The Outlook for MLPs and Midstream Energy Infrastructure Continues to Look Bright

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1 The Outlook for MLPs and Midstream Energy Infrastructure Continues to Look Bright July 30, 2014 by David Chiaro of Eagle Global Advisors MLP Capital in the 2nd Quarter of 2014 It is not often that an obscure book from a university press makes the top of the best seller lists, but the improbable happened with French economist Thomas Piketty s new tome Capital in the 21st Century, a disquisition on rising income inequality in modern economies. The book purports to document the history of income and wealth inequality in both European and American economies from the 1800s to the present, and proposes a theory why this inequality may get wider. It hypothesizes that if the return on capital is greater than the growth rate of the economy, then the owners of capital will see their wealth and income rise faster than that of the vast bulk of society. From those who have read it (and one suspects that many of the sales of this very dry and technical book will just end up as expensive doorstops), there are controversies about the reliability of the statistics, the interpretation of the numbers, and the theories used to explain them. However, there is no controversy that the rich got richer in the second quarter of 2014, especially owners of MLPs and midstream energy infrastructure companies. The return on capital in the MLP sector remains high; using the Piketty framework, capital holders in the MLP sector should continue to see their wealth and income diverge positively from the masses. To the social engineers decrying this trend, we can only say, c est la vie! To be sure, returns on MLPs were boosted by a benign investment environment that saw interest rates fall and all of the main equity markets post good returns. Returns for investors in MLPs were particularly good, with the Alerian MLP Index rising, as mentioned, 14.2% in the quarter, bringing its rise for the year to 16.3%. The quarter saw a number of positive developments that underpin our long term positive outlook on MLPs. Firstly, the need for new midstream infrastructure remains significant, and a number of announcements of large new projects highlighted that this need is not abating. Also, a significant new development in the quarter was the emergence of new export markets for ethane and condensate which will entail associated infrastructure development and other possible profit opportunities for MLPs. Furthermore, the advantages of the MLP structure for financing infrastructure investment continues to gain appreciation by new segments of the energy sector with Shell s recently announced intention to form an associated MLP a major milestone. Finally, institutional investor interest continues to expand with a broadened interest in the sector among generalist mutual funds, pensions and Page 1, 2018 Advisor Perspectives, Inc. All rights reserved.

2 endowments, and foreign-domiciled accounts. Once More Unto the Breach After a pause in the pace of equity offerings and deal announcements in the first quarter of this year, the MLP market returned to the torrid pace of capital raising that has characterized the sector for the past two years. We estimate that more than $6.1 billion was raised in secondary and follow-on offerings last quarter, up from approximately $4.4 billion in first quarter of this year. In addition, we saw seven MLP IPOs raise about $2.3 billion in the second quarter, making up for the dearth of IPOs seen in the first quarter. Related entities structured as C-corps raised an additional $5.5 billion in the quarter, highlighted by Williams $3.5 billion equity follow on to finance the acquisition of the 50% of the Access Midstream general partner that they did not already own. In addition to the very visible equity offerings, MLPs continue to use the less visible ATM ( At the Market ) method to raise capital that we highlighted in last quarter s commentary. The need for capital has not abated; estimates are that capital spending by MLPs in 2014 should surpass last year s $30 billion total. Underlying this need for capital is the requirement for infrastructure to develop new hydrocarbon basins. While a number of studies have projected major needs for new midstream infrastructure for decades to come, some MLP investors have questioned how long the current pace of investment can be maintained. Announcements from this past quarter imply that the investment trends in the sector are still very healthy. Energy Transfer Partners announced a project to connect Bakken crude oil supplies to a transshipment point in Illinois and further down to the Gulf of Mexico petrochemical industry. This investment would entail building or converting 1,800 miles of pipeline and cost $4 to $5 billion. We expect Energy Transfer will likely undertake this investment in conjunction with its partially owned Sunoco Logistics Partners. This is the first major new pipeline project associated with the rising Bakken crude production and raises hopes that other Bakken pipeline projects may also be announced. Energy Transfer also announced a $4 billion project to connect Marcellus and Utica Shale gas production to its existing Panhandle Eastern Pipeline and other interconnection points in the Midwest. EQT and NextEra Energy announced a pipeline to connect the Marcellus to demand markets in the Southeast region of the U.S. Additionally, MLP management teams indicate that numerous unannounced infrastructure projects are at various stages of consideration throughout the U.S. A number of general partners announced transactions structured to enhance the growth profiles of their associated MLPs as well as themselves. The most significant transaction of the quarter in this vein was the acquisition of the 50% of the GP and approximately 50% of the LP units of Access Midstream by Williams Companies. Williams plans to merge its associated MLP, Williams Partners, into Access Midstream in the near future. This sequence of transactions allows for growth both at the MLP level, via combining the expanded footprint of Access with Williams Partners diversified service offerings, as well as at the GP level, as Williams (the parent of Williams Partners) will transition to a pure general partner holding company. Enbridge Energy announced a transaction that reduced its incentive distribution rights to 25% from 50% for its associated MLP, Enbridge Energy Partners; this transaction in essence lowers the cost of capital for the MLP, thereby increasing the effective accretion from future drop downs and ultimately helping its growth profile. Enbridge also announced the first drop down to its recently created Midcoast Energy Partners focused on gas gathering and processing. The combination of these transactions raises hopes that Enbridge Energy will take a greater interest in boosting the growth prospects of both Enbridge Energy Partners and Midcoast Energy Partners. Other Page 2, 2018 Advisor Perspectives, Inc. All rights reserved.

