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Recent Trends in MLP Transactions

8th Annual Texas Journal of Oil, Gas

and Energy Law Symposium Brett Braden (Latham & Watkins LLP)

January 18, 2013

Presentation Overview

1. Level the playing field – MLP 101 refresher

2. Evolution of the MLP Marketplace

3. Variable Distribution MLPs

4. Expanding the MLP Asset Classes

5. “C-Corp” MLPs – Expanding the MLP Investor Base

6. GP Holdcos – Making a comeback?

2

The Basics – MLP 101

• What is an MLP? • Market acceptance of MLPs • Types of MLPs • Typical MLP structure • MLP Governance Issues • Distribution Characteristics of MLPs • Qualifying Income

3

What is an MLP?

• A master limited partnership, or “MLP,” is simply a state law partnership or limited liability company that is treated as a partnership for tax purposes and listed and traded on a national securities exchange.

• Rather than shares of corporate stock, MLPs issue common

units (representing limited partner interests or LLC interests) to the public, but the common units are freely tradable just like shares of corporate stock.

4

What is an MLP?

• The MLP is not subject to corporate-level tax. Instead,

unitholders are allocated income from the MLP and are taxed at their respective individual rates on their allocated share of that income

• Typically, a high percentage of that income (>70%) is “shielded.”

• At least 90% of the MLP’s income (gross revenue or gross margin) must be “qualifying income” under IRC Section 7704.

5

Market Acceptance of MLPs

• MLP securities have been very popular with retail investors looking for a relatively safe and stable income stream, particularly in comparison to the low rates of return offered by other investments (e.g., savings accounts, treasuries)

• Also potential for capital appreciation • More recently, less focus on assets; more focus on absolute return

• MLP investors are typically looking for “yield”; that is, the ratio of the

annualized distribution payment to the unit price • Unit Price: $20.00 • Distribution: $1.50 • Yield: 7.5%

• MLPs are valued based on a multiple of cash flow (EBITDA or DCF) –

not net income.

6

Types of MLPs

• Classic Midstream – The classic MLP is a pipeline company with long-term, fee-based transportation agreements and low maintenance capital expenditures, which provides for stable to increasing cash distributions over time. No direct commodity price exposure. Usually has incentive distribution rights and sponsor subordination.

• E&P - Revenue generated from exploration and production of oil and natural gas. Cash flow is directly exposed to commodity price fluctuations; hedging used to mitigate fluctuations. May or may not have incentive distribution rights and sponsor subordination

• Variable – Similar to E&P regarding commodity price exposure, but broader asset classes. No Sponsor subordination and no incentive distribution rights.

7

Typical MLP Structure

8

LP

Public

Lenders

Assets

OLLC

100%

= ownership = debt G = general partner interest L = limited partner interest IDRs = incentive distribution rights SUB = subordinated units

Sponsor

L/Common Units

L/SUB

GP

G/IDRs

Typical MLP Structure

9

• Sponsor • Strategic - industry player (Marathon, Tesoro) • Financial - private equity firm (Riverstone, Energy Capital

Partners) • Rationale for MLP formation

• Monetize a portion of the business at very attractive multiple while retaining control

• GP owned 100% by sponsor and controls the MLP • Turn a cost center into a revenue producing business

through contribution of assets to MLP and entry into commercial agreements with the sponsor

• Creates a public currency to finance growth

Typical MLP Structure

10

• General Partner (“GP”) • Manages and controls the MLP

• Typically wholly owned by the Sponsor, who appoints all directors on GP board

• Typically holds incentive distribution rights (“IDRs”) • Limited fiduciary duties to public unitholders • Often is the legal employer of the MLP’s employees

• MLP • The top tier partnership in the structure (the “master” partnership) • Typically a holding company that only owns equity interests in operating

subsidiaries • Issues common units to the public and subordinated units and IDRs to the sponsor

• Operating Partnership (“OLP”) / Operating Company (“OLLC”) • Owns the MLPs operating assets • Historically were limited partnerships; nowadays, LLCs are more common • May own stock of corporate subsidiaries • Typically the issuer of debt within partnership group

MLP Governance

• Directors of general partner typically appointed by sponsor; no public election of directors; no annual meetings

• Special NYSE/NASDAQ Rules for MLPs • MLPs required only to have an audit committee • No Compensation Committee (optional) • No Nominating Committee (optional) • No Majority of Independent Directors (optional) • No unitholder approval required for:

• issuances of units to related parties; • issuances of units > 20% of outstanding units; or • change of control.

