FEBRUARY 2016

Are MLPs and Midstream Companies Still Like Utilities Without Walls?
As of this writing, MLPs were falling toward

business is hardly a fad. And we think it is

Weve often spoken of MLPs and mid-

their 2009 lows as measured by the Alerian

helpful to consider MLPs in relation to their

stream companies in similar businesses

MLP Index. What could have been a gar-

close cousins, utilities.

as Utilities Without Walls. Yet after the

MLPs, like utilities, provide services that

jarring price activity in 2015 and 2016,

den-variety market correction after a

remarkable six-year rally has deteriorated
into what might appear to be a full-blown
meltdown, that has erased much of the
price gains made during that period. Some
journalists and financial advisors are questioning the MLP business model, asking
how it will weather this storm.
Investors are rightly confused about MLP
valuations, long-term prospects, and
the very viability of the business model.
But perhaps there is some myopia here,
brought on more by stock price movements than by business fundamentals.

are essential to society. They own monopolistic assets that, for the most part,
generate enough cash flow to pay their
current distribution commitments to
shareholders. Plunging stock prices have

seemingly associated with first declining

oil prices and then natural gas prices, is
this characterization still valid?

SIMILARITIES AND DIFFERENCES

triggered a negative feedback loop, in par-

We first became involved with MLPs in

ticular by raising an MLPs cost of capital

1997 in our Income-Equity Strategy and in

when selling equity and stressing their

ability to fund expansion projectsthe
driver of future cash distribution increases.
We see this not as the end of the road for
MLPs, but rather a bump in the road.

our utilities portfolio, and one reason we

did so was that there was a great pipeline
consolidation during the 1990s (as a result
of FERC Order 636, which changed the
structure of the industry). We had owned
nearly all of the pipelines that soon became

T he business MLPs and mids tream

Quality MLPs and midstream companies

consolidated into energy MLPs, so naturally

corporations engage innamely, the

have sufficient resources to manage

we studied this new vehicle and came to

transportation, processing, and storage

through this turbulence, just as utilities

understand how an MLP workswhich is

of oil and gasdates back 150 yearsthe

managed and then thrived 13 years ago.

not always clear to the average investor.

continued on page 2

Chart 1. Alerian MLP Price Index (20082016)

AMZ

600

INDEX RATE

500

Price Return: 254%

Total Return: 412%

400

Price Return: (53)%

Total Return: (48)%

300
200
100
0
2008

2009

2010

2011

2012
YEAR

2013

2014

2015

2016

Source:
Data shown January 1, 2008 to January 31, 2016.
See important disclosures and definitions on page 12.

2016 Miller/Howard Investments, Inc.

www.mhinvest.com

page 2

MLPs are uniquely connected to utilities,

as a primary function for both is to provide services essential to our society. In
fact, many of todays MLPs were created
from assets previously owned by utilities.
So we think there is much validity in comparing MLPs to utilities in determining
fair valuations.

Similarities
The underlying MLP business is indeed
utility-like in several regards.
Essential services at the heart of both.

Pipeline and processing companies

bring natural gas from its extraction
source to users, such as utility companies, factories, refineries, chemical
companies, residential heating systems,
and shipping terminals. Oil infrastructure also brings product from drillers,
refineries, and terminals, plus inflow
and outflow from storage tanks. The
energy in question is essential: we
would not have society as we know it
without energy. Energy is in constant
use, and use grows with the economy in
an almost perfect correlation. The midstream (transport pipes and processing)
makes the downstream (refineries, electric and gas utilities, etc.) possible, and
the demand for its services is just as constant as the demand for utility services.
Durable

revenues. Like utilities, MLP

revenues are derived from long-term
contracts charging fees (there is some
small degree of commodity-based revenues in the space, but most revenues
are tolls). These contracts do have
end dates (520 years), but at the end
of the lease a shipper (E&P company) or
receiver (utility) will not have another
vendor to negotiate with, since there is
typically only one facility for shipping
and processing. Utilities, of course, have
no competition in exchange for revenues that are protected and limited.

2016 Miller/Howard Investments, Inc.

Limited

competition. MLPs are monopolistic because rights of way for

infrastructure are so difficult to create.
It is extremely rare for two pipelines
to compete. This is not the same as
a legal utility monopoly, but it is a
de facto monopoly.

Differences
The comparison between MLPs and utilities is strong, though not perfect. Some
key differences:

Higher yield. MLPs pay a higher yield

than would otherwise be available from
equities, because the limited partnership structure means the parent does
not pay taxes. Distributions are largely
tax deferred.

Higher rates of return. MLPs rates

of return on investment are higher
than those of utilities, and annual
margins can be two or three times that
of utilities.

Need for capital growth. However,

MLPs must be able to raise capital to
build the infrastructure elements, and
their cost of capital is higher than for
the better-protected utilities.

No walls. MLPs are not geographically limited, like utilities. They can
go where the need arisesand
it has arisen in many places since
shale-drilling technology has become
economical. Utilities are like trees, with
good roots but little opportunity to
expand. MLPs are like strong vines, putting down a root and growing further
along the line.

So the final tally is that the two, utilities

and MLPs (midstream companies), are
similar but not the same. Monopoly vs.
monopolistic, regulated rates vs. much
higher market rates, very inelastic demand
for services vs. fairly inelastic demand for
services, long-term cash flows vs. rather
long-term cash flows.

LIKE MLPS, UTILITIES HAVE GONE

THROUGH SHAKY TIMES, TOO
Many investors think of utilities as
steady-eddiesstable to the point of
being boring. But its instructive to recall
a time not so long ago when utilities, like
MLPs, got caught in a period of irrational devaluation, with a Greek chorus of
shortsighted naysayers predicting their
doom. Yet at the end of the day, utilities
survived and thrived.
Remember that utilities have walls because theyre geographically limited and
their rates are regulated. They also have
a local monopoly mandated by society,
which is a double-edged sword: the certainty of recurring revenues is offset by a
regulatory framework that controls profits. So traditionally, the best utilities have
been those in areas with a growing population (so they can increase the number of
customers served and, therefore, their revenues) and congenial regulation (so their
rates justify their investments), or with a
growth kicker such as infrastructure development. The model utility, then, has
a local monopoly, growing demographics, and friendly regulators. And it has a
reasonable balance sheet, typically with
equal parts debt and equitybut this, too,
is governed by the regulatorsanother
kind of wall. Such companies are characterized by steady and reliable revenues, a
fair if unspectacular return on investments,
and dividend yields among the highest in
the market, along with moderate annual
dividend growth. Certain utilities have
diversified into other businesses, building
on solid utility cash flows, with results that
range from fabulous to disastrous.
So one would think that utilities must be
the most stable equities in the market,
given the inelastic nature of their market
demand, monopoly status, and regulatory
support (which is sometimes better and
sometimes worse). Yet in our long history
as utility investors and observers, there
www.mhinvest.com

