Tortoise North American Energy: An Attractive Energy MLP Closed-End Fund

| About: Tortoise North (TYN)
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Energy Master Limited Partnerships (MLPs) are a good complement for a fixed income portfolio. This has been one of the best performing asset classes over the last 10 years. MLPs have low beta and low correlation with other asset classes, which make MLPs a good portfolio diversifier. The MLP structure also provides significant tax advantages.

There are several ways to own MLPs. If you have large holdings in MLPs, it is probably best to buy individual issues in taxable accounts because of the tax deferral opportunity. But for smaller purchases or inside of an IRA, it may be better to purchase closed-end funds, ETFs or ETNs.

If you directly purchase an MLP, you will receive a K-1, and may be subject to unrelated business taxable income (UBTI). You may also need to file tax returns in several states.

If you buy a portfolio of MLPs inside of a closed-end fund "wrapper," you do have to pay a management fee, but gain some benefits in return:

  1. You will receive one Form 1099 per shareholder instead of multiple K-1 forms.
  2. MLP CEF dividends are considered qualified dividend income (QDI) and a portion of the dividends are normally classified as return-of-capital.
  3. MLP CEF shares do not generate unrelated business taxable income (UBTI) or state taxes in IRAs.
  4. MLP CEFs normally use leverage, which can add to the total return.

Many MLP closed-end funds currently trade at a premium over net asset value. But this is somewhat misleading. Unlike conventional closed-end funds that are usually registered investment companies (RICs), MLP CEFs are usually organized as corporations. Because of this, MLP CEFs must book a deferred tax asset (DTA) or deferred tax liability (DTL) against securities in their portfolio that have depreciated or appreciated.

Because most MLP CEFs have performed well over the last 10 years, the NAV for older funds is artificially low because they have significant unrealized capital gains and DTLs that are subtracted from their NAV.

These DTLs are strictly for accounting purposes and have no effect on the value of the CEF's underlying investments or potential earnings power. The deferred tax liability is only realized when an underlying position with an unrealized capital gain that generated the DTL is actually sold. But MLP CEFs generally have very low turnover, and can easily avoid sales of issues with the largest price appreciation.

For this reason, when an MLP CEF has a low turnover ratio (implying that the tax liability may not be incurred for many years, if at all) it is best to use an "adjusted" NAV where you add back the deferred tax liability to the reported NAV. After this adjustment is made, many MLP CEFs sell at very attractive discounts to net asset value.

I have previously written reports on two MLP closed-end funds (TYG, TYY). In this report, I highlight another MLP closed-end fund that looks attractive now, especially on a pullback.

Tortoise North American Energy Corp. (NYSE:TYN) is a closed-end fund that invests in equity securities of MLPs, including oil and gas exploration, energy infrastructure and energy shipping companies. The fund looks for exposure to the growing and physically integrated midstream and downstream North American energy markets.

This is the sector allocation as of Aug. 31, 2011:

TYN - Sector Allocation Breakdown

Natural Gas/Natural Gas Loquids Pipelines


Crude/Refined Products Pipelines


Oil and Gas Exploitation and Production


Natural Gas Gathering/Processing




Propane Distribution


TYN has good long-term NAV performance with the exception of 2008, when it lost 52.28%. Over the last five years, it has produced a 9.14% annualized return. Here is the total return NAV full-year performance for TYG since inception:

TYN Annual NAV Performance













TYN- Top 10 Equity Holdings (as of Dec 31, 2011)

Enterprise Products Partners LP (NYSE:EPD)


El Paso Pipeline Partners LP(NYSE:EPB)


Magellan Midstream(NYSE:MMP)


Buckeye Partners (NYSE:BPL)


Kinder Morgan Mgt (NYSE:KMR)


Regency Energy Partners (NYSE:RGP)


Enbridge Energy (NYSE:EEP)


Oneok Partners (OKS)


Linn Energy (LINE)


Energy Transfer Partners (NYSE:ETP)


Here are some summary statistics on TYN:

  • Total assets: 205 million
  • Total common assets: 160 million
  • Inception date: Oct. 31, 2005
  • Annual Distribution (Market) Rate= 6.20%
  • Last Regular Quarterly Distribution = $0.3825 (Annual= $1.53) (Note: The quarterly dividend was recently raised from $0.3800)
  • Fund Expense Ratio: 1.50% (Management Fee= 1.07%)
  • Discount to NAV = +12.35% **
  • Deferred Tax Liability (DTL) = 3.75
  • Discount to Adjusted NAV = -17.50% ** (added DTL to NAV)
  • Portfolio Turnover Rate: 28%
  • Effective Leverage: 14.13%
  • Effective all-in cost of leverage: 2.37%
  • Average Daily Volume (shares) = 18,000
  • Average Dollar Volume = $0.44 million

** NAV as of Jamuary 6, 2012

In 2011, the fund estimates 75%-100% of the dividend was qualified with the remainder return of capital. The exact figures will be announced shortly. As of the end of 2011, the CEF asset coverage ratio for debt was 634% where the minimum requirement is 300%.

TYN is not very liquid so limit orders should be used for all purchases. The official NAV for TYN is only updated weekly by the fund, but estimations of the NAV can be made by looking at price changes in the individual holdings. TYN has performed very well over the past few months but has dropped for the last few days. It looks like a reasonable buy on any further price drops. For liquidity reasons, it seems reasonable to gradually scale in to TYN over a period of time.

Disclosure: I am long TYG.