What are Master Limited Partnerships and Why Invest?

A Master Limited Partnership (MLP) is a publicly traded limited partnership. To qualify as an MLP, a partnership must receive at least 90% of its income from qualifying sources such as natural resource-based activities, including the exploration, development, mining, production, processing, refining, transportation, storage and marketing of mineral or natural resources.

There are a variety of MLP's including pipeline MLP's, propane MLP's and coal MLP's. Pipeline MLP's are engaged in transmission and storage of natural gas, the transportation and storage of crude oil, the transportation (usually via pipelines, barges, rail cars and trucks), storage and terminalling of refined petroleum products. Propane MLP's are engaged in the distribution of propane to homeowners for space and water heating and to commercial, industrial and agricultural customers. Propane serves approximately 3% of the household energy needs in the United States, largely for homes beyond the geographic reach of natural gas distribution pipelines. Coal MLP's are engaged in the owning, leasing, managing, production and sale of coal and coal reserves. Electricity generation is the primary use of coal in the United States.

MLP's provide steady cash distributions with attractive growth profiles. Over the past several years many of the major oil companies have divested themselves of midstream energy assets, providing an opportunity for MLP's to acquire these assets at attractive valuations. We believe that this trend will continue and that current market conditions are conducive for continued growth in cash distributions.

MLP's operate strategically important assets that typically generate stable cash flows. MLP's operate in businesses that are necessary for providing consumers with access to energy resources. We believe that due to the fee-based nature and long-term importance of their midstream energy assets, MLP's typically generate stable cash flows throughout economic cycles. Additionally, certain businesses operated by MLP's are subject to regulation by federal and state authorities which often results in highly predictable cash flows.

The midstream energy sector has high barriers to entry. Due to the high cost of constructing midstream energy assets and the difficulty of developing the expertise necessary to comply with the regulations governing the operation of such assets, the barriers to enter the midstream energy sector are high. Therefore, currently existing MLP's with large asset bases and significant operations enjoy a strong competitive advantage.

Due to a lack of broad institutional following and limited retail focus, the MLP market experiences inefficiencies which can be exploited by a knowledgeable investor. Historically, there have been adverse consequences of MLP ownership for many institutional investors and mutual funds. Further, because MLP’s generate unrelated business taxable income (“UBTI”), they are typically not held by tax-exempt investors such as pension plans, endowments, employee benefit plans, or individual retirement accounts. KYN, a closed-end fund, does not generate UBTI and it thus safe for IRA’s.

Also, income and gains from MLP's are subject to the Foreign Investment in Real Property Tax Act (“FIRPTA”), limiting the investment by non-U.S. investors in the sector.