http://www.infracapmlp.com/about/fund-profile.html - Master limited partnerships can be an attractive source of income and diversification for investors. MLPs also generate a lot of questions from investors given the asset class’s unique ownership structure and tax consequences.

1. What Investors Need to Know About Master Limited Partnerships
Master limited partnerships (MLPs) can be an attractive source of income and diversification
for investors. MLPs also generate a lot of questions from investors given the asset class’s
unique ownership structure and tax consequences. This paper is designed to help investors
understand the fundamentals of how MLP investing works, as well as the return opportunities
and risks associated with this alternative asset class.
What Is a Master Limited Partnership?
A master limited partnership is an entity that is structured as a pass-through partnership whose
investment units are publicly traded on U.S. securities exchanges, like common stock of a public
company. Unlike a C-corporation, which is taxed at the corporate level and separate from its
owners, any profits earned by the MLP are taxed at the level of the unitholders at their individual
tax rates. As a result, an MLP combines the benefits of a limited partnership structure with the
liquidity of a common stock.
To qualify as an MLP, per the Tax Reform Act of 1986, an entity must earn at least 90% of its
income through qualified sources and/or activities relating to:
• Natural resources (exploration, mining, production, processing, refining, transportation,
storage, and marketing of natural resources)
• Interest
• Dividends
• Real property rents
• Gain from sale or other disposition of real estate
The disclosures of an MLP are regulated by the Securities and Exchange Commission, and an
MLP must file 10-Ks, 10-Qs, and notices of material changes similar to any publicly traded
corporation. An MLP must also comply with the record keeping and disclosure requirements of
the Sarbanes-Oxley Act.
It is important to note that a limited liability corporation (LLC) is similar to an MLP and
maintains the same tax advantages, including no taxes at the corporate level and tax deferral for
limited partners. LLCs and MLPs, however, differ in terms of operational control. Specifically,
an LLC generally does not have ageneral partner managing the operations of the business and
therefore does not issue incentive distribution rights (discussed adjacent). Instead, stakeholders
of an LLC typically possess some form of control through voting rights, which limited
partnership unitholders of an MLP do not have.
Background: How the MLP Market Became Dominated by Energy Companies
The first MLP, Apache Oil Company, was launched in 1981. Other oil and gas MLPs as well as
real estate MLPs soon followed. The original intent was to raise capital from individual investors
by offering them a partnership investment in more affordable and liquid securities. During the
1980s, the number of MLPs grew rapidly, and MLPs were created for a variety of businesses

2. purposes, including hotels, restaurants, and even sports franchises, such as the NBA’s Boston
Celtics, presumably to avoid double taxation. Conscious of this trend, Congress stepped forward
with the Tax Reform Act of 1986 and passed legislation that continues to serve as the framework
for publicly traded partnerships today.
During the late 1980s and throughout the 1990s,the highly cyclical nature of many of these types
of businesses proved ill-suited for an entity that is required to distribute large amounts of its cash
flows. Consequently, many of the original oil and gas exploration MLPs left the space, as they
were unable to maintain distributions when oil and gas prices plummeted. In addition, most of
the original real estate MLPs converted to real estate investment trusts (REITs). Integrated
energy companies sold or spun off midstream assets (the parts of the business involved in
gathering, processing, pipelines, and distribution) to MLPs so the company could focus on its
core business. These energy spinoffs became the core of the modern MLP universe.
Today there are more than 130 MLPs, about 110 of which are energy-related, meaning they are
engaged in the transportation, storage, processing, refining, marketing, exploration, production,
and mining of minerals and natural resources. More than half of today’s 110 energy MLPs are
involved in midstream assets (split almost equally between natural gas and oil infrastructure),
with an additional 17 in upstream assets (exploration and production) and nine in downstream
assets (refining, marketing, and distribution). The rest cover the spectrum of the energy value
chain, including propane, marine transportation, coal, and royalty trusts.
The majority of MLPs receive a fee or toll for delivering a customer’s product across their
infrastructure systems, resulting in relatively stable cash flows. The MLP, in most cases, does not
own the commodity, essentially eliminating commodity price exposure and thereby smoothing
out its cash flows. Natural gas pipelines receive stable income in the form of rental fees from
pipeline capacity reservations, independent of actual throughput and largely through “take-or-
pay” contracts. Other product pipeline revenues typically depend on throughput, but are
protected by inflation escalators that act as a hedge. Other midstream assets have similar fee-
based contracts that vary in risk depending on their position in the energy value chain.
While it is not legally required to do so, an MLP typically pays a substantial portion (70% to
100%) of its cash flow from operations to unitholders in tax-deferred distribution, which are not
dividends. To accomplish this, the MLP usually engages in businesses that provide robust,
stable, and predictable cash flows. Investors typically seek partnerships that can grow
distributions over time, and an MLP accomplishes this partly by growing its asset base through
organic projects, asset purchases from its parent known as “dropdowns,” or third-party
acquisitions.
Ownership: General Partner and Limited Partners
An MLP generally has two main classes of owners: the general partner (GP) and limited partner
(LP). The general partner typically owns 1% to 2% of the partnership and is responsible for
managing the daily operations of the MLP. In return, the GP receives its pro rata share of the
MLP’s available cash flows through distributions, which are generally paid out on a quarterly

