Confidential and Proprietary
2
Today’s Panel
Capital Markets:
David Oelman
713.758.3708
Doug McWilliams
713.758.3613
Tax:
Ryan Carney
713.758.4720
Confidential and Proprietary
MLP Capital Markets Practice Group
Mike Rosenwasser David Oelman Doug McWilliamsAlan Baden Michael Swidler D. Alan Beck
Shelley Barber
Catherine Gallagher
Brenda Lenahan
Jeff Malonson
Jim FoxGillian Hobson Jim Prince Adorys VelazquezMatt PaceyE. Ramey Layne
Cheryl Jordan Will JordanSarah Morgan John Johnston Lauren Dean Dan SpelkinSteve Gill Doug Getten
Lande SpottswoodWill Burns Thomas Zentner Lauren Hunt James Brown Randi RevisoreAdam Law Matt Wiener
3
Confidential and Proprietary
4
MLP Tax Practice
MLP Finance Practice
Robert JacobsonRyan Carney Debbie DuncanBarry Miller Price Manford Judy Blissard John Lynch
Will Bos Brian Moss Brett SantoliMichael McKay
Price Manford Gary Huffman
Confidential and Proprietary
6
Contents
• MLP History
• Capital Markets
• Traditional Structure
• Governance & Accounting Issues
• Qualifying Income
• Other Tax Considerations
• Legislative Developments
• Questions and Answers
Confidential and Proprietary
History of MLPs
1981 First MLP (Apache Petroleum Company)
1981 –1986:
Rollups (Apache)
Liquidations (ServiceMaster)
1983 First underwritten MLP (Transco Exploration Partners, Ltd.)
1986
Last underwritten E&P MLP for 20 years (Santa Fe EnergyPartners, L.P.)
IDRs developed (Forum Retirement Homes, L.P.; BuckeyePartners, L.P.)
Tax Reform Act of 1986
1987Section 7704/Qualifying Income
Last roll-up E&P (Mission Resource Partners)
8
Confidential and Proprietary
History of MLPs (cont’d)
9
1997Enron Liquids Pipeline, L.P. becomes Kinder MorganEnergy Partners, L.P.
2004 First LLC/MLP (Copano Energy LLC)
2005 First GP MLP (Inergy Holdings, L.P.)
2006
Return to E&P (Linn Energy, LLC) and Refining(Calumet Specialty Products, L.P.)
18 MLPs (including 8 GP MLPs)
2011 CVR Partners (1st Variable MLP)
2012Hi-Crush (1st Frac Sand MLP)
Wholesale/Retail MLPs
Confidential and Proprietary
BCU
WGP
* In Registration† Corporate IPO
Years
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
KSP
HEP
STON
CPNO
USS
XTXI†
HWY
SFL
PCL
KPP
TPP
PDE
TNH
EEP
KMP
UAN
OKS
LEV
CRO
FGP
EOT
SGU
APU
CNO
GEL
NPL
ETP
SPH
TIMBZ PAA
EPD
ARLP
TCLP
APL PVR
NRGY
NS
MMP
SXL
MWE
PPX
NRP
MMLP
XTEX
HLND
TGP
TLP
GLP
WPZ
BWP
DPM
NRGP
EPE
LINE
CLMT
RGNC
EVEP
BBEP
EXLP
EROC
ATN
CEP
ETE
MGG
AHGP
AHD
NSH
BGH
HHGP
PVG
TOO†
LGCY
DEP
NGLS
CQP
SEP
BKEP
CMLP
ENP
VNR
EPB
QELP
CPLP†
NMM†
WMZ
PSEP
WES
PNG
CHKM
NKA
OXF
RNO
QRE
UAN
GLNG†
TLLP
NGL
GSJK
AMID
TRGP†
KMI†
OILT
LRE
RNF
RRMS
MCEP
MRMP
PDH
NRGM
Initial Public Offerings: 1987-2012
12
FFP
VAL
CAL
PET
MAR
Exploration and Production
Refining
Midstream
Coal
Propane
Timber
Shipping
Fertilizer
General Partner/Holding Co.
Other
MRP EPR
OSP†
EQM
USAC*
SRLP*
ARPS*
FELP*
QPP*
SXE*
MXLP*
NTI
LGP*
SUSP*
MPLX*
HCLP
DKL*
*
SXCP*
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SDLP*
ALDW*
Confidential and Proprietary
2010 IPOs - Selected Terms and Facts
Issuer IDRsSubordination Period/
Conversion Test% SubUnits
% Sold inIPO Use of Proceeds Sponsor Industry
PAA NaturalGas Storage,L.P.