11

MLP Governance

• Section 17-1101(d) of DRULPA allows for the modification, restriction or elimination of fiduciary duties in the MLP partnership agreement. • Gives flexibility to deal with conflicts of interest

• Cannot eliminate the implied contractual covenant of

good faith and fair dealing.

12

Distribution Characteristics of MLPs

• MLPs pay out all of their “available cash” on a quarterly basis (essentially cash on hand at end of quarter, less cash expenses and reserves, plus working capital borrowings after end of quarter)

• One of the hallmarks of the traditional MLP has been the relative stability in its quarterly distribution payments; the number one goal of most MLPs has been to maintain or grow distributions every quarter

• Any decrease in an MLP’s quarterly distribution is typically perceived very negatively by the investment community and usually a significant drop in the MLP’s unit price when a distribution cut is announced

• MLPs have historically managed cash flow stability through: (1)

distribution coverage, (2) long-term contracts and (3) hedging.

13

Available Cash

14

• Distributions are out of “Available Cash” • “Available Cash” generally means, for each fiscal quarter, all

cash on hand as of the end of the quarter, • Less the amount of cash reserves established by the General

Partner to: • Provide for the proper conduct of the MLP’s business; • Comply with applicable law, any of the MLP’s debt instruments, or

other agreements; or • Provide funds for distributions to the MLP’s unitholders and to the

General Partner for any one or more of the next four quarters; • Plus all cash on hand on the date of determination of available

cash for the quarter resulting from working capital borrowings made after the end of the quarter.

• Some recent MLPs have eliminated the requirement to distribute 100% of available cash each quarter (Hi-Crush, Suncoke)

Minimum Quarterly Distribution

15

• Economic structure highlight: Regular cash distributions

• The MLP states in its IPO prospectus its intention to distribute at least a specified minimum level of cash per unit on a quarterly basis

• Referred to as the “minimum quarterly distribution” or “MQD” when the MLP has subordinated units

• Distribution of MQD is not guaranteed • Market driven – not a legal requirement

• Cash distributions are typically fully or partially shielded — i.e., cash distribution amount typically exceed the unitholder’s allocated taxable income

• Discussed in IPO prospects as “Ratio of Taxable Income to Distributions”

• Sponsor often holds “subordinated units” with subordinated cash distribution rights for a designated time period (e.g., 3 years)

• Typically 50/50 split between subordinated units/common units • Typical early conversion provision: 100% conversion if MLP earns and

pays 150% of MQD for four consecutive quarters • Subordinated units receive no distributions until common units receive

MQD

Incentive Distribution Rights

16

• Incentive Distribution Rights (“IDRs”) • Definition: the right to receive an increasing share of

cash distributions as benchmarks for limited partners are achieved

• Tiers (example) • 98%/2% (target 10% yield based on MQD) • 85%/15% (upon achieving 11% yield) • 75%/25% (upon achieving 12.5% yield) • 50%/50% (upon achieving 15.0% yield)

• Rationale • Incentive for general partner to grow the MLP’s business • Compensation for subordination

Qualifying Income

• In 1987, Congress changed the tax code to provide that all publicly traded partnerships (i.e., MLPs) will be taxed as corporations (and, therefore, be subject to entity level taxes) unless 90% of the gross income is “qualifying income.”

• Although there are several types of qualifying income (interest, dividends, rents from real property), the most prominent category of qualifying income relates to natural resource activities.

• For income to qualify under the natural resource exception, there are two questions to ask:

• Question 1: Is the item involved in the activity a mineral or natural resource?