Then in 2008, utilities experienced another ~50% declinedid investors really

think we wouldnt need electricity and
gas, just because the banks had created
a mess?before beginning a long and
steady recovery through 2014. Through
the rises and crashes, utilities continued
to provide their services, society continued
to function, and basically, the nature of the
industry was unchanged all along.
Even equities with the most stable of
businesses can experience periods
of volatility. This is especially true in a
market world of many players who dont
understand the long-term nature of the
underlying businesses. Many investors
only learned about the midstream
companies after massive gains from 2009
through 3Q2014, and after Wall Street
fed the hot-dot appetite with numerous
products all buying the same stocks. And
at about $450 billion in market cap (up
from $55 billion 10 years ago) the sector
isnt that liquid. Normally, for long-term
investors, that would not be a problem.
In a panic of novices, however, volatility
is greatly exaggerated. As weve seen
over the past year-plus, investors can at
certain periods trade MLPs in line with
oil prices, even when MLP cash flows
are only modestly affected. This is a big
difference in factors between MLPs and
2016 Miller/Howard Investments, Inc.

utilitiesthough many would argue that

it shouldnt be, and that demand and
volumes matter much more. The counterargument is that reduced exploration and
drilling activity reduces the need for new
infrastructure. Thats true, but that speaks
only to future growth, and only one part
of future growthnot current cash flows.
The underlying midstream and MLP
businesses have not really changed, save
for a growth profile that is reduced but
still a growth profile, and still better than
utilities in terms of the potential for future
expansion.

WHATS BEHIND MLPS

PUZZLING VALUATION?

At this writing (early January 2016) MLPs

are yielding far more than their own bonds
(which are mostly investment grade), in
many cases twice as much as their bonds.
And overall, MLPs are yielding as much
as average junk bonds. This, despite
the fact that the major companies are
investment-grade credits (!), MLP equities in general are selling at a level that
reflects pending distribution cuts. There
seems to be a view that current low oil
prices will make the MLP business go
backwards forever.
Yet the majority of infrastructure (about
two-thirds), in our portfolio and in the
Alerian index, is involved with natural
gas, and has nothing to do with oil or
the price of oil. Most of the revenues are
derived from long-term contracts and are
fee-based. Midstream companies charge
a contractual toll, just as utilities charge
a distribution fee (often as not the actual
electricity comes from a different supplier).

The issue weve been studying is the unjustified devaluing of MLPs. For starters,
what kind of a return premium does one
require for accepting a lower level of
monopoly and regulation for the business, a little more variability in demand,
shorter though still very long contracted So why did MLPs collapse in price during
cash flows? Should the required current 2015, in many cases even more so than
cash yield be 23 times that of utilities, oil companies who rely on price for revewhich it is today?
nues? Its
a conundrum. To be sure, we can
MLPs vs Utilities:
Yield
(2002 - 2016e)

Chart 2. Yields: MLPs vs. Utilities (20022016e)

14%
12%
10%
YIELD

have been noteworthy moments when it

was the end of the world for utilities. In
2002, the Dow Jones Utilities Index completed a ~50% decline in the aftermath
of the Enron implosion. From that point
forward the sector became one of the best
performers in the market until the financial
crisis hit. Investors had mistakenly sold,
based on headlines, not fundamentals.
But we will never forget the Wall Street
analysts and financial media shouting in
2003 that most utilities would go bankrupt
and they would never again be stocks for
widows and orphans. That prediction fell
flat. It was myopic, failing to understand
the essential nature of the companies.

page 3

8%

Alerian MLP Infrastructure

Index Yield

6%

MLP-UTIL Average Yield Spread=344 bps

4%
2%
0%

861 bps
Spread

672 bps
Spread*

Dow Jones Utilities Index Yield

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e

YEAR
Source: Bloomberg,
Factset,
Alerian.com.
are
represented
byMLP
the
AlerianIndex;
MLPUtilities
Infrastructure
Index.
Utilities are
Source: Bloomberg,
Factset,
and alerian.com;MLPs
MLPs are
represented
by the Alerian
Infrastructure
are represented by
the Dow Jones
Utilities Index. *Current as of 1/29/16 sourced from Bloomberg
represented by
the Dow Jones Utilities Index.
*2016 estimated yield spread sourced from Bloomberg.
Data shown January 1, 2002 to January 31, 2016.
See important disclosures and definitions on page 12.

www.mhinvest.com

page 4

concede that to the extent oil is involved

in midstream infrastructure, the reduction
in oil prices raises questions about growth
as well as creditworthiness of a companys
transport and processing customers. And
as the stock prices decline, the consequent
rising yields make it harder for companies
to raise capitalthrough selling equity
that will have an attractive return from
contemplated projects. These are legitimate concerns.

tax-deferred. Are the absolute valuations

for utilities and MLPs correct? Are the
relative valuations correct?
Because valuations for these groupsas
well as every equity group in the market
are always changing over both the short
and the long term, it is as much art as
science to determine where any equity
or group should sell in the marketplace
to reflect all available information and

How much should these concerns affect all factors that matter in the projection
valuation? If we view MLPs as a sector of long-term cash flows (always the true
or industry that became clearly defined value of a company). Relative valuation
about the turn of this century, we can is a more reasonable quest. For example,
see that since that starting point (which, utilities should obviously sell at a yield
granted, is not a long history) investors lower than junk bonds, since utilities are
have accorded them a higher valuation investment grade and have at least some
than utilities based on EBITDA (earnings
growth of distributions, while junk bonds
before interest, taxes, depreciation, and
represent credit interest in risky compaamortizationa generally accepted
nies and the bond distributions will never
metric that compares apples to apples for
companies with different debt, tax, and grow. Investors accept a lower yield for
depreciation profiles). Their valuation has utilities because of the certainty of their
typically reflected a higher multiple of underlying businesses and the payouts
MLPs vsare
Utilities:
EV/EBITDA
that
will flow from them, compared to the
EBITDA because growth prospects
better, and their higher yields are mainly
18x

speculative
nature of high-yield bonds.
2002 - 2016e

EV/EBITDA

Alerian MLP Infrastructure Index EV/EBITDA

12x
MLP-UTIL Average EV/TTM EBITDA Spread=3.9x

10x
8x

1.4x

6x

(0.1)x
Dow Jones Utilities Index EV/EBITDA

4x
2x
0x

On the flip side, after the rages of 2015,

MLPs now sell for less than utilities, in
terms of EV/EBITDA. Its hard to understand when one considers that:

Chart 3. MLPs vs. Utilities (20022016e)

16x
14x

As you can see from Chart 3, MLPs sold at

an average EV/EBITDA 3.9 points higher
than utilities from 2002 through 2016
estimates, with a significant but brief
dip to 1.4 in 2008, and a rise to 5.4 in
2014. No one can say for sure if 5.4 points
higher than utilities is too expensive for
MLPs, but under conditions of sharply falling oil prices, it certainly was. We suspect
that excess valuations wont be seen again
anytime soon, and that if the EV/EBITDA
ratio for MLPs reaches a number 4.5 above
the utilities number, then that is a danger
zone for MLP valuations.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e*
YEAR

Source: Bloomberg, Factset; MLPs are represented by the Alerian MLP Infrastructure Index; Utilities are represented by the Dow Jones
Source: Bloomberg,
Alerian.com. MLPs are represented by the Alerian MLP Infrastructure Index. Utilities are
Utilities Index. *Current as of 1/29/2016 sourced from Bloomberg
represented by the Dow Jones Utilities Index.
*2016 estimated yield spread sourced from Bloomberg.
EV/EBITDA: Current Enterprise Value or Enterprise Value as of January 29, 2016. Date / Trailing 12 Month EBITDA.
With the trailing twelve months starting on the pulled Enterprise Value date. The Bloomberg mnemonic for this
value is CURRENT_EV_TO_T12M_EBITDA.
Index Estimated EV/EBITDA: Index Estimated EV/EBITDA Current Year. Calculated as Enterprise Value Per Share
divided by Estimated EBITDA Per Share FY1. The Bloomberg mnemonic for this value is IDX_EST_EV_EBITDA.
See important disclosures and definitions on page 12.

2016 Miller/Howard Investments, Inc.

MLPs assets and attendant revenues of

MLPs can grow geographically.
MLPs distributions have continued to
grow all through the oil price decline.
Many MLP assets have a FERC-mandated
rate increase by contract of PPI + 2.6.
MLPs can be bought by others without
local regulatory approval.
MLPs pay distributions at a tax-deferred
rate thats more than twice that of utilities taxable yields.
Most MLPs have investment-grade ratings similar to utilities.

Theres no rule that says MLPs cant sell for

less than utilities, but one has to question
just how much the protections of a regulated monopoly (which are matched by
its limitations) are worth. After all, theyre
both part of the same systemthe delivery of essential goods and services of
energy, that commodity without which
we cant live. In any event, the consensus
of investors for a decade and half was
a premium (MLPs vs. utilities) of ~4 for
nearly all that time. We cant believe that
investors were so dim thenand this
includes the period when MLPs were not
very well known and not a hot dot, but just
an investment for sophisticated holders
and should really only have been paying
www.mhinvest.com

page 5

No one knows the correct valuation here,

or anywhere else, but today it is worse for
MLPs than the highly stressed period (and
low oil prices) of the financial crisis in 2008.
Perhaps enthusiasm over the shale boom
put them too high. But in a world where
regression/progression to the mean is
possibly the only universal force there
is, the radical turnabout weve seen suggests overcorrection.

YES, THERE ARE POTENTIAL ISSUES

What about concerns regarding producer companies going out of business
or needing to renegotiate long-term
contracts? That should be mentioned as a
reason MLPs are down. In our view those
concerns are enough to prompt a pause
in what had been leading performance
among all equity sectors, but not enough
to cause such a rapid reduction in price.
The world of midstream energy infrastructure in services is hardly coming to
an end; if it did, wed have no electricity,
no gasoline, no society. Companies may

have to adjust to capital markets conditions, but thats what companies do, just
as utilities did in 2002 when they were able
to use their recurring-revenue stream to
strengthen their balance sheetsthis, following a 62% drop in the value of the S&P
Utilities Index between 2001 and 2002.
That utilities index has returned 11.1%
annually in the 13+ years since then as of
this writing.
Utilities could do that, no matter the
doomsday predictions of journalists
and analysts, because they had the recurring revenues to deal with their debt
and operational problems. They had the
raw material with which to recover from
missteps. Indeed, in 2009, MLPs did not cut
distributions but reduced growth instead,
because their distributions were covered
by existing cash flows.

lifespan, and generally show EBITA at least

three times that required to service their
debt. That cash flow arises from 520 year
contracts providing recurring cash flow
from tenants of their infrastructure.
This speaks to concerns that some investors have over the long-term viability of
the MLP model for midstream business. Its
easy to say the revolution is at hand (we
said it every day in the 1960s), especially if
you dont understand the dynamics of the
industry. We address the business model
concerns at the end of this paper.

WHATS THE RIGHT AMOUNT OF

LEVERAGE?

What about excess leverage? Are MLPs

hampered by high debt levels? Some
MLPs did stretch their balance sheets in
response to growth opportunities resulting from the shale revolution. They took
MLPs vs Utilities: Net Debt to EBITDA
(2002 -of
2016e)
Investors should know and understand this. advantage
Wall Streets healthy appetite
Why have they sold MLPs5 and regular for both MLP debt and equity to meet
MLPs
midstream companies to a level that im- very
real energy infrastructure needs.
4
plies they could go out of business (junk But looking at historical leverage levels
UTILITIES
bond yields), though the debt
of those for MLPs compared to utilities makes it
3
same companies is investment grade? hard to argue that leveraging for MLPs
Recall, MLPs own assets with2 a 5075 year has risen to alarming heights. MLPs are
NET DEBT TO EBITDA

todays rate of a mild negative premium to

utility valuations all along.

Chart 4. MLPs vs. Utilities

0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e
YEAR

MLPs vs. Utilities:

NetMLPs
DebtvstoUtilities:
EBITDANet(20022016e)
Debt to EBITDA

MLPs vs. Utilities:

TotalMLPs
DebtvstoUtilities:
Total Equity
(20022015)
Total Debt
to Total Equity

Source: Bloomberg; MLPs are represented by the Alerian MLP Infrastructure Index, Utilities are represented by the Dow Jones Utilities
Index

(2002 - 2015)

(2002 - 2016e)

250

MLPs

UTILITIES

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e
YEAR
Source: Bloomberg; MLPs are represented by the Alerian MLP Infrastructure Index, Utilities are represented by the Dow Jones Utilities
Index

Data shown for the period from January 1, 2002 to January 31, 2016.
MLPs vs Utilities: Total Debt to Total Equity
(2002 - 2015)

TAL DEBT TO TOTAL EQUITY

200

150

MLPs

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
YEAR
Source: Bloomberg; MLPs are represented by the Alerian MLP Infrastructure Index, Utilities are represented by the Dow Jones Utilities
Index

Data shown for the period from January 1, 2002 to December 31, 2015.