3 announcements of acquisitions and new projects by the general partners of Summit Midstream, EQM, Southcross, and others pointed to continued interest in GPs to raise and extend the growth profiles of their associated MLPs. One notable development during the second quarter was the expansion of a new group of securities focused on renewable and traditional energy generation assets patterned after MLPs. These securities, which have been termed YieldCos due to their high distribution rates, rely on long term contracts with stable cash flows, and visible growth paths based on drop downs from associated companies. While these securities share many of the attributes of MLPs including tax preferences associated with wind and solar energy tax credits, they are organized as C corporations and not partnerships, and don t issue K-1s as a result. In the second quarter, there were two IPOs of YieldCos: Abengoa Yield (ABY) and NextEra Energy Partners (NEP). Those IPOs performed extremely well, registering first day gains over 25%, paving the wave for future YieldCo new issuance. We expect at least one additional IPO near term (TerraForm Power Inc.) and believe other YieldCos are possible. While we have not invested in any YieldCos, we are monitoring these securities as possible investments. We also view these securities as an example of how the MLP universe continues to expand. MLP dedicated investment vehicles continue to funnel funds into the MLP asset class. The past quarter saw one new closed-end fund go public that should enable nearly $750 million in new capital to be invested in the sector. MLP dedicated open-end funds, ETNs and ETFs also continue to grow significantly and this past quarter was no exception. Many retail and institutional investors, which were inhibited from direct investing in MLPs due to their tax structure, have taken advantage of the greater convenience and ease of tax filing that these new investment vehicles offer. Open-end mutual funds focusing on MLPs are the newest and fastest growing source of funds to the sector, with over $20 billion invested in these new vehicles by the end of the quarter. It is worth pointing out that while the growth in MLP open-ended funds is dramatic, many of these new investment vehicles are relatively young and are still a small fraction of the total sector market capitalization. Politics are Positive for MLPs - for once One vestige of the energy crises of the 1970s is the prohibition of the export of crude oil from the U.S. This regulation has been largely irrelevant for the term of its existence as the U.S. saw its oil production fall from 1970 to 2011 and its net imports of crude rise. However, with the unexpected dramatic increase of U.S. crude production since 2011, the U.S. now faces the unprecedented situation where domestic supply of certain types of crude exceeds demand and U.S. crude sells domestically at a discount to the world price of oil. As a result, this regulation only serves as a hidden subsidy to many U.S. refiners who enjoy the advantages of low priced feedstock, and generally do not pass on the savings in lower gasoline or refined product prices (which can be internationally traded and hence are priced off of world markets). As a result, many bipartisan policy analysts have called for a repeal of the regulation prohibiting oil exports; this prospect has tantalized oil producers who would realize a higher price for their product and MLPs which would benefit from building the crude export infrastructure. The Obama administration has been sympathetic to the economic arguments advocating crude exports, but in an election year had not been expected to take any action that could be accused of Page 3, 2018 Advisor Perspectives, Inc. All rights reserved.

