| What is a Master Limited Partnership? |
| A Master Limited Partnership, or MLP, is a limited partnership the interests in which (known as units) are traded on public stock exchanges. An MLP has one or more general partners that manage the partnership, and many limited partners, which provide capital to the partnership but have no role in its management. When an investor buys a unit in an MLP, he or she becomes a limited partner. |
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| How is an MLP different from a corporation? |
A corporation is a legal entity, separate from its shareholders and employees. The entity has liability for all obligations of the corporation. The shareholders contribute capital, but have no liability to creditors, taxing authorities, or other parties that may have a claim against the corporation. The corporation is also treated as a separate entity for tax purposes and must pay taxes on its income. If there is any income left after corporate taxes, capital investment and other uses, it may be passed on to the shareholders in the form of dividends. Shareholders then pay taxes on the dividends they receive. Since the dividends passed on to shareholders have been taxed once at the corporate level and once at the shareholder level, it is said that corporate income is "double taxed."
An MLP is not considered a separate entity, but rather is an aggregation of all of the partners. For tax purposes, a partnership is treated as a "pass through" entity, meaning that there is no income taxation at the partnership level. The partnership's income is treated as having been earned by all of the partners and is therefore allocated among all the partners in proportion to their ownership interests in the partnership. All other items that figure into the income calculation, such as gains and losses, depreciation, etc., are also allocated to the partners. Each partner is then responsible for paying tax on his or her share of the income. Thus, partnership income is said to be "single taxed."
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| Do MLPs pay a dividend? |
MLPs make cash distributions to their partners, usually on a quarterly basis. Each MLP is governed by its partnership agreement that specifies the manner in which cash distributions will be made to its general partner and limited partners. Generally, an MLP's partnership agreement mandates that it distribute 100% of its available cash flow (defined in the partnership agreements, and often referred to as distributable cash flow) to its unitholders within 45 days after the end of a quarter. Distributable cash flow generally means the amount of cash flow that is available to be distributed to partners after expenses, such as interest payments and maintenance capital expenditures, have been paid. The general partner has the discretion to retain a portion of the distributable cash flow in the partnership in order to meet its needs by making reserves. Most MLPs have fiscal year ends in December; therefore distributions are typically paid in mid-February, May, August and November.
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| Are MLP distributions guaranteed? |
| No, an MLP's cash distributions are not guaranteed and are contingent on its ability to generate distributable cash flow.
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| What are the incentive distribution rights? |
| The incentive distribution rights, also known as "splits", give a general partner the right to an increasing percentage of the incremental distributable cash flow generated by a partnership as the per unit distribution to the partnership's limited partners increases. The general partner's share of incremental distributable cash flow in most MLPs starts at 2% and escalates to higher levels such as 15%, 25% and 50%. Each MLP's partnership agreement defines the target distribution levels and the corresponding "splits" on the incremental distributable cash flow. The incentive distribution rights are generally thought to incentivize the general partner to rapidly grow the distributions to its limited partners. PNG's splits are as follows: Less than or equal to $1.35 per unit - 2%; greater than $1.35 but less than $1.485 per unit - 15%; greater than $1.485 but less than $2.025 per unit - 25%; and greater than $2.025 per unit - 50%.
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| Why can cash distributions from MLPs be tax deferred? |
| A unitholder's initial tax basis in his or her units will generally be the amount paid for the units. Generally, a unitholder's basis is adjusted upward by the amount of income allocated to him or her and adjusted downward by the amount of cash distributions received by him or her. In most MLPs, the amount of cash distributions received by a unitholder exceeds the amount of income allocated to the unitholder. A unitholder will pay their taxes based on the amount of income allocated to him or her. The difference between the amount of cash distributions received by a unitholder and the amount of net income allocated to that unitholder will be treated as a "return of capital" to the unitholder and will reduce the unitholder's basis in the units.
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| How can MLPs pay out more in cash distributions than they are generating in net income? |
| The answer has to do with the way that depreciation expense is treated. Depreciation expense is a means of allocating the cost of a long-term asset, such as a pipeline or terminal, over its useful life. Depreciation expense is called a "noncash" expense because cash is not actually being paid out for the depreciation of the long-term asset. A typical corporation must reinvest a substantial portion of its cash flow in order to replace equipment, keep pace with technology, remain competitive or expand its business. After these payments are made, any remaining cash flow can be paid out to shareholders in the form of dividends. MLP assets, such as pipelines and terminals, however, are generally long-lived; require very little maintenance; and are not subject to major technological changes or physical deterioration. It is for these reasons that an MLP can pay out a very high level of its cash flow to unitholders without hurting the long-term basic earnings power of the business.
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| Where is PAA Natural Gas Storage's stock traded? |
| What is its stock symbol? PAA Natural Gas Storage, L.P. is a Master Limited Partnership traded on the New York Stock Exchange under the symbol "PNG."