Source: Bloomberg; MLPs are represented by the Alerian MLP Infrastructure Index, Utilities are represented by the Dow Jones Utilities Index.
See important disclosures and definitions on page 12.

UTILITIES

2016 Miller/Howard Investments, Inc.

150
100

UTILITIES

50

250

200

100

TOTAL DEBT TO TOTAL EQUITY

NET DEBT TO EBITDA

www.mhinvest.com

page 6

not the Lehman Brothers or Bear Stearns of

2008. Its also important to remember that
much of the capital was used to acquire
assets or build new infrastructure assets
that will be or are already put into place
to generate a stable revenue stream. This
MLP capital was not used to pay for advertising, or launch new product lines, or
acquire a social media website.

liquid issues that the funds were using.

Like a movie theater in which someone
had yelled fire, there were far too many
bodies to fit through a limited door, and
volatility rose to unanticipated heights.

SECULAR MARKET FACTORS

HAVE BEEN CRUCIAL

I f this all sounds familiar, that might be

because it describes the overall market by
the end of 2008a year that many suggested marked the end of the economic
world. But life goes on, and life did go on.
The lights did not go out; buildings were
heated that winter; drivers slowly began
to pile up more and more miles on their
cars; Christmas was not canceled. Essential
services delivered by utilities did not
change, nor did the midstream services
the utilities depend upon to provide fuel.
Indeed, since 2008 overall energy infrastructure has grown at a 5% rate, serving
previously unmet needs in the national
energy system and stimulated by the
newly developed economics of horizontal drilling. That rate is expected to grow,
not stagnate, at a 68% level. The Energy
Information Administration estimates
for infrastructure needed in the future
decade or so range from $650 billion to
$900 billionwhich is plenty to chew on
for a sector whose total equity market cap
is currently less than $450 billion.

There are other factors that have contributed to MLPs malaise. We think the secular
market environment played a huge role.
Start with large groups of investors who
never heard of MLPs before and had no
idea there even was a midstream industry investing in these companies mainly
through packaged productsdue to
the tax complexity of owning individual
units. Add a Wall Street buffet of open-end
funds, closed-end funds, ETFs, and ETNs,
ready to provide a home for dollars chasing what had been the best-performing
sectorwith all of these products buying
mostly the same stocks due to limited
liquidity in the space. Add a dose of leverage, coming from the closed-end funds
operating on 30% margin, as well as hedge
funds purveying the bright and shiny new
thing. Consider that these packaged products control more than 15% of the market
cap in the sector. It was a potent recipe for
disaster when investors unfamiliar with the
solid assets that underlie the companies,
and unfamiliar with the essentially feebased nature of the business, began to
associate the midstream with oil prices
even though in past years the midstream
was no more connected to oil prices than
was the S&P 500.
Like any crash, concern led to fear, lack of
knowledge about the investments led to
panic, and investors fled the fundssome
of which had lifted the sector in the first
place as they had grown in number and
size. But there are only about 3040 more
2016 Miller/Howard Investments, Inc.

WHAT SMART INVESTORS

SHOULD BE LOOKING AT
DEMAND IS RISING

For a moment, investors have forgotten

what energy infrastructure really is. Its
not some ancillary feature of oil and gas
drilling. It is how energy BTUs get from
where they are extracted to where they
are used. To be sure, the level of drilling
has an impact on companies that perform
gathering services, and the price of natural
gas liquids has an impact on companies
that process natural gas (though that business has become increasingly fee-based
and protected, especially compared to the
200809 period). But the real measure of
transport, terminal, and storage services

has to be not drilling, but demand. After

all, if usage is risingand it tends to rise
if prices are lowhow does the product
get to the user?
The simple usage/demand facts, according to the International Energy Agency,
from third quarter 2014 through third
quarter 2015:
Natural gas usage up 3.2%, led by increase in utilities gas-fired generation.
US petroleum and other liquids up 1.4%
including motor gasoline (up 2.7%).

Yes, production has been high and so

prices have been low. But transport and
processing happens at fixed-fee rates
(mostly) under long-term contracts.
Investors should have been focusing on
higher demand rather than lower prices,
since the midstream companies benefit
from higher volumes. That is why cash flows
and EBITDA for midstream companies
have been rising, even as product prices
have declined.
Even during the period in which oil prices
fell in earneststarting in the fourth
quarter of 2014infrastructure EBITDA
has been chugging along, rising from
$78.1 per share for 2014 to an estimated
$82.7 for the same quarter of 2015. To be
sure, one source of potential future growth
(gathering) is diminished as oil slows
down, but there are many more areas of
potential, such as export and electricity
generation. It doesnt matter where the
BTUs are coming from or where they are
going; they all must travel through pipes
and processes.

And should investors only be paying for

growth? What about the revenues coming
from existing assets that will continue for
perhaps 50 years? Clearly the midstream
business has continued to develop as
well or better than utilities during this
down-oil period, but the price paid in
the market for it has diminished radically.
What should that price be?
www.mhinvest.com

page 7

Are selling investors falling for the

herd mentality?

The spread between MLP and utility

yields was higher only briefly during
the financial crisis, and the relative EV/
EBITDA of MLPs compared to utilities has
never been lower in this century.

Char t 5 shows a comparison of MLP

EBITDA and Distributions to Utilit y
Earnings and Dividends. Note that both
the MLP earnings and distributions show
a stronger persistent positive trend over
time than utilities and utilities dividends.

bonds of the same company, but should

certainly not yield as much as junk bonds
if the MLP is investment grade. When the
snapshot for Chart 7 (following page) was
taken, the BAML High Yield Bond Index
was at 9.2%. Of course no growth ever is
meaningless, except to an investor in midair after jumping off a bridge. But look at
some of these equity yields!