4 raising gasoline prices. Therefore, it was surprising when the U.S. Commerce Department in June announced that Enterprise Product Partners and Pioneer Natural Resources received confirmation that they would be permitted to export a minimally processed super-light oil known as condensate. After the announcement, Enterprise Product Partners reported it would enter into contracts to build infrastructure for this new export market. Some observers indicate that this ruling might also open the door to the export of other types of crude which only need minimal processing. This development could lead to a new range of infrastructure investment for MLPs. Enterprise Products also announced during the quarter that it would build an export facility for the natural gas liquid ethane, to be shipped to refineries in Europe. This is a significant new export potential that many observers did not predict; the long term commitments that consumers must make to underpin these projects was taken as further confirmation that the projected future supplies of North American hydrocarbons will continue for many years to come. Long Term Outlook: Positive As we look into the future, we continue to have a very favorable view of the total return potential of the MLP and midstream energy infrastructure market through a combination of yield and price appreciation. Valuations, while not as attractive as they were a year ago, are still attractive relative to most other asset classes. The average MLP yield is about 5.2%, down from about 6.6% at the beginning of 2013, but still fairly high. Spreads of MLP yields versus Treasuries, REITS, and corporate bonds have compressed from unusually high levels a year ago; they are now slightly below their longterm averages. MLP yield spreads versus high yield bonds have also compressed but are still significantly higher than the historical average. While spreads have shrunk over the last two years, the outlook for distribution growth has improved over that time frame, driven by accretive capital projects and the availability of asset acquisitions. So despite the run up in stock prices, our outlook for attractive total returns over the next few years remains intact. Rates on competing yield sectors like fixed income, REITs, and utilities generally fell in the quarter, and they are absolutely low in a relative and historic context. We believe that the demographic trend of an aging population retiring and expecting to live off their investments will result in a wider investor base seeking out the income generation of the MLP asset class. The growth in the distribution that MLPs offer is a further attraction to those wishing to stay ahead of inflation and earn positive real returns as well as a buffer to rising rates in the long term. The Eagle MLP Strategy Fund Team Disclosures: Investors should carefully consider the investment objectives, risks, charges and expenses of the Eagle MLP Strategy Fund. This and other important information about the Fund is contained in the prospectus, which can be obtained by calling or visiting The prospectus should be read carefully before investing. The Eagle MLP Strategy Fund is distributed by Northern Lights Distributors, LLC member FINRA/SIPC. This is an actively managed dynamic portfolio. There is no guarantee that any investment (or Page 4, 2018 Advisor Perspectives, Inc. All rights reserved.

5 this investment) will achieve its objectives, goals, generate positive returns, or avoid losses. The information provided should not be considered tax advice. Please consult your tax advisor for further information. Eagle Global Advisors, Princeton Fund Advisors, LLC and Northern Lights Distributors, LLC are not affiliated. A master limited partnership (MLP) is a limited partnership that is publicly traded on a securities exchange. It combines the tax benefits of a limited partnership with the liquidity of publicly traded securities. To qualify for MLP status, a partnership must generate at least 90 percent of its income from what the Internal Revenue Service (IRS) deems "qualifying" sources, generally relating to the production, processing or transportation of natural resources, such as oil and natural gas. The Alerian MLP Index is a composite of the 50 most prominent energy master limited partnerships calculated by Standard & Poor's using a float-adjusted market capitalization methodology. A real estate investment trust (REIT) is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors a regular distribution, as well as a highly liquid method of investing in real estate. Risk Factors Credit Risk: There is a risk that note issuers will not make payments on securities held by the Fund, resulting in losses to the Fund. In addition, the credit quality of securities held by the Fund may be lowered if an issuer s financial condition changes. Distribution Policy Risk: The Fund s distribution policy is not designed to guarantee distributions that equal a fixed percentage of the Fund s current net asset value per share. Shareholders receiving periodic payments from the Fund may be under the impression that they are receiving net profits. However, all or a portion of a distribution may consist of a return of capital (i.e. from your original investment). Shareholders should not assume that the source of a distribution from the Fund is net profit. Shareholders should note that return of capital will reduce the tax basis of their shares and potentially increase the taxable gain, if any, upon disposition of their shares. ETN Risk: ETNs are subject to administrative and other expenses, which will be indirectly paid by the Fund. Each ETN is subject to specific risks, depending on the nature of the ETN. ETNs are subject to default risks. Foreign Investment Risk: Investing in notes of foreign issuers involves risks not typically associated with U.S. investments, including adverse political, social and economic developments, less liquidity, greater volatility, less developed or less efficient trading markets, political instability and differing auditing and legal standards. Interest Rate Risk: Typically, a rise in interest rates can cause a decline in the value of notes and MLPs owned by the Fund. Liquidity Risk: Liquidity risk exists when particular investments of the Fund would be difficult to purchase or sell, possibly preventing the Fund from selling such illiquid securities at an Page 5, 2018 Advisor Perspectives, Inc. All rights reserved.

