that engage in transportation, storage, processing, distribution or marketing of such energy commodities. Interest rate. Rising interest rates could increase the costs of capital thereby increasing operating costs and reducing the ability of MLPs and other companies operating in the energy industry to carry out acquisitions or expansions in a costeffective manner. MAI Investment Management Page 20

21 INVESTMENT Alternative ways to invest in MLPs There are many differences between MLPs and other publicly traded securities. The various vehicles may be more suitable depending on the type of account, the investing entity, and investor preference. Examples of alternative ways to invest in MLPs include MLP Funds and RICs (both Open & Closed Funds), Exchange Traded Funds (ETFs), and Exchange Traded Notes (ETNs). MLP Fund (C-Corp) RIC ETF ETN Individual MLP Tax Reporting K-1 MLP Limit None 25% C-Corp or RIC None Pricing NAV NAV Exchange Offering Exchange Management Active Active Passive Passive Block UBTI * Corporate Tax Drag If C-Corp Note: 1. MLP Fund: 40 Act Fund that typically invests 100% of its assets in securities of MLPs or MLP affiliates 2. Regulated Investment Company (RIC): Similar to MLP Fund but can only invest up to 25% of its portfolio in MLPs *UBTI from ETNs: The IRS has not issued a formal opinion or guidance on this issue, and you should consult your tax advisor about your own tax situation. Source: PwC. MLP Funds and Investment Products Introduction MAI Investment Management Page 21

22 RIC VS. C CORP RIC Structure vs. C Corporation MLP Fund There are many key differences between a RIC MLP Fund and a C Corporation MLP Fund including: RIC MLP Fund is a flow through entity that pays no tax, but invests primarily (greater than 75% of assets) in corporations that pay tax. 1 C corporation MLP Fund pays tax, but invests primarily in partnerships that do not pay tax. C corporation does pay tax on capital gains from the sale of the partnership interests. 1 C Corporation Regulated Investment Company (RIC) No Limit on MLP investment MLP investment limited to 25% No Income or asset testing required Entity-level income taxation No passive activity loss rules Generally subject to franchise tax on NAV Must accrue for deferred taxes SH distributions are primarily return of capital Quarterly income & asset testing required Pass-through income taxation Passive activity loss rules apply Some states provide exemption from franchise taxes Typically no deferred tax accrual SH Distributions are primarily ordinary income 1 Cohen Fund Audit Services. Launching and Operating a 1940 Act MLP Fund. June 22, 2014 Chart Source: PwC. MLP Funds and Investment Products Introduction MAI Investment Management Page 22

23 RIC VS. C CORP RIC Structure vs. C Corporation MLP Fund An Example Assumptions 1. Fund Appreciates in Value by 10% and pays a 6% dividend (all ordinary income) 2. Performance of a $1,000,000 investment 3. Assumes 37% federal and state tax rate at corporate level, all dividends from RIC are not QDI 4. Assumes 43.4% federal individual tax rate, 5% state tax rate, and 23.8% QDI/LTCG rate at individual level RIC C Corp C Corp vs. RIC Increase in NAV before tax 100, ,000 Fund level tax expense (37,000) Increase in NAV before tax 100,000 63,000 63% Less dividend paid (60,000) (60,000) Gain on which investors would be taxed 40,000 3,000 Tax Rate on Sale of Shares 28.8% 28.8% Tax on Gain of Sale of Shares 11, Gain on Sale of Fund, Net of Tax 28,480 2,136 8% Dividend Income 60,000 60,000 Tax Rate on Dividend 48.4% 28.8% Tax on Dividends 29,040 17,280 Dividend Income from Fund, Net of Tax 30,960 42, % Net return to investor on $1m investment 59,440 44,856 75% Source: Cohen Fund Audit Services. Launching and Operating a 1940 Act MLP Fund. June 22, 2014 MAI Investment Management Page 23

24 CONCLUSION Conclusion MLPs have been around since the 1980s MLPs are primarily in the energy supply chain U.S. Energy Renaissance is still in beginning stages New drilling processes and increased demand should keep production strong MLPs have a history of attractive yield and growth than can potentially offer double digit total returns MLPs have exhibited low correlations to most other major asset classes A portfolio with an allocation to MLPs has historically increased returns and decreased volatility compared to a traditional portfolio without MLPs Compared to a C Corporation MLP Fund, a RIC structure can reduce tax drag Past performance is no guarantee of future similar results. MAI Investment Management Page 24

25 IMPORTANT Important Information This information provided to you by MAI Investment Management is intended for educational purposes only. No other distribution or use of these materials has been authorized. The opinions expressed in these materials represent the personal views of the investment professionals and staff of MAI Capital Management, LLC and is based on their knowledge, experience, research, and analysis of the energy, energy infrastructure, and MLP space. Past performance is not a guarantee of future similar results. All performance or performance related statistics are as of the date of this pamphlet. The information contained herein is derived from sources believed accurate but not guaranteed. Prices, yields and availability will change with market movement. There is no guarantee future yields will be similar. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. MAI Capital Management, LLC disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation to buy any securities. MLP returns have the potential to be highly volatile and investing in MLPs may not be suitable for everyone. MAI Investment Management provides targeted investment solutions, communication and support to financial advisors and institutions. MAI Investment Management is a division of MAI Capital Management. MAI Investment Management Page 25