Wed suggest that if the market would

like to assume no growth, ever, the stock
should yield some risk premium over

Chart 5. MLPs and Utilities: EBITDA/Earnings and DPS Comparison (2007 to 2015e*)

MLPs: EBITDA
and Distributions
per Share
MLPs: EBITDA
and Distributions
per Share
(2007 to(2007
2015e*)
to 2015e*)

Utilities:Utilities:
EarningsEarnings
and Dividends
per Share
and Dividends
per Share
(2007 to(2007
2015e*)
to 2015e*)
UTIL Earnings
per Shareper Share UTIL Dividends
per Shareper Share
UTIL Earnings
UTIL Dividends

$90

$80

$80
$68$70

$70
$60
$50
$40

$86
$83

$83
$78

$78

$86

$68

$83
$78

$78
$78

$78
$74

$74
$74

$74

$83

$60
$50

$42
$39

$39
$36

$42
$42

$41
$42

$50

$50

$45

$45

$40
$35
$30
$25
$41
$20

$40
Shown in USD

$90

Shown in USD

$100

Shown in USD

Shown in USD

MLP EBITDA
Shareper Share MLP Distributions
per Shareper Share
MLPper
EBITDA
MLP Distributions
$100

$31

$35
$30

$30

$15

$20
$15
$15

$20

$20

$10

$10

$10

$10

$5

$5

$0

$0
2007

$0
2015e*
2014
2015e*

$0
2007

2008
2007

$36
$34

$35
$34

2009
2008

2010
2009

$36
$36

2011
2012
2010
2011
YEAR
YEAR

2013
2012

2014
2013

$32
$32

$32
$32

$32
$32

2008
2007

2009
2008

$18
$17

$17
$17

$17
$16

$16
$15

2010
2009

$36
$34

$34

$32
$30

$30
$29

$25

$40$34
$30

$35
$34

$32
$31

$19
$18

2011
2012
2010
2011
YEAR
YEAR

$36

$29
$20
$19

2013
2012

$20
$20

2014
2013

$22
$20

$22

2015e*
2014
2015e*

Source: Bloomberg.
Utilities are
represented
by the Dow
Jones
Utilities
Source:
Bloomberg.
Utilities
represented
the
Dow
JonesIndex.
Utilities Index.
Source: Bloomberg.
Bloomberg.
MLPs
represented
by the
MLP
Infrastructure
Index. Index.
Source: Bloomberg.
MLPs
are represented
by the
Alerian
MLP
Infrastructure
Index. Utilities
Source:
MLPsare
are
represented
by Alerian
the
Alerian
MLP
Infrastructure
are
represented
by the
Doware
Jones
UtilitiesbyIndex.
*2015e: Bloomberg estimates are as of 12/21/2015.
See important disclosures and definitions on page 12.

Table 6. MLP Distributions Compared to Corporate Bonds

Ticker

Company

S&P
Rating

APU

AMERIGAS PARTNERS

NR

EEP

ENBRIDGE ENERGY PARTNERS

BBB

ENLK

ENLINK MIDSTREAM PARTNERS

BBB

Indicated Distribution
Rate (1/19/16)

Corporate Bond Yield

to Maturity (1/19/16)

Spread of Distribution
Rate minus Bond Yield

Corporate Bond
Maturity

10.41

7.89

2.52

5/20/2022

13.72

6.46

7.26

10/15/2025

13.57

7.93

5.64

6/1/2025

EPD

ENTERPRISE PRODUCTS PARTNERS

BBB+

7.35

5.07

2.28

2/15/2026

EQM

EQT MIDSTREAM PARTNERS

BBB-

4.31

6.67

(2.37)

8/1/2024

ETE

ENERGY TRANSFER EQUITY

BB

15.12

11.49

3.63

6/1/2027
1/15/2026

ETP

ENERGY TRANSFER PARTNERS

BBB-

18.25

7.34

10.91

GEL

GENESIS ENERGY

BB-

9.81

11.39

(1.58)

8/1/2022

MMP

MAGELLAN MIDSTREAM PARTNERS

BBB+

4.95

4.28

0.67

3/15/2025

MPLX

MPLX

BBB-

6.63

6.12

0.51

2/15/2025

OKS

ONEOK PARTNERS

BBB

12.04

7.04

5.00

3/15/2025

PAA

PLAINS ALL AMER PIPELINE

BBB

14.66

6.32

8.34

10/15/2025

SEP

SPECTRA ENERGY PARTNERS

BBB

5.87

5.19

0.68

3/15/2025

SHLX

SHELL MIDSTREAM PARTNERS

N/A

2.47

N/A

N/A

N/A

TEP

TALLGRASS ENERGY PARTNERS

NR

7.54

N/A

N/A

N/A

WES

WESTERN GAS PARTNERS

BBB-

9.70

6.38

3.31

6/1/2025

Source: Bloomberg.
N/A = Not Available. NR = Not Rated.
See important disclosures and definitions on page 12.

2016 Miller/Howard Investments, Inc.

www.mhinvest.com

page 8

Chart 7.
Yield Comparison: MLPs, BBB Corporate
Bonds, High-Yield
(January 31, 1997January 31, 2016)
Yield Comaprison:
MLPs, BBBBonds
Corp, Junk
(1/31/1997 to 1/31/2016)

25%

MLPBBB Historical Yield Spread

1/31/199701/31/2016
4.58%

5.35%

20%
BofA Merrill Lynch US
High Yield Master II Effective Yield

0%

YIELD

1995

2000

2005

2010

2015

15%
Alerian MLP Infrastructure Index
10%
MLPBBB
Spread 5.35%

5%
BofA Merrill Lynch US Corporate BBB Effective Yield
0%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
YEAR

Source: Bloomberg.
Data shown January 31, 1997January 31, 2016.
See important disclosures and definitions on page 12.

Chart 7 above offers some history. Note

that the spread between MLP distributions and BBB yields (MLPs borrow at
around BBB rates) has not been higher,
even during the financial crisis.

on there was no fracking revolution, later

A key factor weighing on investors minds

there was. Why is this time different in

has been a consideration that the MLP

investors eyes, when there will still be

business model may be in need of ren-

EBITDA and distribution growth on av-

ovation, possibly radical change. These

erage, and there is still some $50+ billion

concerns have been inspired by the case

On average, MLPs have sold for nearly

twice the yield of Utilities, and have
provided twice the distribution growth.*
But there are a number of years when
distribution growth slowed for MLPs,
such as 2005, 2009, and 2011, and investors continued to buy, driving the index
higher and looking toward the future.
Oil and natural gas prices were higher at
some points, lower at some points. Earlier

a year of growth capex to be undertaken

of Kinder Morgan (KMI), which, amazingly,

for the next 10 years or so, growth capex

both raised its dividend by 16% and cut

that will enhance cash flows and distribu-

it by 75% in the fourth quarter of 2015 (!).

tion returns? That level of infrastructure

With a vast and impressive array of infra-

buildout would more than double the

structure assets across the country but

current market cap of the sector, a lot of

aggressively managed from a financial

work to do up ahead. Though KMI is not

standpoint, KMIs extreme approach cer-

an MLP, it is in the midstream business

tainly contributed to investors wariness

leaving some investors to wonder, Why

of the whole midstream sector. Why

is this time different? Why indeed?

wouldnt other companies copy them?