Standardpercentages,but startabove MQD,not 115%
Series A – Standard
Series B – do not participate in cashdistributions pending operation ofstorage capacity expansion andsatisfaction of financial metrics
30.6% 25% Repay Intercompany Debt Plains All AmericanPipeline, L.P. (NYSE:PAA)
Gas Storage
Niska GasStoragePartners LLC
Standard 3 years cumulative earn and payMQD with 1 year look forward test.
50.0% 25% Repay Debt (Used forSponsor Distribution); FundCapEx
Carlyle/Riverstone Funds Gas Storage
OxfordResourcePartners LP
Standard Standard 50.0% 42% Sponsor Distribution; RepayDebt; Pay PE Advisory Fee;Replenish Working Capital;Purchase Assets
American InfrastructureMLP Fund
Coal Mining
ChesapeakeMidstreamPartners, L.P.
Standard Standard 50.0% 15% Repay Debt; Fund CapEx Chesapeake EnergyCorporation/GlobalInfrastructure Partners
Gas Gatheringand Processing
RhinoResourcePartners LP
Standard Standard 50.0% 13% Repay Debt Wexford Capital Coal Mining
QR Energy, LP * Fee Later of 2 years or the date allarrearages on common units havebeen eliminated.
20.0% 42% Sponsor Distribution; RepayDebt
Quantum EnergyPartners
Oil and Gas
E&P
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Confidential and Proprietary
2011 IPOs - Selected Terms and Facts
Issuer IDRsSubordination Period/
Conversion Test% SubUnits
% Sold inIPO Use of Proceeds Sponsor Industry
CVR PartnersLP
None None – Variable distribution model 0.0% 30% Sponsor Distribution;Purchase Sponsor Assets;Fund CapEx
CVR Energy Inc. (NYSE:CVI)
Nitrogen fertilizer
Manufacturing
TesoroLogistics LP
Standard 3 years earn and pay MQD, 1 yearearn and pay 150% of MQD, additionalforecast earn and pay for succeeding 4quarters without including curtailmentfees from Tesoro Corp.
50.0% 42% Sponsor Distribution Tesoro Corporation(NYSE: TSO)
Crude oil andrefined productslogistics
NGL EnergyPartners LP
Standard Standard 41.0% 24% Repay Debt; Fund CapEx Denham CapitalManagement
Retail propane;wholesale supplyand marketing;and midstream
CompresscoPartners, L.P.
Standard Standard 40.8% 17% Repay Intercompany Debt;Fund CapEx
TETRA Technologies, Inc.(NYSE: TTI)
Wellheadcompression
OiltankingPartners, L.P.
Standard Standard 50.0% 25% Sponsor Distribution; RepayDebt; Replenish WorkingCapital
Oiltanking GmbH Crude oil, refinedpetroleumproducts and LPGterminalling,storage andtransportation
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Confidential and Proprietary
Issuer IDRsSubordination Period/
Conversion Test% SubUnits
% Sold inIPO Use of Proceeds Sponsor Industry
AmericanMidstreamPartners, LP
Standard Standard 50.0% 41% Sponsor Distribution; RepayDebt; Pay PE Advisory Fee
American InfrastructureMLP Fund, L.P.
Natural gasgathering, treating,processing andtransporting
RentechNitrogenPartners, L.P.
None None – Variable distribution model 0.0% 39% Sponsor Distribution; RepayDebt; Fund CapEx
Rentech, Inc. (AMEX:RTK)
Nitrogen FertilizerManufacturing
LRR Energy,L.P.
Max at 23% 12 quarter (aggregate) earn andpay MQD, 1/3 increments after 4, 8and 12 quarter earn and pay MQD
30.0% 42% Sponsor Distribution; RepayDebt
Lime Rock Resources Oil and Gas
E&P
Rose RockMidstream,L.P.