26 MLP RISKS Industry Specific Risk. MLPs are subject to risks specific to the industry they serve, including the following: Fluctuations in commodity prices may impact the volume of commodities transported, processed, stored or distributed; Reduced volumes of natural gas or other energy commodities available for transporting, processing, storing or distributing may affect the profitability of an MLP; Slowdowns in new construction and acquisitions can limit growth potential; A sustained reduced demand for crude oil, natural gas and refined petroleum products that could adversely affect MLP revenues and cash flows; Depletion of the natural gas reserves or other commodities if not replaced, which could impact an MLP s ability to make distributions; Changes in the regulatory environment could adversely affect the profitability of MLPs; Extreme weather and environmental hazards could impact the value of MLP securities; Rising interest rates which could result in a higher cost of capital and drive investors into other investment opportunities; and Threats of attack by terrorists on energy assets could impact the market for MLPs. Energy Industry Concentration Risks. MLPs are engaged primarily in the energy industry and will therefore be susceptible to adverse economic, environmental or regulatory occurrences affecting the energy industry. Risks associated with investments in MLPs and other companies operating in the energy industry include but are not limited to the following: Commodity Risk. MLPs and other companies operating in the energy industry may be affected by fluctuations in the prices of energy commodities. Fluctuations in energy commodity prices would directly impact companies that own such energy commodities and could indirectly impact MLP companies that engage in transportation, storage, processing, distribution or marketing of such energy commodities. Supply and Demand Risk. MLPs and other companies operating in the energy industry may be impacted by the levels of supply and demand for energy commodities. Depletion Risk. MLPs and other energy companies engaged in the exploration, development, management, gathering or production of energy commodities face the risk that commodity reserves are depleted over time. Such companies seek to increase their reserves through expansion of their current businesses, acquisitions, further development of their existing sources of energy commodities or exploration of new sources of energy commodities or by entering into long-term contracts for additional reserves; however, there are risks associated with each of these potential strategies. Environmental and Regulatory Risk. MLPs and other companies operating in the energy industry are subject to significant regulation of their operations by federal, state and local governmental agencies. Additionally, voluntary initiatives and mandatory controls have been adopted or are being studied and evaluated, both in the United States and worldwide, to address current potentially hazardous environmental issues, including hydraulic fracturing and related waste disposal and geological concerns, as well as those that may develop in the future. Acquisition Risk. MLPs may depend on their ability to make acquisitions that increase adjusted operating surplus per unit in order to increase distributions to unit holders. Interest Rate Risk. Rising interest rates could increase the costs of capital thereby increasing operating costs and reducing the ability of MLPs and other companies operating in the energy industry to carry out acquisitions or expansions in a costeffective manner. Rising interest rates may also impact the price of the securities of MLPs and other companies operating in the energy industry as the yields on alternative investments increase. Extreme Weather Risk. Weather plays a role in the seasonality of some MLPs cash flows, and extreme weather conditions could adversely affect performance and cash flows of those MLPs. Catastrophic Event Risk. MLPs and other companies operating in the energy industry are subject to many dangers inherent in the production, exploration, management, transportation, processing and distribution of natural gas, natural gas liquids, crude oil, refined petroleum and petroleum products and other hydrocarbons. Any occurrence of a catastrophic event, such as a terrorist attack, could bring about a limitation, suspension or discontinuation of the operations of MLPs and other companies operating in the energy industry. Liquidity Risk. Although common units of MLPs trade on the NYSE, the NASDAQ, and Amex, certain MLP securities may trade less frequently than those of larger companies due to their smaller capitalizations. In the event certain MLP securities experience limited trading volumes, the prices of such MLPs may display abrupt or erratic movements at times. MLP Tax Risk. MLPs do not pay U.S. federal income tax at the partnership level. Rather, each partner is allocated a share of the partnership s income, gains, losses, deductions and expenses. A change in current tax law, or a change in the underlying business mix of a given MLP, could result in an MLP being treated as a corporation for U.S. federal income tax purposes, which would result in such MLP being required to pay U.S. federal income tax on its taxable income. The classification of an MLP as a corporation for U.S. federal income tax purposes would have the effect of reducing the amount of cash available for distribution by the MLP. Sector Risk. Sector risk is the possibility that securities within the same group of industries will decline in price due to sectorspecific market or economic developments. Additionally, some sectors could be subject to greater government regulation than other sectors. Therefore, changes in regulatory policies for those sectors may have a material effect on the value of securities issued by companies in those sectors. MAI Investment Management Page 26

27 CONTACT INFO MAI Investment Management a division of MAI Capital Management, LLC 1360 East Ninth Street, Suite 1100 Cleveland, OH Phone: Fax: MANAGE. ADVISE. INNOVATE. MAI Investment Management Page 27