*Source Boomberg, Alerian.com.

2016 Miller/Howard Investments, Inc.

www.mhinvest.com

page 9

THE HEALTH OF THE MLP BUSINESS

MODEL: FACTS VS. FEARS
First, we have to understand what the
reality of the business model is. MLPs
create and buy assets in the stream of
producing and delivering energy. There
are upstream MLPs that explore for
energy, drill, and operate older, more
mature fields. These are producers, and
their fortunes are very much tied to the
price of the commodity they produce
(natural gas and oil). The downstream
includes businesses such as utilitiesthe
end-users of product. Some observers
include refineries and maritime terminals
in the downstream, but they can also
be considered midstream. All the infrastructure between the upstream and
the downstreamgathering systems,
long-distance pipelines, terminals, gas
processing, refined product transport,
and storage facilitiesare part of the

midstream. This segment is our concern,

since it dominates the Alerian index as well
as our portfolio.
The MLP part of MLPs is just a form of
legal entity, a Master Limited Partnership
that holds the assets. MLPs trade like
stocks, but the shares are actually
partnership units, and a unitholder is a
limited partner. There are several tax advantages to using this form. First, unlike
the typical corporation, an MLP pays no
corporate income taxes at the entity level.
Distributions, rather than dividends, are
a pass-through of cash from operations
to the investors, who are ultimately the
taxpayers. Second, the distributions are
often mostly tax-deferred. This is because
the depreciation that is generated by
capital investment is also passed through,
shielding most of the cash flows from
taxes. With each new investment by the
MLP, we can expect more cash flow to

be shielded from taxes by increased depreciation. Most tax obligations arise, if

at all, on sale rather than during a holding
period. The net effect of all this is that
MLPs are among the highest yielding investments available, and that high yield
is further enhanced, at least for a period
of years, by tax deferral.
Because MLPs pass through their cash
to investors, in general they dont retain
much for future investment. In order to
build or buy new assets, the typical MLP
needs to issue new debt and equity. Bear
in mind that assets in this field arent
built on speculation; all or most of a new
pipeline, for example, will be leased
to upstream or downstream companies
before a shovel goes in the ground. So
in ordinary times the system works
fine. The MLP gets preconstruction commitments from users, then goes to the
market to raise debt and equity (usually

TTM EV/EBITDA For Sample Sectors and Industries

(2006January 29, 2016)
Chart 8.
EV/EBITDA: Various Sectors and Industries (2006January 2016)
25x

10-Year Average EV/EBITDA

2016 Estimated EV/EBITDA
10-Year Range EV/EBITDA

EV/EBITDA

20x

15x

10x

5x

0x

MLPs

Utilities

REITs

Consumer
Staples

Information
Technology

Telecom

Chemicals Pharamaceuticals

Source: Bloomberg
Data shown is for the period January 1, 2006 to January 31, 2016.
EV/EBITDA Definition: Current Enterprise Value or Enterprise Value as of Date / Trailing 12 Month EBITDA. With the trailing twelve months starting on the pulled Enterprise Value
date. The Bloomberg mnemonic for this value is CURRENT_EV_TO_T12M_EBITDA.
Index Estimated EV/EBITDA: Index Estimated EV/EBITDA Current Year. Calculated as Enterprise Value Per Share divided by Estimated EBITDA Per Share FY1. The Bloomberg
mnemonic for this value is IDX_EST_EV_EBITDA.
See important disclosures and definitions on page 12.

2016 Miller/Howard Investments, Inc.

www.mhinvest.com


about half debt and half equity), and both
types of financing carry similar costs in
terms of how much the MLP will have to
pay for the money. If an MLP pays 68%
interest on debt and a similar level on the
equity it issues, it makes a very nice profit
on projects whose return on investment is
in the 1220% range.
So its important for MLPs to maintain
an investment-grade rating in order to
control the costs of the debt financing.
And most of the midstream companies
are investment grade or close to it. For
example, in our portfolio, cash from operations covers the debt servicing by at least 3
times, and is as high as 10 times. Basically,
the companies can pay the mortgage on
the debt side. Over time MLPs debt has
sold at a similar interest rate to corporate
investment grade debt (BBB), sometimes a
little lower, sometimes noticeably higher
when times are less certain, as now, but
not as high as below-investment-grade.
The issue for MLPs in general now is not
debt issuanceassuming the debt they
carry is within a multiple of EBITDA thats
acceptable to the ratings agenciesand
most do have some room to issue more
debt today. But the cost to issue equity
has risen along with distribution yields, as
the stocks have been the object of intense
selling by investors. This selling may not
be always rational, and may be influenced
by secular market factors. These include
leveraged investors needing to deleverage; short sellers; investors disappointed
that growth may be lower than in the
recent past due to declining activity in the
energy fields (not no-growth, but lower
growth, in our view); and investors adopting a confused view that product pricing
and midstream profitability are highly
correlated. To be sure, MLPs had moved
toward the high end of their historical valuation range after returning an annualized

page 10

25.15% during the 5 years leading up to

September 2014,** driven in partbut
only in partby the evolving shale revolution. But it looks to us as a classic case
of overshooting on the correction as
we find ourselves on the bottom end of
historical valuations.
So that is the problem. Equity prices have
come down but distribution levels have
not, meaning that equity that might have
cost the company 56% in the recent
past now might cost 810% or more. And,
as noted, bond costs are higher too, at the
moment. The net effect is that margins are
getting squeezed and some future projects may not make sense economically.
So far, investor response has been to sell
equities, further increasing the cost, in
part based on the view that distributions
will have to be cut in order to continue the
basic model:
1. Conceive of the project (whether
build or buy).
2. Build in the cash flows through
commitments or existing shippers.
3. Go to market to fund the project
through equity and debt.
We think that in the emotion of the
moment, investors are missing the other
options MLPs have to avoid selling public
equity at high distribution yields.
In terms of raising capital to finance new
projects, there are quite a few options for
MLPs in todays market environment. Here
are eight of them. Every one of these
tools, below, has been utilized by at least
one MLP in the past three months.
1. Reinvesting from retained cash flows.
There are a number of high-quality MLPs
that do not pay out all of the cash from
operations to investors and can afford
to continue operations and grow them,
as they have in the past by reinvesting