Standard Standard 50.0% 41% Sponsor Distribution SemGroup Corporation(NYSE: SEMG)
Crude oil gathering,transportation,storage andmarketing
MemorialProductionPartners LP
Max at 25%,IDRs take 1.9%from GP
12 quarter (aggregate) earn andpay MQD, 1 year earn and pay125% of MQD
25.0% 42% Purchase Assets fromSponsor
Natural Gas Partners Oil and Gas
E&P
Mid-ConEnergyPartners, LP
None None 0.0% 30% Sponsor Distribution; RepayDebt; Acquire Assets
Yorktown Partners LLC Oil and Gas
E&P
InergyMidstream,LLC
Start at 50%above the IQD,IDRs take 2%from GP
None 0.0% 22% Repay Debt Inergy LP (NYSE: NRGY) Natural gas andNGL storage andtransportation
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2011 IPOs - Selected Terms and Facts (cont’d)
Confidential and Proprietary
2012 IPOs - Selected Terms and Facts
Issuer IDRsSubordination Period/
Conversion Test% SubUnits
% Sold inIPO Use of Proceeds Sponsor Industry
PetroLogisticsLP
None None – Variable distributionmodel
0% 25.2% Primary – future capitalexpenditures; majority wasa secondary sale
Lindsay Goldberg/YorkCapital
PropaneDehydrogenation
EQTMidstreamPartners, LP
Standard Standard 50% 35.0% Sponsor Distribution; Pre-Fund CapEx; Fees
EQT Corporation (NYSE:EQT)
Natural gasgathering, storageand transmission
NorthernTier EnergyLP
None None – Variable distributionmodel
0% 17% Repay Debt; RepayContingentConsideration; HedgePayment; SponsorDistribution
TPG Global LLC andACON Investments
Refining andretail of motorfuels
Hi-CrushPartners LP
Standard, butIDRs take 2%from GP
Standard 50% 41.2% Secondary Offering Avista CapitalPartners
Frac sand mining
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Confidential and Proprietary
MLPs In Registration Selected Terms and Facts (cont’d)
Issuer IDRsSubordination Period/
Conversion Test% SubUnits
% Sold inIPO Use of Proceeds Sponsor Industry
SusserPetroleumPartners LP
Standard, butIDRs take 2% fromGP
Standard TBD TBD Sponsor Distribution;Purchase Treasuries(Lakehead)
Susser HoldingsCorporation (NASDAQ:SUSS)
Wholesaledistribution ofmotor fuels
MPLX LP Standard Standard 50% TBD Expansion Capex; SponsorDistribution; GeneralPurposes; Loan OriginationFee
Marathon PetroleumCorporation (NYSE:MPC)
Crude pipelineand othermidstream assets
Delek LogisticsPartners, LP
Standard Standard 50% TBD Sponsor Distribution;Repay Debt; ReplenishWorking Capital; GeneralPurposes
Delek US Holdings, Inc.(NYSE: DK)
Crude oil andrefined productslogistics andmarketing assets
SunCokeEnergyPartners, L.P.
Standard Standard TBD TBD Sponsor Distribution;Repay Debt; Identifiedcapex and sales discountsReplenish Working Capital
SunCoke Energy Inc.(NYSE: SXC)
Cokemaking
SummitMidstreamPartners
Standard Standard 50% TBD Sponsor Distribution;Repay Debt
Energy Capital Partners;GEFS
Natural gasgathering andcompression
Alon USAPartners, LP
None None None TBD Repay Debt; SponsorDistribution
Alon USA Energy, Inc.(NYSE: ALJ)
Crude oil refining
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Confidential and Proprietary
MLPs In Registration - Selected Terms and Facts
17
Issuer IDRsSubordination Period/
Conversion Test% SubUnits
% Sold inIPO Use of Proceeds Sponsor Industry
SpragueResources LP
Standard, butIDRs take 2%from GP
12 quarter modified earn and payMQD with 1 year look forwardtest.
50% TBD Replenish Working Capital Axel Johnson Marketing andterminalling ofvarious materials
USACompressionPartners, LP
Standard Standard 50% TBD Repay Debt Riverstone Holdings LLC Natural gascompression
ArmstrongResourcePartners, L.P.
None None – Other than taxdistributions, no currentdistribution plans
0% TBD Purchase Assets fromSponsor
Yorktown Coal leasing
ForesightEnergyPartners LP
Standard, butIDRs take 2%from GP
Subordinated units received PIKunits instead of cash distributions
Standard conversion
TBD TBD Sponsor Distribution Cline Group/RiverstoneHoldings LLC
Coal mining
QuicksilverProductionPartners LP
Standard, butIDRs take 1.99%from GP
12 quarter (aggregate) earn andpay MQD, 1 year earn and pay125% of MQD
TBD TBD Sponsor Distribution Quicksilver Resources,Inc. (NYSE: KWK)
Oil and Gas
E&P
SouthcrossEnergyPartners, L.P.