• Question 2: Is the activity directed at the mineral or natural resource within one of the following categories:

17

Qualifying Income

• Question 1: Is the item involved in the activity a mineral or natural resource? • Oil, gas and products thereof:

• “Products” means only those products that are derived from petroleum refineries or field facilities and not those products that are produced by additional processing beyond that of petroleum refineries or field facilities.

• Gasoline • Kerosene • Number 2 fuel oil • Refined lubricating oils • Diesel fuel • Methane / Butane • Propane • Similar products recovered from petroleum refineries or field facilities

• Selected other natural resources or minerals • Coal • Bauxite / Alumina • Salt • Liquefied natural gas (LNG) • Others (e.g., asphalt, benzene, toluene, xylene, bentonite, granite, trona) • Limited “clean energy” products (biodiesel / ethanol) • Industrial source CO2

18

Qualifying Income

• Question 2: Is the activity directed at the mineral or natural resource within one of the following categories:

• Exploration • Development • Mining • Production • Processing • Refining • Transportation • Marketing • Storage

19

Industry Analysis and Current Trends

• MLP Market Capitalization • Evolution of the Energy MLP Marketplace • Variable Distribution MLPs • Analysis of New Asset Classes • The “C-Corp MLP” • GP Holdcos – Making a Comeback?

20

MLP Market Capitalization [Need to update for 12/31/2012]

Market Capitalization ($ in Billions)

Source: Factset

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003$ in Billions $2 $4 $5 $7 $10 $11 $15 $25 $27 $43# of Listed Partnerships 8 10 13 13 16 18 19 24 30 30

0

10

20

30

40

50

60

70

80

90

$0

$50

$100

$150

$200

$250

$300

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

# of Listed Partnerships

$ in

Bill

ions

21

22

Evolution of the Energy MLP Marketplace

Nustar

Atlas Energy

Teekay Offshore

Penn Va. GP

Constell- ation(1)

Eagle Rock

Exterran

Breitburn

EV Energy El Paso Pipeline

Hiland GP

Quest

DCP Buckeye GP

Vanguard

Boardwalk Pipeline

NuStar GP

Encore

Global Alliance GP

Crestwood

Enterprise GP

Magellan GP

Blueknight

Suburban Propane

Crosstex Williams Energy Transfer Equity

Spectra

Heritage* Magellan Martin Copano Inergy GP

Regency Cheniere

EOTT* National* NRP U.S. Shipping

Trans- montaigne Calumet Targa Western

Gas

Pride* Enbridge Arcadian* El Paso* Ferrelgas Amerigas Genesis Enterprise TC Pipeline Inergy Markwest Holly Teekay LNG

Linn Energy

Duncan Energy

Pioneer SW

Teppco AMC* Kinder Morgan

Northern Border* Crown* Star Corner-

stone* U.S. Timber*

Plains Alliance Atlas Penn Virginia

Sunoco K-Sea Hiland Atlas GP Legacy Williams Pipeline

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

PAA Natural Gas Storage

Access Midstream

Niska Golar LNG

CVR Partners

Tesoro Logistics

NGL Energy

Compress-co

Oiltanking

American Midstream

Rentech

Rose Rock Midstream

Inergy Midstream

Petro- logistics

EQT Midstream

Targa Resources

Kinder Morgan

Oxford Resource

Rhino Resources

QR Energy

LRR Energy

Memorial Production

Mid-Con Energy

Refined Products

GP

E&P

Pipeline

Propane

Coal

Midstream

Shipping

Refinery Logistics

G&P

Pacific

(1) Constellation also has upstream assets consisting mostly of natural gas.

Hi-Crush

Susser Petroleum

Summit Midstream

Seadrill

Southcross Energy

Alon USA

Other

Lehigh Gas

MPLX

Northern Tier

Delek Logistics

Western Gas Equity

OSG America

23

Evolution of the Energy MLP Marketplace

Nustar

Atlas Energy

Teekay Offshore

Eagle Rock

Exterran

Breitburn

EV Energy El Paso Pipeline

DCP

Boardwalk Pipeline

NuStar GP

Global Alliance GP

Crestwood

Blueknight

Suburban Propane

Crosstex Williams Energy Transfer Equity

Spectra

Heritage* Magellan Martin Copano Regency Cheniere

NRP Trans- montaigne Calumet Targa Western

Gas

Enbridge Ferrelgas Amerigas Genesis Enterprise TC Pipeline Inergy Markwest Holly Teekay LNG