from retained cash flows. But these companies have been sold along with all the
rest. Among this type that we hold are
Enterprise Products Partners, Magellan,
EQT Midstream Partners, Shell Midstream
Partners, Genesis, and Western Gas. Yes,
there are companies that are not financially stressed right now (though you wouldnt
know it from their stock prices).
2. Temporarily using lines of credit. Most
major MLPs have lines of credit measured
in the $billions, and the lines remain
mostly unused as of this writing. ONEOK
Partners announced in early January that it
will be using $1 billion of 3-year unsecured
bank lines to refinance debt, at a rate of
Libor +1.30%lower than their existing
ratesand the company wont need to
raise equity or debt until at least mid-2017.
3. Slowing down or pushing back existing projects. Now that investors are more
concerned with the security of distributions than with maximized distribution
growth, this would help the unit prices
and turn what has become a vicious circle
into a virtuous one. We expect some postponements or deferrals to be announced
at upcoming fourth-quarter earnings
conference calls.
4. Selling assets. On January 8, 2016,
NGL Partners (we dont own this one) announced a sale of assets to private equity
firm ArcLight Partners. The deal enables
NGL to pay down lines of credit as well
as fund its upcoming capital needs so it
wont have to issue debt or equity. There
are many private equity investors circling
the waters now, with plenty of nonpublic
capital. As one observer put it: The purchase of assets from NGL is most likely
just the start of private equity purchases
of MLP assets or companies. The undervaluation of assets is profound and will
eventually be arbitraged.

**Alerian MLP Index Annualized Total Return August 31, 2009August 31, 2014. Source: Bloomberg. See full diclosure on page 12.

2016 Miller/Howard Investments, Inc.

www.mhinvest.com


5 . E n t e r i n g i n t o j o i n t ve n t u r e s .
Companies can joint-venture projects with
other MLPs or with private equity companies or large institutions. The most recent
example of this is Plains and Magellan
forming a joint venture with Grand Mesa
for the Saddlehorn crude oil pipeline in
the Rockies.
6. Seeking seller financing. Purchase
deals can be done with seller financing.
We saw a recent example of this in late
2015, when EnLink purchased midstream
assets from a private company on an
installment sale basis, in a $1.6 billion
deal. (EnLink now has no 2016 equity sale
needs.) Enterprise also bought Pioneer
Naturals Eagle Ford midstream assets for
about $2 billion on an installment basis.
7. Getting a boost from their GPs. Many
MLPs have strong general partners that
can provide capital or temporarily reduce
their profits interest to help maintain the
MLPs distribution or fund capital investment. Enbridge has done this frequently,
and in the first week of January Enterprise
Products general partner (holds MLP
units, and no profits interest) announced
it would buy $300 million of units, and
has already bought one third of that.
Marathon, the C-corp parent of MLPX,
provided $1 billion to help consummate
the merger of MLPX and MWE. Devon
Energy the majority holder of the GP of
Enlink, bought $50 million worth of units
from the MLP.
8. Finding creative financing solutions.
Some companies have used or considered
using other creative financing tools, such
as convertible preferreds. Tallgrass (TEP)
recently sold units to its GP (TEGP), which
provided the capital, but gave TEP a free
call to buy back the units issued. Plains All
American recently announced the sale of
convertible preferred to a private equity
firm at a rate of 8% versus the public
equity yield of 12.75%, coupled with an
2016 Miller/Howard Investments, Inc.

page 11

IDR reduction at the general partner and a

flat distribution, and now needs no further
access to the capital markets for 2016 and
2017by which time the cash flows from
new projects will return the company to
the strong financial position of recent years.
For battered MLPs in the current marketplace, these are real options or alternatives
to finance continued growth without selling public equity in todays terrible equity
market. For each option there has already
been an example in the last 34 months.
Actually, none of these tools are new.
They speak to the question of the day, Is
the MLP business model broken?
The answer is that there are many MLPs to
which the current issues of stress do not
apply (bonds and equity at modest costs);
these companies will likely gain an edge
as others need to retrench. And there
are many tools apart from public equity
that MLPs can use to bridge the period
of market volatility were in, a period
that may last a year but likely not much
longer than that.
We believe that MLPs will preserve their
distributions as a top priority. Bear in mind
that current distributions are funded not
by new bonds or equities, but by projects already built and running. Part of the
essence of the MLP model is reliability or
sustainability of the distributions. While
there are always going to be weak players
that have to seek a restart, cutting the distribution is going to be the last thing an
MLP wants to do. Growth may or may not
be there, or it may be higher or lower than
expected. But the current distribution is
the foundation, the premise, the credibility
of the investment.

indeed break the model for many investors. Thats why we believe distributions
at the leading MLPs will remain constant
at least.
Indeed, in our portfolio weve had eight
distribution increases in January 2016,
and nearly all raised distributions in the
fourth quarter of 2015. Perhaps the situation is not as dire as recent headlines
might suggest. MLP recurring revenues
will provide the raw material for balance
sheet repair and recovery. Longer term,
the need for additional infrastructure in
the US and elsewhere in the world is not
going away (like the need for energy delivery that utilities address), and the MLPs are
the companies that will provide it.
Miller/Howard Investments is an employee-owned equity management firm with three
decades of experience managing dividend-focused portfolios for institutions and individuals
nationally. We emphasize high-quality stocks
with high current dividend yield and strong
dividend growth. Our portfolio management
team has more than 175 years of collective
experience in companies that pay and grow
dividends. Miller/Howard Investments, Inc., is
a registered investment advisor specializing
in multi-cap, core equity management and
dividend strategies.
Please see important disclosures and definitions
on page 12.

The model is not broken. There are

options to carry the day until energy
markets are stronger. Should many MLPs
begin to cut, however, the group could
develop a reputation as a variable-payout
security, and in the long run that would
www.mhinvest.com