6 advantageous time or price, or possibly requiring the Fund to dispose of other investments at unfavorable times or prices in order to satisfy its obligations. Management Risk: Eagle s judgments about the attractiveness, value and potential appreciation of particular asset classes and securities in which the Fund invests may prove to be incorrect and may not produce the desired results. Additionally, Princeton s judgments about the potential performance of the Fund s investment portfolio, within the Fund s investment policies and risk parameters, may prove incorrect and may not produce the desired results. Market Risk: Overall securities market risks may affect the value of individual instruments in which the Fund invests. Factors such as domestic and foreign economic growth and market conditions, interest rate levels, and political events affect the securities markets. MLP Risk: Investments in MLPs involve risks different from those of investing in common stock including risks related to limited control and limited rights to vote on matters affecting the MLP, risks related to potential conflicts of interest between the MLP and the MLP s general partner, cash flow risks, dilution risks and risks related to the general partner s limited call right. MLPs are generally considered interest-rate sensitive investments. During periods of interest rate volatility, these investments may not provide attractive returns. Depending on the state of interest rates in general, the use of MLPs could enhance or harm the overall performance of the Fund. MLP Tax Risk: MLPs, typically, do not pay U.S. federal income tax at the partnership level. Instead, each partner is allocated a share of the partnership s income, gains, losses, deductions and expenses. A change in current tax law or 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. Thus, if any of the MLPs owned by the Fund were treated as corporations for U.S. federal income tax purposes, it could result in a reduction of the value of your investment in the Fund and lower income, as compared to an MLP that is not taxed as a corporation. Energy Related Risk: The Fund focuses its investments in the energy infrastructure sector, through MLP securities. Because of its focus in this sector, the performance of the Fund is tied closely to and affected by developments in the energy sector, such as the possibility that government regulation will negatively impact companies in this sector. Energy infrastructure entities are subject to the risks specific to the industry they serve including, but not limited to, the following: Fluctuations in commodity prices; Reduced volumes of natural gas or other energy commodities available for transporting, processing, storing or distributing; New construction risk and acquisition risk which can limit potential growth; A sustained reduced demand for crude oil, natural gas and refined petroleum products resulting from a recession or an increase in market price or higher taxes; Depletion of the natural gas reserves or other commodities if not replaced; Changes in the regulatory environment; Extreme weather; 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. Non-Diversification Risk: As a non-diversified fund, the Fund may invest more than 5% of its total Page 6, 2018 Advisor Perspectives, Inc. All rights reserved.

7 assets in the securities of one or more issuers. Small and Medium Capitalization Company Risk: The value of a small or medium capitalization company securities may be subject to more abrupt or erratic market movements than those of larger, more established companies or the market averages in general. Structured Note Risk: MLP related structured notes involve tracking risk, issuer default risk and may involve leverage risk. Mutual Funds involve risk including possible loss of principal. Eagle Global Advisors Page 7, 2018 Advisor Perspectives, Inc. All rights reserved.