Standard Standard TBD TBD Sponsor Distribution;Repay Debt
Charlesbank Natural gasgathering, storageand transmission
Maxum EnergyLogisticsPartners, LP
Standard Standard TBD TBD Sponsor Distribution; PayA/P; Replenish WorkingCapital; General Purposes
Maxum Petroleum Marketing anddistribution ofrefined products toE&P and coalmining
Confidential and Proprietary
• Follow-On Equity Offerings (excludes ATM)
– 2007 — 26 offerings ($5.1 billion)
– 2008 — 19 offerings ($3.4 billion)
– 2009 — 52 offerings ($6.5 billion)
– 2010 — 62 offerings ($11.9 billion)
– 2011 — 56 offerings ($10.6 billion)
– 2012 (through August) — 35 offerings ($11.9 billion)
• Debt Financings
– 2007 — 14 offerings ($6.2 billion)
– 2008 — 41 offerings ($13.2 billion)
– 2009 — 29 offerings ($10.1 billion)
– 2010 — 38 offerings ($20.4 billion)
– 2011 — 49 offerings ($20.8 billion)
– 2012 (through August) — 35 offerings ($19.2 billion)
Offering Activity
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Confidential and Proprietary
• PIPEs
– 2009 — 2 PIPEs ($97 million)
– 2010 — 4 PIPEs ($365 million)
– 2011 — 7 PIPEs ($2.4 billion)
– 2012 (through August) — 7 PIPEs ($3.1 billion)
• At the Market Equity
– 2010 — 3 programs ($900 million (as amended) registered;$308 million sold as of June 30)
– 2011 — 6 programs ($1.7 billion registered; $834 million soldas of June 30)
– 2012 (through August) — 4 programs ($1.9 billion registered;$114 million sold as of June 30)
PIPES & ATM Market
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Confidential and Proprietary
• Sponsor Placements (incl. drop-downs)
– 2009 — 7 transactions ($617 million)
– 2010 — 4 transactions ($8.1 billion)
– 2011 — 6 transactions ($324 million)
– 2012 (through August) — 6 transactions ($684 million)
• Acquisition Currency
– 2009 — 4 transactions ($247 million)
– 2010 — 0 transactions
– 2011 — 6 transactions ($2.5 billion)
– 2012 (through August) — 6 transactions ($1.7 billion)
Non-PIPE Private Placements
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Confidential and Proprietary
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Organizational Structure
Sponsor
MLP
Public
LP
Assets= OwnershipGP = General PartnerLP = Limited Partner (units)IDR = Incentive Distribution Rights
GP LP
GP/IDRs
100%
Confidential and Proprietary
Economic Structure (Traditional MLP)
Key Concepts
• Distribution Policy
• Minimum Quarterly Distribution (“MQD”)
• Subordinated Units – Form of Distribution Support
• Incentive Distribution Rights (“IDRs”)
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Confidential and Proprietary
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Economic Structure (cont’d)
Distribution Policy
• The MLP’s goal is to generate stable (and increasing) cashdistributions to unitholders
• In the prospectus, the MLP makes a statement as to itsintention to distribute a specified minimum level ofdistributions on a quarterly basis (the “MQD”)
– Basis for yield at which the MLP is marketed and sold
– Basis for distribution support
– Starting point for IDRs
• Partnership agreement typically requires (in a very loosesense) distribution of 100% of “Available Cash”
• Distributions are not a tax requirement
Confidential and Proprietary
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Economic Structure (cont’d)
Available Cash Definition
• “Available Cash” generally means, for each fiscal quarter, allcash on hand as of the end of the quarter
Less the amount of cash reserves established by the GeneralPartner to:
Provide for the proper conduct of the MLP’s business;
Comply with applicable law, any of the MLP’s debtinstruments, or other agreements; or
Provide funds for distributions to the MLP’s unitholders andto the General Partner [for any one or more of the next fourquarters];
Plus all cash on hand on the date of determination of availablecash for the quarter resulting from working capital borrowingsmade after the end of the quarter.