Linn Energy

Pioneer SW

AMC* Kinder Morgan

Northern Border* Star Plains Alliance Atlas Penn

Virginia Sunoco Atlas GP Legacy

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

PAA Natural Gas Storage

Access Midstream

Niska Golar LNG

CVR Partners

Tesoro Logistics

NGL Energy

Compress-co

Oiltanking

American Midstream

Rentech

Rose Rock Midstream

Inergy Midstream

Petro- logistics

EQT Midstream

Targa Resources

Kinder Morgan

Oxford Resource

Rhino Resources

QR Energy

LRR Energy

Memorial Production

Mid-Con Energy

Refined Products

GP

E&P

Pipeline

Propane

Coal

Midstream

Shipping

Refinery Logistics

G&P

Hi-Crush

Susser Petroleum

Summit Midstream

Seadrill

Southcross Energy

Alon USA

Other

Lehigh Gas

MPLX

Northern Tier

Delek Logistics

Western Gas Equity

Vanguard

Variable Distribution MLPs – Expanding the MLP Asset Classes The Age Old Question: “It may be qualifying under 7704, but is it suitable for an MLP?” • Historically, the answer to this question depended to a large extent on

the stability and predictability of the cash flows generated by the business

• Over the past 18 months, a change has been occurring in the MLP asset class as more and more investors look for yield without requiring stability in distributions

• This phenomenon has led to the introduction of so-called “variable” MLPs 24

Variable Distribution MLPs

• MLPs typically pay out all of their “available cash” on a quarterly basis (essentially cash receipts less cash expenses and reserves)

• One of the hallmarks of the traditional MLP has been the relative stability in its quarterly distribution payments; the number one goal of most MLPs has been to maintain or grow distributions every quarter

• Any decrease in an MLP’s quarterly distribution is typically perceived very negatively by the investment community and usually a significant drop in the MLP’s unit price when a distribution cut is announced

• The classic MLP is a pipeline company with long-term transportation

agreements and low capital expenditures, which provides for stable to increasing cash distributions over time

• MLPs have historically managed cash flows through: (1) distribution coverage, (2) long-term contracts and (3) hedging.

25

Variable Distribution MLPs

• Although there are over 90 MLPs currently traded on U.S. stock exchanges, there are only a very limited number of “variable” energy MLPs

• As the name implies, variable MLPs are characterized by cyclical businesses with choppy cash flow (unlike traditional MLPs)

• Although variable MLPs make quarterly distributions, the market expects significant variability in distributions as a result of the nature of the underlying business

• Focus is on maximizing distributions every quarter, not smoothing cash flow to maintain steady distribution growth (e.g., no coverage ratio)

26

Comparative Cash Distribution History

* - Cumulative split-adjusted distributions IPO through Q3 2012

$-

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

EEPTNHKMP

$194.59 *

$99.14 *

$68.41 *

27

Variable Distribution MLPs • CVR Refining LP (In Registration)

– Owns two mid-continent refineries and associated crude logistics assets – 18.8% yield at IPO (based on midpoint of range)

• Alon USA Partners, LP (IPO Date: 11/26/12) – Owns one mid-continent refinery and associated distribution and marketing business – [26.2]% yield at IPO (on a forecast basis)

• Northern Tier Energy LP (IPO Date: 7/31/12) – Owns a refinery and retail gas distribution network – 19% yield at IPO (on a forecast basis), with a high institutional allocation

• PetroLogistics LP (IPO Date: 5/9/12) – Refines propane into propylene – 11.9% yield at IPO (on forecast basis), with a high institutional allocation

• Rentech Nitrogen Partners, L.P. (IPO Date: 11/9/11) – Produces nitrogen fertilizer from natural gas – 11.7% yield at IPO (on forecast basis), with a high institutional allocation