page 12

PERFORMANCE DISCLOSURE
Investing in MLPs entails basic stock market risk. Opinions and estimates offered constitute Miller/Howards judgment and are subject to change without
notice. Common stocks and MLPs do not assure dividend (distribution) payments.
Distributions are paid only when declared by an issuers board of directors, and
the amount of any distribution may vary over time. Distribution yield is one component of performance and should not be the only consideration for investment.
Past performance does not guarantee future returns. Index returns do not reflect
the deduction of fees or expenses.
The information provided should not be considered a recommendation and should
not be considered investment advice. It does not take into account an investors
individual circumstances. Information is obtained from sources believed to be reliable, but its accuracy, completeness, and interpretation cannot be guaranteed.
The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume
that an investment in the securities identified was or will be profitable.
Common stocks do not assure distribution payments. Distributions are paid only
when declared by an issuers board of directors and the amount of any dividend
may vary over time. Distribution yield is one component of performance and
should not be the only consideration for investment. The information and analyses contained herein are not intended as tax, legal or investment advice and may
not be suitable for your specific circumstances; accordingly, you should consult
your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability.
The views expressed here represent Miller/Howard Investments views and are
subject to change at any time. Nothing stated herein, including the mention of
specific company names, should be construed as a recommendation to buy, hold,
or sell any security, sector, or MLPs in general. Past performance does not guarantee future results.
Consumer Price Index is one of the most widely recognized price measures for
tracking the price of a market basket of goods and services purchased by individuals. The weights of the components are based on consumer spending patterns.
Tax considerations. The tax treatment for investors with portfolios investing in
units of Master Limited Partnerships (MLPs) is different from that of an investment
in stock, including: (a) The investors share of the MLPs income, deductions, and
expenses are reported on Schedule K-1, not Form 1099; (b) Because of the possibility of unrelated business taxable income, charitable remainder trusts
should not invest in this strategy, and other nontaxable investors (such as
ERISA and IRA accounts) should carefully consider whether to invest in this
strategy; (c) Investors may have to file income tax returns in states in which the
MLPs do business; and (d) MLP tax information is sent directly from the partnership, which generally has until April 15th to provide this information. You should
discuss these and any other tax implications with your tax advisor.
DEFINITIONS
Enterprise Value (EV): Enterprise value is calculated as market cap plus debt,
minority interest, and preferred shares, minus total cash and cash equivalents.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): A
non-GAAP measure used to provide an approximation of a companys profitability.
This measure excludes the potential distortion that accounting and financing
rules may have on a companys earnings; therefore, EBITDA is a useful tool when
comparing companies that incur large amounts of depreciation expense because
it excludes these noncash items, which could understate the companys true
performance.
FTSE NAREIT All Equity REITS Index is a free-float adjusted market capitalization-weighted index that includes all tax qualified REITs listed in the NYSE, AMEX,
and NASDAQ National Market.

The Alerian MLP Infrastructure Index is a composite of energy infrastructure

MLPs. The cap-weighted index, whose constituents earn the majority of their cash
flow from the pipeline transportation, gathering, processing, and storage of energy
commodities, was developed with a base level of 100 as of December 29, 1995.
The Dow Jones Utilities Average is a price-weighted average of 15 utility companies that are listed on the New York Stock Exchange and are involved in the
production of electrical energy. The average as it is known today began on January
2, 1929, with a base value of 50.
Moodys Corporate Bond Baa: Data used is the Moodys Bond Indices Corporate
Baa Index (TickerMOODCBAA). Yields are released by Moodys on a one-day lag
basis and are available for the previous day at approximately 11 AM New York time
the following day.
Bank of America Merrill Lynch US High Yield Master II Effective Yield This
data represents the effective yield of the BofA Merrill Lynch US Corporate BBB
Index, a subset of the BofA Merrill Lynch US Corporate Master Index tracking the
performance of US dollar denominated investment grade rated corporate debt
publically issued in the US domestic market. This subset includes all securities with
a given investment grade rating BBB. When the last calendar day of the month
takes place on the weekend, weekend observations will occur as a result of month
ending accrued interest adjustments.
Bank of America Merrill Lynch US Corporate BBB Effective Yield This data
represents the effective yield of the BofA Merrill Lynch US High Yield Master II
Index, which tracks the performance of US dollar denominated below investment
grade rated corporate debt publically issued in the US domestic market. To qualify
for inclusion in the index, securities must have a below investment grade rating
(based on an average of Moodys, S&P, and Fitch) and an investment grade rated
country of risk (based on an average of Moodys, S&P, and Fitch foreign currency
long term sovereign debt ratings). Each security must have greater than 1 year of
remaining maturity, a fixed coupon schedule, and a minimum amount outstanding
of $100 million. Original issue zero coupon bonds, global securities (debt issued
simultaneously in the eurobond and US domestic bond markets), 144a securities
and pay-in-kind securities, including toggle notes, qualify for inclusion in the
Index. Callable perpetual securities qualify provided they are at least one year from
the first call date. Fixed-to-floating rate securities also qualify provided they are
callable within the fixed rate period and are at least one year from the last call prior
to the date the bond transitions from a fixed to a floating rate security. DRD-eligible
and defaulted securities are excluded from the Index
S&P 500 Index contains approximately 500 stocks chosen for market size, liquidity, and industry group representation. The index generally has represented
about 75% of NYSE market capitalization and 30% of NYSE issues. It is a capitalization-weighted index calculated on a total return basis with dividends reinvested.
S&P 500 Chemicals Industry Index is a capitalization-weighted index. The index
was developed with a base level of 10 for the 1941-43 base period. Theparent index
is SPXL3. This is a GICS Level 3 Industries. Intraday values calculated by Bloomberg
and not supported by S&P.
S&P 500 Consumer Staples Sector Index is a capitalization-weighted index.
The index was developed with a base level of 10 for the 1941-43 base period. The
parent index is SPXL1. This is a GICS Level 1 Sector group. Intradayvalues calculated
by Bloomberg and not supported by S&P.
S&P 500 Information Technology Sector Index is a capitalization-weighted
index. The index was developed with a base level of 10 for the 1941-43 base period.
The parent index is SPXL1. This is a GICS Level 1 Sector group. Intraday values
calculated by Bloomberg and not supported by S&P.
S&P 500 Pharmaceuticals Industry Index is a capitalization-weighted index.
The index was developed with a base level of 10 for the 1941-43 base period. The
parent index is SPXL3. This is a GICS Level 3 Industries. Intraday values calculated
by Bloomberg and not supported by S&P.

Net Debt to EBITDA. Measure computes the companys ability to pay off its debt
by utilizing the earnings before interest, taxes, depreciation and amortization
(EBITDA). Unit: Actual.
Total Debt to Total Equity. Total debt divided by total shareholders equity.
Alerian MLP Index is a composite of 50 energy Master Limited Partnerships

calculated by Standard & Poors using a float-adjusted market capitalization

methodology. The index is disseminated by the New York Stock Exchange
real-time on a price return basis (NYSE: AMZ). The corresponding total return
index is calculated and disseminated daily through ticker AMZX.
I N V E S T M E N T P R O D U C T S : A R E N O T F D I C I N S U R E D M AY LO S E VA LU E A R E N O T B A N K G UA R A N T E E D
WP_UWW_2310_20160129

2016 Miller/Howard Investments, Inc.

www.mhinvest.com