Confidential and Proprietary
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Economic Structure (cont’d)
Subordinated Units – Form of Cash Distribution Support
• Sponsor retains Subordinated Units (often 50% of total units)
• Subordinated Units are subordinated to Common Units inpayment of the MQD, Common Units entitled to arrearagesthereon
• End of Subordination Period
– after three four quarter periods of “earning” and “paying” theMQD on all outstanding units, and there being no existingarrearages on the common units
– First tested ~three years after IPO, rolls from quarter toquarter thereafter
• Early conversion of the Subordinated Units
– after one four quarter period where the MLP has “earned” and“paid” 150% of the MQD on all outstanding units and thecorresponding payment on the IDRs
Confidential and Proprietary
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Economic Structure (cont’d)
Incentive Distribution Rights (IDRs)
• After 115% of the MQD is paid on the Common andSubordinated Units each quarter, the IDR holders have a right toincreasing share of marginal cash distributions as target cashdistributions to unitholders are exceeded
% Interest in Marginal Distribution
Distribution Per Unit Unitholders GP IDR
< MQD 98% 2% -
> MQD < 1st Target (115% of MQD) 98% 2% -
> 1st Target < 2nd Target (125% of MQD) 85% 2% 13%
> 2nd Target < 3rd Target (150% of MQD) 75% 2% 23%
> 3rd Target 50% 2% 48 %
Confidential and Proprietary
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Economic Structure (cont’d)
Incentive Distribution Rights (IDRs) (cont’d)
• Provides incentive for the GP to grow distributions andcompensation for subordination
• Issues associated with growth when the MLP is in the highsplits
– IDRs are effectively a free carried interest as the MLP grows
– Potentially creates cost of capital issues
• IDR reset provision
– IDR holders exchange old IDRs for new IDRs, MQD is reset tocurrent distribution level, target distributions are set based onnew MQD, and IDR holders receive common units that will givethem distributions roughly equivalent to the recent distributions onthe old IDRs
Confidential and Proprietary
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Governance
General Partner controls the MLP
• General Partner is typically 100% owned by the sponsor
• Executive officers of the sponsor are typically designated toserve as executive officers of the MLP
Executive officers of the MLP may devote 100% of their timeto the MLP or may continue to be involved with otherbusinesses of the sponsor
• Often, the MLP and the General Partner of the MLP have noemployees
Employees can be retained by the sponsor and the allocableshare of salaries and benefits of these employees reimbursedto the sponsor by the MLP
The General Partner typically establishes new equity incentiveplans to incent employees who devote a substantial portion oftheir time to the MLP’s affairs
Confidential and Proprietary
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Governance (cont’d)
Board and Committee Requirements
• Board of Directors – limited partnerships and “controlledcompanies” NOT required to have majority of independentdirectors
• Conflicts Committee – composed of entirely independentdirectors
• Audit Committee – composed of entirely independent directors
• Corporate governance and compensation committee – NOTrequired for limited partnerships or controlled companies
– But not having an independent compensation committee is a trapfor the unwary under 16b-3
Confidential and Proprietary
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Governance (cont’d)
Voting Rights of Limited Partners
• Limited Partners Do Not Elect Directors of the General Partner
– As a result, most MLPs do not have annual meetings of unitholders
– BreitBurn, Buckeye, Copano, Linn, Magellan, MarkWest, Suburbanand certain shipping MLPs are among the exceptions
• Limited Partners Vote only on Strategic Events
– Sale of all or substantially all assets
– Removal of the General Partner (upon the vote of at least 66-2/3% ofall outstanding common units and subordinated units (if any), votingtogether as a class, including units owned by the General Partnerand its affiliates)
– Certain material amendments to partnership agreement
Confidential and Proprietary
Governance (cont’d)
Fiduciary Duties
• In absence of contractual modification, traditional fiduciaryduties apply
– Duty of care, loyalty and good faith
– “Revlon” and “entire fairness” scrutiny in the M&A context
– Directors of GP owe fiduciary duties to partners of the LP
• Delaware law permits a partnership agreement to modify oreliminate any duty or liability other than the implied covenantof good faith and fair dealing. DRULPA § 17-1101(d).