3. basis, similar to dividends on common stock. Distributable cash flow is calculated as net income
plus depreciation and other noncash items, less maintenance capital expenditures. These
distributions from the MLP are at the discretion of the GP and in accordance with the
partnership’s documents.
Limited partners usually own the remaining interest in the partnership in the form of publicly
traded “common units.” While LPs receive quarterly cash distributions in exchange for
contributing all of the capital to the partnership, they have no role in daily operations nor do they
have any voting rights. Additionally, liability is limited to the amount of capital invested.
Incentive Distribution Rights
In return for managing the business, the GP also owns incentive distribution rights (IDRs), which
specify the GP’s share of the total cash distributions. The GP’s share typically increases, as a
percentage, as distributions exceed certain thresholds. IDRs motivate the GP to operate and grow
the business in a manner that maximizes cash distributions to the unitholders. They are generally
agreed to between the partnership and the GP at the creation of the MLP and typically start with
the GP receiving 2% of the cash distributions. A GP’s IDRs can reach as high as 50% and this is
referred to as “high splits.”
High splits can stifle the growth of an MLP as projects and/or acquisitions will require more cash
flow generation to compensate for the higher distribution flows to the GP. Different IDR split
structures have a material impact on total distribution paid to LPs.
Tax Environment and Implications for Investors
Classified as a partnership rather than a corporation, an MLP is not subject to corporate-level
federal income taxes, eliminating double taxation at the unitholder level.
MLPs combine the pass-through tax benefits of a limited partnership structure with the liquidity
of common stock
This effectively provides an MLP with a cost advantage over its incorporated peers when
pursuing growth or expansion projects. The tax liability of the entity is passed on to its
unitholders, and the GP and LPs are required to pay taxes on their allocable share of the
partnership’snet income at the investor’s individual ordinary income tax rate.
The Schedule K-1 (Form 1065)
The K-1 is the tax statement that an MLP investor receives each year from the partnership which
outlines the investor’s share of the partnership’s income, gains, losses, credits, and deductions,
including accelerated depreciation and amortization deductions. It is typically distributed in
February of each year and is similar to a Form 1099 that an investor receives from a corporation.
If the partnership reports a net loss after deductions, it is considered a passive loss under the tax
code. While passive losses may not be used to offset income from active sources, they may be
carried forward and used to offset future income from the same MLP or other passive sources.

4. The amount of taxes an LP pays is determined by several factors, including the unitholder’s
ownership percentage, the timing of the investment, and the cost basis.
Typically, the K-1 allocates partnership income and loss items to each state in which the
partnership conducts business or owns property. Thus, a potential complication with direct
investing in an MLP is that an LP may be required to file state and local income tax returns in
some or all of the various jurisdictions, regardless of the investor’s residence. As a result, many
investors are often discouraged from allocating capital to this asset class due to the onerous tax
filings.
Tax Deferral
MLPs can generate two distinct sources of income each year for investors:
1. An allocable share of an MLP’s net income for tax purposes
2. Quarterly cash distributions
This distinction is important because the two income sources are taxed differently. While the
investor’s allocable share of net income is taxable on an annual basis, the amount tends to be
very small relative to the annual cash distribution. This is because an MLP typically generates
significant noncash deductions, such as depreciation expenses, that substantially offset the
allocated income and greatly reduce the amount of taxable income. These noncash deductions do
not affect the quarterly cash distributions. Indeed, the allocable share of net income typically
accounts for only 10% to 20% of an LP’s total income received in a given year. In other words,
an investor receives a tax shield equivalent to 80% to 90% of its cash distributions in a given
year until the investor sells the LP units. At the time of the sale , however, there is depreciation
recapture and the net income that was shielded by the deductions becomes deferred taxable
income and is taxed as ordinary income.
Unlike stock dividends, the quarterly cash distributions are not taxed in the year received and are
100% tax-deferred. These distributions are treated as reductions in the investment’s cost basis, or
a return of capital, and create a deferred tax liability. There are two primary events that can
trigger the end of the tax-deferred status of the distributions:
1. Monetization: Once the investor sells his or her units, the deferred portion of the distributions
becomes taxed at the investor’s personal income rate (capital gains above the purchase price are
taxed at the capital gains tax rate).
2. Basis reaches zero: Each year, the portion of the distributions that the net income allocation
does not offset goes toward decreasing the original cost basis of the investment. If the sum of
these offsets increases beyond the original purchase price of the units, then the future
distributions lose their tax-deferred status.
MLPs are a unique estate planning tool for tax-efficient wealth transfer. When an heir receives
the units, the cost basis is reset at the new price. Therefore, there are no taxes on the prior
deferred distributions. An investor’s basis is calculated by taking the initial basis plus allocated
income less depreciation and less the cash distribution.