• CVR Partners, LP (IPO Date: 4/7/11) – Produces nitrogen fertilizer from petroleum coke – 12% yield at IPO (on forecast basis), with a high institutional allocation

• Terra Nitrogen Company, L.P. (IPO Date: 12/4/91) – Produce nitrogen fertilizers from natural gas – Steady distribution through January 1995, variable since (ex 2003 & 2004) – IDRs, common units entitled to arrearages [UPDATE WITH RECENT YIELDS]

28

Characteristics of Variable MLPs • The following table sets forth the certain important characteristics of “traditional”

MLPs and “variable” MLPs

Traditional MLPs Variable MLPs

Large, single asset Uncommon More common Distribution Stability Yes No Minimum Quarterly Distribution Yes No Coverage Ratio 1.10x – 1.20x 1.0x Available Cash - Cash on hand at the end of each quarter that is

required to be paid to unitholders, either through partnership agreement terms or stated policy

Yes No

Operating Surplus - Cash generated by the MLP during a quarter less

cash expenditures during such quarter, plus working capital borrowings (typically the maximum that can be distributed by an MLP without resetting the MQD and IDRs)

Yes No

Capital Surplus - Cash generated from asset sales and similar

activities

Yes No

29

Characteristics of Variable MLPs

Traditional MLPs

Variable MLPs

Subordination Period - Period during which the sponsor’s units are

subordinated in right of payment to the public’s units

Typically from 1 to 3 years, but

sometimes 5 years

No

Types of Securities

General Partner Interest 2.0% 0% Common Units - Units held by the public and, to a lesser degree,

the sponsor

Yes Yes

Subordinated Units - Units held by the sponsor that experience the

first distribution cut if there is insufficient available cash to pay the full distribution on all units; a device to protect the common unitholders

Yes (typically 49% of all outstanding

units at the time of the IPO)

No

PIK Units - Units held by the sponsor that pay distributions

“in-kind” if there is insufficient available cash to pay the full distribution on all units

No Sometimes (Northern Tier)

30

Characteristics of Variable MLPs Traditional

MLPs Variable MLPs

Incentive Distribution Rights - Rights held by the sponsor entitling it to

increasing percentages – 13%, 23% and 48% – of the MLP’s available cash as distributions increase

Yes No

Common unit arrearages - The right of public unitholders to accrue unpaid

minimum quarterly distributions and receive payment of such unpaid distributions before any payments to the sponsor on its units

Yes No

Maintenance of “Distribution Coverage” - The practice of paying out less than all available

cash for the purpose of maintaining stability or growth in quarterly distributions (an MLP that withholds 10% of its available cash would have a distribution coverage ratio of 110%); this feature is a highly monitored by analysts and sought-after by investors

Yes No

31

Characteristics of Variable MLPs

Traditional MLPs

Variable MLPs

Working Capital Borrowings to Pay Distributions - The practice of using working capital borrowings

(which are borrowings intended to be repaid within 12 months) to maintain stability in quarterly distribution payments (typically done to avoid fluctuations in distributions due to seasonal variations in the business)

Yes No

Direct exposure to commodity price movements - Traditional MLPs typically use hedging and other

arrangements to avoid direct exposure to commodity prices (in order to mimic the distribution stability of a FERC regulated pipeline, for example)

Avoided Expected

Direct and immediate exposure to fluctuations in cash generated by the business - The consequence of the distribution policies

described above

No Yes

Flexible distribution covenants in debt arrangements a priority

Yes Depends

32

Pros and Cons of Variable Distribution Structure

Pros Cons No need to manage to steady cash flow – coverage, hedging or long term

contracts might be costly or unwieldy and lower total return

– high cash distribution to Sponsor No coverage in IPO forecast – IPO priced on fully distributed basis No subordination Higher institutional interest – potential for larger IPO – potential for more liquid market

No IDRs (may be a pro for public) – the quid-pro-quo for no subordination High IPO yield (may be a pro for public) Limited comps/history – 3 existing comps, all in fertilizer – UAN and RNF have limited history Questionable ability to access market in industry troughs – TNH has not attempted to access the

market since IPO – units may trade with higher peaks and

lower troughs - underwriters wary to issue at perceived peak and issuer reluctant to issue at perceived trough