– “§ 1101(d) allows MLPs to eliminate completely a generalpartner's fiduciary duties to common unitholders, subject onlyto the limited protections of the covenant of good faith and fairdealing.” In re Inergy, 2010 WL 4273197, at *12 (Del. Ch.Oct. 29, 2010)
33
Confidential and Proprietary
Governance (cont’d)
Fiduciary Duties
• Duty set forth in LP Agreement – a “good faith” standard
– When the GP is acting in its capacity as the general partner ofthe MLP, it shall act in good faith and shall not be subject to anyhigher standard
– Any action taken (or failure to act) by the GP will be deemed tohave been taken in good faith unless the Board believed theaction (or failure to act) was adverse to the interests of thePartnership
– Any action taken (or failure to act) by the GP in reliance uponthe advice or opinion of a professional expert (lawyer,consultant, investment banker, etc.) is presumed to have beendone in good faith and in accordance with such advice oropinion
• Case law states that it is “subjective”, but indicates that theprocess is the key.
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Confidential and Proprietary
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Governance (cont’d)
• Fiduciary Duty Issues
– Conflicts of interest may develop, after the completion of the IPO,between the MLP and the sponsor
• Business opportunities, such as potential acquisitions, that eitherthe MLP or the sponsor could pursue individually, or when theydecide to pursue them jointly
• Direct dealings between the MLP and the sponsor such as in thecase of the sponsor desiring to sell additional assets to or buyassets from the MLP or the MLP and the sponsor entering into acontractual arrangement
• Allocations of general and administrative expenses to the MLP
• Enforcement of indemnification or other agreements between thesponsor and the MLP
• The decision to borrow money or sell equity
Confidential and Proprietary
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Governance (cont’d)
• The partnership agreement will contain other conflict ofinterest resolution procedures, which typically provide thatthe General Partner will not be in breach of its fiduciary dutyto the MLP or its unitholders if the resolution of the conflictis
– Approved by the Conflicts Committee of the General Partner(a committee comprised entirely of directors who areindependent from the sponsor); or
– Approved by the vote of a majority of the outstanding commonunits, excluding any common units owned by the GeneralPartner or any of its affiliates
Confidential and Proprietary
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Governance (cont’d)
• Many MLPs enter into an Omnibus Agreement with thesponsor that, among other matters, specifies variousprocedures to deal with potential conflicts
– These provisions typically include non-compete provisionsthat require, at a minimum, the sponsor to allow the MLP thefirst opportunity to pursue an acquisition of a business that isin the same line of business as the MLP or a designatedgeographic area
– These provisions often also give the MLP a right of firstrefusal to purchase any assets of the sponsor that thesponsor is interested in selling if the assets are in the sameline of business as the MLP or a designated geographic area
Confidential and Proprietary
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Accounting Issues
• Generally Required for all IPOs
– Audited Financial Statements
Three years’ income statement (or two for EmergingGrowth Companies)
Two years’ balance sheet
– Unaudited financial statements for any stub period
– Five years of selected financial data
• Special Requirements for MLP IPOs
– Cash Distribution Forecast (ability to pay first year’s MQD)
– Cash Distribution Backcast (pro forma ability to have paidMQD during the last year)
• Where MLP succeeds to some, but not all, of a sponsor’sbusiness, carve-out financials may be appropriate
– Preclearance letter to SEC’s Office of the Chief Accountant
Confidential and Proprietary
40
Qualifying Income
• Statutory Requirement for Partnership Treatment
– Qualifying Income Test: 90% or More of Gross Income
Services (e.g., pipeline transportation): Gross revenue
No reduction for cost of services
Products (e.g., e&p): Gross margin
Gross revenue less costs of goods sold
• Measured Each Tax Year
• Failure Results in Corporate Treatment
Confidential and Proprietary
41
Qualifying Income
• Natural Resource Qualifying Income
– Qualifying Products: Natural Resources and “Green” Fuels
Naturally occurring deposits (gas, oil, depletable minerals)