5. In general, tax-exempt vehicles such as pension accounts, 401(k)s, IRAs, and endowment funds
are encouraged not to directly invest in MLPs because the partnerships generate unrelated
business taxable income (UBTI). If a tax-exempt entity receives UBTI in excess of $1,000 per
year, the investor would be required to file IRS form 990-T andmay be liable for tax on the
UBTI.
MLP Investors
Historically, MLPs have been mostly owned by individual investors rather than institutions. In
2000, individual ownership approximated 90% of total MLP units, with limited institutional
participation.
Before 2004, institutional investors such as mutual funds and other registered investment
companies were restricted from investing in MLPs because distributions and allocated income
from publicly traded partnerships were considered nonqualifying income. To retain their special
tax status as regulated investment companies (RICs), mutual funds and other registered
investment companies were required to receive at least 90% of their income from qualifying
sources. Since the passage of the American Jobs Creation Act in October 2004, however, it is
now incrementally easier for RICs to own MLPs. Still, the current parameters specify that no
more than 25% of a fund’s asset value may be invested in MLPs and a fund may not own more
than 10% of any single MLP. So any fund with an MLP focus would easily exceed these
thresholds and would no longer be eligible to file as a RIC. As a result, the fund would likely file
as a C-corporation, which is subject to income taxes at the corporate level, negating the taxation
benefits of the MLP structure.
Investment Vehicles
As previously mentioned, the most tax-efficient means to invest in MLPs is through direct
ownership of the securities by either buying them in a brokerage account or in a separately-
managed account. However, direct owners receive K-1s which can require tax filings in multiple
states. Various investment vehicles have been created to consolidate tax reporting, and each have
their own pros and cons.
Limited Partnerships
Accredited investors and qualified purchasers can obtain MLP exposure through limited
partnerships that pool investor capital. While these vehicles provide a single consolidated K-1,
they tend to have high minimums and liquidity constraints. Unlike other vehicles, limited
partnerships may not protect against the generation of UBTI, which can make them restrictive
for tax-exempt accounts.
Open-End Mutual Funds
Mutual funds replace the burden of multiple K-1s for investors with a single 1099 and provide
professional management. However, the MLP investment parameters of the American Jobs
Creation Act restrict a RIC’s investments in LP structures to 25%. While mutual funds will
include the GP portion of MLPs, or invest in other creative structures to increase exposure to the
LPs, they are not considered pure plays on the MLP space. If an open-ended mutual fund elects

6. to concentrate in MLPs and file as a C-corporation instead of a RIC, the fund is not only subject
to double taxation but it must also reduce its net asset value (NAV) to reflect withholding for the
future tax liability on deferred income and distributions. For these reasons, many critics question
whether mutual funds can adequately track the performance of MLP indices. At the time of this
writing, there were 12 open-ended funds.
Closed-End Funds (CEFs)
For MLP-dedicated funds, the closed-end structure has been preferred over the open-ended one,
and today there are 23 distinct options. However, many closed-end funds are structured as C-
corporations because of the aforementioned RIC limitations on owning MLPs. Therefore CEFs
are subject to corporate level taxes. While CEFs offer intraday liquidity, they may trade at a price
that differs from NAV, creating a price discount or premium.
Exchange-Traded Funds (ETFs)
An MLP ETF holds units in a diversified basket of MLPs, with the benefits of providing a single
1099 and intra-day liquidity. While ETFs are generally less expensive than funds, they are
structured as C-corporations, making all income and capital appreciation subject to the corporate
tax rate of 35%. Therefore, ETFs must adjust their NAV for any deferred tax liability, which
may lead to substantial tracking error. Distributions from the ETF, however, do retain the
characteristics of the underlying MLPs. As such, most of the distributions from MLP ETFs to
date have been treated as a return of capital, though this could change as the ETFs turn over their
underlying positions. The first of now six MLP ETFs, the Alerian MLP ETF (AMLP), was
launched in August 2010.
Exchange-Traded Notes (ETNs)
An exchange-traded note operates as an index-linked bond that provides access to an index, such
as the Alerian MLP Index (a market-cap weighted, float-adjusted index created to provide a
comprehensive benchmark for investors to track the performance of the energy MLP sector.) The
unsecured note pays coupons linked to the distributions of MLPs tracked in the underlying index
less fees. Because the payment is a coupon, income distributions are treated as ordinary income
and there is no deferral mechanism. ETNs typically track the index better than ETFs because
they are not constrained by proportion of ownership of the securities in the index. In this
structure, the sponsor essentially guarantees that funds will be available to replicate the value of
the index holdings at the date of maturity. This makes credit risk a concern with ETNs, as a
decline in credit rating or bankruptcy of the note-issuing bank can erode the value of the
securities. Highlighting this risk is that the first MLP ETN was started in 2007 by Bear Stearns,
which failed in 2008. Many institutions have constraints that prohibit them from taking on
significant credit exposure from a single issuer, so investments in ETNs may be limited. At the
time of this writing, there were six ETNs listed for trading.
Investment Risks

