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Master Limited Partnerships A brief outline of investment approach and outlook.

Richard Daskin, CFA, CFP® Sub-Advisor for Cumberland Advisors (MLP)

What are Master Limited Partnerships? • • • •

• • • •

Pass through entity in the tax code (no corporate level taxation) New MLPs created after tax reform must be for eligible purposes Vast majority are now related to energy due to eligibility test Business model is mainly for steadier transportation or processing businesses in energy to pay out growing distributions of tax shielded income Examples: pipelines, gathering and processing systems, logistics, blending, storage, wholesale distribution (“midstream businesses”) Cost of capital is attractive to issuers due to tax treatment Issuer can maintain control of asset through ownership of the general partner Company and capital structure of MLPs have evolved fairly rapidly in last decade

Benefits to investors • Limited partners receive tax shielded income- on average 75-80% of distributions are considered Return of Capital and are not taxed • Yield is attractive (~7-8% average currently) and income generally grows over time • High yield does not necessarily reflect more risk in an individual partnership, but may also reflect lower growth prospects • Distribution growth provides some inflation protection • Tax deferred income can become tax exempt due to step up provisions for estate tax planning purposes

Risks/downside • Tax filing complicated due to K-1s for each partnership • Rising rates can be a headwind if combined with widening credit spreads • Exposure to counterparty risks with sponsor and energy industry generally • Most MLPs have volumetric risks for throughput in their systems, this factor varies greatly depending on business and contracts • Basis risks due to geography, time and product type • Some commodity price exposure possible depending on MLPs business • Limited partners generally have little say in management/higher agency risk than a corporation • Tax code risk • Financial credit and general market risk ©Copyright 2015 Cumberland Advisors ®. Further distribution prohibited without prior permission.

Capital structure of MLPs • Generally sponsor owns the general partner which runs the partnership and may have economic interest through incentive distribution rights (IDRs) • Economic interests of IDRs for general partners resemble 2/20% for hedge funds in some respects • Some GPs and LPs have merged or started out as one entity with no IDRs since this can simplify credit picture and ultimately lower cost of capital • Debt to equity varies but rule of thumb is 50% debt/ 50% equity • Debt to EBITDA varies with business models but MLPs generally are target 3.5-4.5 times • MLPs can undertake “lumpy” capital projects so metrics are not etched in stone and can vary ©Copyright 2015 Cumberland Advisors ®. Further distribution prohibited without prior permission.

Capital structure continued • Interest on debt is not deductible for MLPs as there is no entity taxation • Use 50/50 debt to equity, and 4x Debt to EBITDA target for leverage • Implies a 8x price to EBITDA cost for acquiring assets to grow, of course this will vary depending on risk, type of project etc. • Many MLPs acquire assets for sale by sponsor/general partner these are called dropdowns and are often lead to fast more predictable growthfavorable attribute if the acquisition price is fair

Investment Approach • Investment universe is K-1 issuing partnerships in energy • Focus on midstream partnerships

• MLP: Equity investments with tax shelter attributes • Yield indicates growth potential and risk • Risk management seeks diversification and offsetting various exposures • Seek to trade-off growth in income versus current income • Attractive returns take place if balancing the above factor is done well ©Copyright 2015 Cumberland Advisors ®. Further distribution prohibited without prior permission.

Present Issues • Low prices/excess supply for oil and gas – Result: lower production of domestic supplies by stressed E&P producers

• Indicate somewhat less need overall for infrastructure and slower distribution growth • Opportunities in bottlenecks still exist • Our research indicates generally higher interest rates, not a tailwind; but credit spreads and access to credit are very important • Usually positive correlation with energy prices – Why correlation higher this time?

Future Big Picture Issues • World economic growth and demand for energy – What is the price elasticity of demand due to lower energy prices?

• OPEC and geopolitical considerations • Technology – Especially battery storage (long-term issue in my view)

• Relaxation of crude export ban by USA? • MLP taxation

Company Profile  Managing client portfolios since 1973  Over $2.4 billion total assets under management • • • • •

Individuals Institutions Retirement plans Government entities Cash management portfolios

 Team-based approach with an average of over 25 years of investment experience  Clients located throughout the US and abroad  Offices • Headquartered in Sarasota, Florida • Branch office in Vineland, New Jersey ©Copyright 2015 Cumberland Advisors ®. Further distribution prohibited without prior permission.

Disclosure All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed. Past performance is no guarantee of future results. All investments involve risk including loss of principal. Fixed income investments are subject to interest rate and credit risk.