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 Note - US Energy infrastructure: The MLP example
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US Energy infrastructure: The MLP example

Among infrastructure assets, energy infrastructure assets such as pipelines, storage facilities or processing plants, are experiencing a rapid growth, especially in the USA. Master Limited Partnerships (MLPs) have played a key role in facilitating investment in US energy infrastructure.

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What is an MLP?

An Master Limited Partnerships (MLP) is a publicly traded partnership (PTP). Unlike a corporate stock, an MLP does not pay tax on their income and to qualify for an MLP structure, a PTP must have at least 90% of its income derived from « qualifying sources ». Most MLPs operate in the field of energy and natural ressources, especially in the energy markets (crude oil and natural gas) through exploration, development, production, processing, refining, transportation or storage for example.

MLPs are listed on public exchanges such as the NYSE in the USA. Since 1995, the sector has seen a compound annual growth rate of 25% in market capitalization. As of June 30, 2014, there were 117 energy MLPs totaling over $500 billion in market cap.

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Different types of activities

Energy infrastructure activities in the USA can be divided into three main areas:

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Structure of a MLP

The ownership of a MLP is divided between the general partners (GPs) and the limited partners (LPs). The GPs manage the MLP and while the LPs only provide the capital and do not take part in the management of the MLP.

The LPs are initially entitled to receive the majority of the cash flow generated by the MLP. The cash flow available for distribution is allocated between GPs and LPs. The GPs typically hold 2% of the MLP equity but can grow its entitlement to the MLP profit margin through incentive distribution rights (IDR). The IDRs are calculated as a percentage of the cash distributed. As the distribution to LPs increases and reaches certain levels, the IDR increases as well and can represent up to 50% of the incremental cash flow available for distribution.

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Key characteristics

Since the 2008 crisis, investors have become more cautious about market risk. In addition, with interest rates low, there has also been increasing demand for steady and stable yields. MLPs provide potential solutions to both of these needs.

According to Henry Boua, Associate Director for France and Monaco at ETF Securities, historically, MLPs have tended to show the following investment characteristics:

  • Higher and more stable distribution yield than equities and bonds
  • Higher total return relative to other asset classes over the past five years
  • Better risk/return ratio than equities, bonds and commodities
  • Diversification potential, as MLPs have a low correlation to bonds and a declining correlation to equities and commodities