7. Investing in MLPs involves risks that differ from investments in common stock. These risks
include those related to cash flow risk, interest rate risk, the ability to access capital markets,
taxation risk, regulatory risk, and industry-specific risk.
Cash Flow Risk
Distribution yields and their growth serve as an essential driver of MLP performance. MLPs
typically pay out a large proportion of their excess cash flows through quarterly distributions to
unitholders. The distribution yield is typically inversely related to expected distribution growth
because investors are willing to forego current yield in return for future distribution growth.
Historically, those MLPs with the fastest distribution growth tended to outperform those with
little or no distribution growth. Thus, any reduction in an MLP’s distribution yield and/or
distribution growth will likely be met with falling prices.
Interest Rate Risk
Investors are often attracted to MLPs because of the relatively high current yield the securities
offer. Interest rates represent an important driver of MLP performance as MLP yields are
compared with government bond yields. As government bond yields fall, MLP prices may rise,
as they become more desirable alternatives for income-producing securities; but the reverse is
also true: as government bond yields rise, MLP prices may fall, as they become less desirable
alternatives. Rising interest rates could also raise an MLP’s cost of capital, which may drive
investors into other investment opportunities.
Most MLPs have become public since 2000, a period in which the United States was in a
declining interest rate environment. There have been intermittent periods of rising rates within
the broader declining rate environment and, during these periods, MLPs lagged the S&P 500, but
tended to outperform utilities and REITs. According to a Credit Suisse analysis, there were 11
instances when 10-year Treasury rates increased from trough to peak. Out of those instances, the
Alerian MLP Index underperformed the S&P 500 seven times but mostly outperformed utilities
and REIT indices. This data suggests that while rising interest rates may force MLPs to lag the
broader equity markets, they may hold up better than other yield-oriented securities.
In addition, rising interest rates may increase an MLP’s debt costs, which would further reduce
the available capital for the general and limited partners.
Access to Capital Markets
The success of MLP partnerships depends on their ability to effectively manage projects as well
as to execute profitable acquisitions. Because MLPs pay out the majority of their cash flow as
distributions, MLPs rely heavily on access to capital markets to issue debt and equity to finance
growth projects and acquisitions. Limited access to financing would negatively affect MLPs that
require significant capital resources to continue producing strong returns.
The financing mix for these projects averages around 50% equity and 50% debt. Following the
credit crisis in 2008, the capital markets have continued to improve and remain accessible today.
In 2013, MLPs completed about 70 deals including IPOs and secondary offerings to raise a total
of more than $20 billion, according to RBC Capital Markets.

8. Legislative 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 by Congress, 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.
Further, 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.
Regulatory Risk
The IRS has called an internal working committee to evaluate REIT qualification principles in
response to a growing list of companies with nontraditional real estate assets seeking conversion.
Primarily, the committee is looking at the definition of real property, the framework for
determining rents versus service revenues, and tax-free spin-offs of REITs from a C-corporation.
While the IRS has yet to establish an internal working group to evaluate current principles used
to determine qualification for MLP status, a modification of the tax code could be a negative
event.
Industry-Specific Risk
Energy infrastructure companies also are subject to risks specific to the industry they serve,
including:
• Reduced volumes of natural gas or other energy commodities available for transporting,
processing, storing, or distributing
• Sustained reduction in demand for crude oil, natural gas, and refined petroleum products
resulting from a recession, an increase in market price, or higher taxes
• Depletion of the natural gas reserves or other commodities if not replaced
• New construction risks and acquisition risk that can limit growth potential
• Changes in the regulatory environment, and
• Extreme weather, such as warm winters or natural disasters