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| What are the primary drivers of PAA Natural Gas Storage's business? |
| The long-term demand for storage services in the United States is driven primarily by the long-term demand for natural gas and the overall lack of balance between the supply of and demand for natural gas on a seasonal, monthly, daily or other basis. In general, to the extent the overall demand for natural gas increases and such growth includes higher demand from seasonal or weather-sensitive end-users (such as gas-fired power generators and residential and commercial consumers), demand for natural gas storage services should also grow. In addition, any factors that contribute to more frequent and severe imbalances between the supply of and demand for natural gas, whether caused by supply or demand fluctuations, should increase the need for and value of storage services.
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| Is PAA Natural Gas Storage's business vulnerable to commodity prices? |
| PNG's primary business is not commodity price dependent. We do not take title to the natural gas that we store for our customers and, accordingly, are not exposed to commodity price fluctuations on the gas that is stored in our facilities by our customers. Except for the base gas we purchase and use in our facilities, which we consider to be a long-term asset, and volume and pricing variations related to small amounts of natural gas we are entitled to retain from our customers as compensation for our fuel costs, our current and planned business strategies are designed to minimize our exposure to fluctuations in the outright price of natural gas.
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| Does PNG have a target credit profile? How does PNG plan to finance its growth? |
Since PNG's initial public offering in 2010, we have consistently communicated our intention to maintain a strong credit profile that we believe is consistent with an investment grade credit rating. We have targeted a general credit profile with the following attributes:
- An average long-term debt-to-total capitalization ratio of approximately 40% or less;
- An average long-term debt-to-EBITDA ratio of approximately 3.5x or less; and
- An average EBITDA-to-interest coverage ratio of approximately 3.3x or higher.
In order for us to maintain our targeted credit profile, we generally intend to fund approximately 60% of the capital required for expansion and acquisition projects through a combination of equity capital and cash flow in excess of distributions. From time to time, we may be outside the parameters of our targeted credit profile due to timing issues related to the initial funding of certain capital expenditures or acquisitions with debt or delays in realizing increases in Adjusted EBITDA, synergies or other benefits from expansion and/or acquisition projects.
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| Which of PAA Natural Gas Storage's securities are available to the public and how can I make an investment? |
| Common Units of PAA Natural Gas Storage, L.P. trade on the New York Stock Exchange (NYSE: PNG). As a publicly traded security, the units are available through retail brokerage services.
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| When are PAA Natural Gas Storage's cash distributions paid? |
| Upon approval by the Board of Directors of the Managing General Partner, cash distributions are paid quarterly, no later than 45 days following the end of a calendar quarter. Distributions are typically paid mid-month in February, May, August and November.
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| Does PAA Natural Gas Storage offer a Direct Purchase Plan (DPP) or a Dividend Re-Investment Plan (DRIP)? |
| PNG does not currently offer limited partnership units for purchase under either a DPP or a DRIP. |
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| As an investor, will I receive any tax information from PAA Natural Gas Storage? |
| Yes. As a partner in a limited partnership, you will be allocated your share of the partnership's income on an annual basis. PAA Natural Gas Storage intends to furnish each individual that owned units during the year with a customized tax package called a Schedule K-1 that will describe the unitholder's respective share of PNG's net income, gains, losses and deductions for the year. You must then utilize that information when filing your tax returns. Unitholders can usually expect to receive their Schedule K-1 by the middle of March. Unitholders can also access online copies of their Schedule K-1 by accessing the Tax Web section of this website by clicking on the View K-1 button on the home page.
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| Why doesn't the taxable income that I am allocated equal the cash distributions that I have received? |
| Taxable income includes noncash items such as depreciation, while the cash distributions that you receive are based upon the cash flow generating ability of the partnership's assets.
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| What is UBTI? |
| Unrelated business taxable income, or UBTI, is income that is taxable to an otherwise tax-exempt institution or account. UBTI usually comes into play for individual investors when they consider holding MLP units in nontaxable accounts such as IRAs. |
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| Can I hold MLP units in my individual retirement account (IRA)? |
| Yes, you can hold MLP units in an IRA, however, only the first $1,000 of UBTI from all sources is excluded from taxation. In other words, to the extent that you were allocated more than $1,000 in aggregate UBTI, the excess would become taxable even though the units are held in a tax-exempt account. Since PAA is prohibited from offering tax advice, we strongly recommend that you consult a tax advisor regarding the tax ramifications of MLP ownership. |
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| Do I have to file tax returns in all the states listed in the tax package? |
| Tax laws vary among states and ownership of our units may require you to file a return in a given state even though you do not reside in that state. Please consult your tax advisor for assistance in this area. |
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| If I have other questions or would like a copy of the Partnership's annual report or other written documents, how can obtain them? |
Questions can be handled in a variety of ways:
1) email to info@pnglp.com;
2) call Roy Lamoreaux at 713/646-4222 or 800/564-3036, or, 3) by mail to :
PAA Natural Gas Storage, L.P.
Attn: Roy Lamoreaux
333 Clay, St., Ste. 1600
Houston, TX, 77002-4162
You may request annual reports, news releases, conference call summaries, SEC-filed documents, or any public documents that the Company distributes in the same manner.
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