Oil and gas products (refinery tailgate or gas processingtailgate) – includes gasoline, kerosene, number 2 fuel oil,refined lubricating oils and diesel fuel
Fertilizer
Geothermal energy
Timber
Industrial source CO2
Biodiesel/ethanol (transport and storage only)
Confidential and Proprietary
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Qualifying Income (cont’d)
• Natural Resource Income
– Natural Resource Activities
Exploration
Development
Mining
Production
Processing
Refining
Transportation
Storage
Marketing
Confidential and Proprietary
43
Qualifying Income (cont’d)
• Non-Natural Resource Qualifying Income
– Real property income
Rents from real property (excluding (i) rents for personalproperty in excess of 15% related personal property and (ii)related party rents)
Income from sale of real property (including inventory)
– Gain from sale of assets generating qualifying income
– Interest (not from financial/insurance business)
– Dividends (from qualifying or non-qualifying activities)
– Gain from sale of stock
– Gain from commodities, futures, forwards and options with respectto commodities
Confidential and Proprietary 4520122007 2008 2009 2010 2011 44
Leasing Electrical T&Das REIT
PLR 200725015
Pipeline and TerminalOperations
PLR 200740010
Subpart F Income –CDO Structure
PLR 200728025
Subpart F Income –CDO Structure
PLR 200722007
Processing, Packaging andMarketing of Base Lube OilsPLRs 200718005, 6, 7, 9, 10
Blending andAsset OperationsPLR 200712002
Specialty Refining, Processing,Packaging & Marketing
PLR 200848018
Customer Reimbursementsfor Pipeline Construction
PLR 200845035
Interest Rate Hedging –Locks & SwapsPLR 200841017
Oilfield Services – Drilling,Workover and Completion
PLR 200827022
Oilfield Services –Fluid Handling (Frac)
PLR 200827014
Power GenerationNot Qualifying
PLR 200821021
Leasing Natural Gas LDCas REIT
PLR 200937006
Marine BargeTime Charters
PLR 200939016
Production & MarketingOf Modified Asphalt
PLR 200927002
Ethanol Blendingat Terminals
PLR 200921010
Interest Rate Hedging –Locks and SwapsPLR 200919019
Licensing Seismic Data
PLR 200909006
Marine BargeTime Charters
PLR 201027003
Tugboat Marine Servicesfor LNG TerminalPLR 201025037
Leasing Asphalt Terminal
PLR 201005018
Oilfield and Mining Services –Fluid Handling (frac and acid)
PLR 201043024
Subpart F Income – Non-U.S.Marketing Subsidiary
PLR 201113018
Sale of StatedNatural ResourcesPLR 201113018
Processing, Packaging andMarketing Refined Products
PLR 201129028
Fees and Reimbursements ForManaging Qualifying Activities
PLR 201132012
Provision of Butane BlendingServices & Automated Systems
PLR 201132020
Oilfield Services – Frac FluidTransport, Storage & Heating
PLR 201137005
Refinery Services
PLR 201141013
Processing, Marketing andDistributing Stated Products
PLR 201201002
Terminal Additizationand Ethanol Blending
PLR 201206004
Interest Rate Hedging –Locks and Forward Swaps
PLR 201208021
Hydrogen Byproduct Sales
PLR 201216022
Oilfield Services –Produced Water Services
PLR 201222029
LNG Processing & Marketing
PLR 201224023
Oilfield and Mining Services –Extraction Logistics Supply
PLR 201226018
Oilfield and Mining Services –Fuel Sales and Deliveries
PLR 201227001
Oilfield Services – Waste &Environmental Services
PLR 201227002
Terminal Additization
PLR 201232008
Sale of EPA Credits forBlending Bio-Fuels
PLR 201232020
Extracting and Marketing aProduct to Industrial Users
PLR 201233009
Gas Gathering; Amine Plant;Management Fee NGL Facility
PLR 201233010
Oilfield Services –Water Pipeline
PLR 201234005Qualifying Income – IRS PLRs(43 PLRs in last 6 years)
Confidential and Proprietary
45
Qualifying Income – IRS PLRs (cont’d)
• Favorable Trends – Specific Examples
– Activities Integral to Qualifying Income
• Exploration and Production
– Fluid handling – PLRs 201234005, 201222029,201137005, 201043024 and 200827014
– Waste and Environmental Services – PLR 201227002
– Fuel, lubes and chemical end-user sales – PLRs201227001 and 201226018
– Licensing seismic data – PLR 200909006
• Refinery Services – PLR 201141013
Confidential and Proprietary
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Qualifying Income – IRS PLRs (cont’d)
• Favorable Trends / Unique PLRs – Specific Examples
– Activities Integral to Qualifying Income (cont’d)
• Blending Activities – PLRs 201232020 (RINs), 201232008,201206004
• Byproduct Sales – PLRs 201216022, 9339014
– Industrial End-User Sales – PLR 201233009
– Rents From Real Property
• Electrical T&D assets – PLR 200725015
• Natural gas LDC assets – PLR 200937006
• Asphalt terminal assets – PLR 201005018
Confidential and Proprietary
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Sponsor Tax Considerations
• Formation and Drop-Down Transactions
– Potential deferral of gain upon contribution of assetsto an MLP, even where sponsor receives a distributionor is relieved of debt
– General Rule: Assets in + Cash Out = Sale
– Exceptions to Sale Treatment:
Working capital retention
Cap-ex reimbursement (prior 24 months)
Distributions of operating cash flow
Assumption of qualified liabilities
Leveraged distributions
Confidential and Proprietary
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Investor Tax Shield
• General Concept
– Unitholders are taxed on their share of the taxableincome as if they were engaged in the activity directly
– Distributions are non-taxable (return of capital) unlessthey exceed a partner’s basis
• Disclosure is for Marketing
– Reciprocal of “Ratio of Taxable Income toDistributions”
– Taxable income may differ across asset classes:
Industry Typical Shield Typical Ratio
Midstream Pipelines >80% <20%
E&P >70% <30%Refineries >50% <50%
Mining (coal / sand) >40% <60%
Confidential and Proprietary
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Investor Tax Shield
• General Concept
– Unitholders are taxed on their share of the taxableincome as if they were engaged in the activity directly
– Distributions are non-taxable (return of capital) unlessthey exceed a partner’s basis
• Disclosure is for Marketing
– Reciprocal of “Ratio of Taxable Income toDistributions”
– Taxable income may differ across asset classes:
Industry Typical Shield Typical Ratio
Midstream Pipelines >80% <20%
E&P >70% <30%Refineries >50% <50%
Mining (coal / sand) >40% <60%
Confidential and Proprietary
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Investor Tax Shield (cont’d)
• Unitholder vs. Sponsor Considerations
– Tax rules allow, and unitholders anticipate, deductionsbased on full FMV tax basis
– Sponsor pays for this by agreeing to offsetting incomeallocations to the extent there is not actually enoughbasis
– Refreshing of Shield
754 Election / 743(b) Adjustment for SubsequentPurchasers
Confidential and Proprietary
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• Tax Exempt Investors
– Unrelated business taxable income (“UBTI”) for tax exempts
• Non-U.S. Investors
– Effectively connected income (“ECI”) and withholding for foreignpersons
– Ownership restrictions for certain MLPs with federal O&G leasesand Jones Act shipping businesses
• Mutual Funds
– Qualifying income for mutual funds; 2004 Jobs Creation Act
– Ownership restrictions for certain MLPs with FERC regulatedpipelines
Special Investor Considerations
Confidential and Proprietary
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State Taxes and Accounting
• State Tax Issues
– Investor filing obligations
– Company filing obligations
• Tax Accounting
– Section 754 Election
– Tax Accounting Systems / Service Providers
Confidential and Proprietary
• Medicare Tax
– Beginning January 1, 2013, most investment income willbe subject to a 3.8% “Unearned Income MedicareContribution” (i.e., tax)
– This tax applies to an MLP unitholder’s “flow through”share of the MLP’s earnings
– Like other income taxes, the MLP’s “tax shield” willsignificantly defer the imposition of this tax
– Gain from sale of MLP interests is also subject to tax
Legislative Developments (cont’d)
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Confidential and Proprietary
• Proposed Legislation
– End Welfare Polluter Act
• Excludes natural resource activities from qualifyingincome
– MLP Parity Act
• Expands qualifying income to include alternativeenergy (wind, solar, hydro-electric, solid waste, andproduction of biofuels)
– Carried Interest Legislation
• Taxes certain partnership income and sales of“carried interests” partnership interests as ordinaryincome rather than capital gains
Legislative Developments
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Confidential and Proprietary
• Tax Reform
– Broadening the base and lowering the rate
– Closing loopholes
– Leveling the playing field
– Taxation of passthroughs
– National Association of Publicly Traded Partnerships(www.NAPTP.org)
Legislative Developments
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Confidential and Proprietary
Circular 230 Notice
This presentation was written or intended to be used, andcannot be used, for the purpose of (i) avoiding penaltiesunder the Internal Revenue Code or (ii) promoting,marketing or recommending to another party anytransaction or matter addressed herein.
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