33

Pros and Cons of Traditional Distribution Policy

Pros Cons IDRs Lower IPO yield Multitude of comps/history Ability to access market across industry/market volatility High retail component (longer term holders)

Need to manage to steady cash flow – coverage, hedging or long term

contracts might be costly or unwieldy and lower total return

– lower cash distribution to Sponsor (at least initially)

Coverage in IPO forecast – IPO yield is not on fully distributed

basis Subordination of a portion of the Sponsor’s interest Low institutional interest – IPO sizes constrained – low post-IPO trading volume

34

Variable MLP Unit Performance

• Rentech Nitrogen Partners LP

Variable MLP Unit Performance

• Northern Tier Energy LP

Variable MLP Unit Performance

• Alon USA Partners LP

Variable MLP Unit Performance

• CVR Partners LP

Variable MLPs – Expanding the MLP Asset Classes • Beginning in 2011, variable MLPs have opened up new (or

expanded existing) asset classes to MLP investment • Fertilizer • Refining/Petrochemicals • Oilfield Services • E&P • Marketing • Storage

• What is on the horizon? • Expansion of MLP IPO and M&A activity within categories above • Look out for more PLRs on new activities and asset classes or

new twists on existing ones – variable MLPs are driving much of the recent PLR activity

39

• The shale gas boom is resulting in huge investments in industries and facilities that use natural gas as a primary feedstock (petrochemicals, ammonia fertilizer, methanol) and driving a shift in power generation from coal to natural gas

• Example – Sasol’s recently announced $11-14 billion gas-to-liquids complex in Louisiana

• “At the news conference on Monday, Gov. Bobby Jindal said the Sasol project, which also includes a separate $5 billion ethane cracker to produce plastics and solvents, would be the largest manufacturing project in the history of Louisiana and one of the largest ever in the United States. “The global financial markets will be watching,” he said.”

Source: New York Times December 3, 2012

Continuing Impact of the Unconventional Resource Boom

40

• Shale gas boom: • Really good for MLPs tied to industries that use natural gas

or NGLs as a feedstock (fertilizer, petrochemicals) • Good for MLPs focused on transporting cheap natural gas

to higher-priced markets (LNG liquefaction) • Good for MLPs with assets dependent on wet gas

production (E&P, G&P) • Not as good for MLPs with assets dependent on dry gas

production (E&P, gathering and transportation) • Bad for coal MLPs

Continuing Impact of the Unconventional Resource Boom

41

Continuing Impact of the Unconventional Resource Boom • The shale oil boom has been very profitable for refiners with

access to WTI-priced crude oil • Good for refinery and refinery logistics MLPs • Good for crude and refined products transportation MLPs • Good for wholesale refined product distribution MLPs

• But this “second golden age” of refining may begin to wane once Brent/WTI differentials begin to narrow as the mid-continent crude transportation infrastructure build-out catches up

• Refiners looking to expand midstream investment to mitigate refining margin risk (Tesoro, Marathon, P66)

• Let’s take a closer look at the assets and activities that have been the focus of recent MLP activity (both variable and traditional MLPs)

42

Nitrogen Fertilizer MLPs

• Recent transactions: • CVR Partners (IPO Date: 4/7/11)

• Produces nitrogen fertilizer from petroleum coke

• Rentech Nitrogen Partners (IPO Date: 11/9/11) • Produces nitrogen fertilizer from natural gas

• Market precedent:

• Terra Nitrogen Company (IPO Date: 12/4/91) • Arcadian Partners (IPO Date: 4/1/92)

• Qualifying income: • “Fertilizer” is treated as a natural resource • Legislative history

• Refining natural resources includes “production of fertilizer” • Fertilizer includes “plant nutrients such as sulphur,

phosphate, potash and nitrogen that are used for the production of crops and phosphate-based livestock feed”

43

Crude Refinery MLPs

• Recent/Pending transactions:

– Northern Tier Energy (IPO Date: 7/31/12) – Alon USA Partners (IPO Date: [ /12]) – CVR Refining (in registration)

• Market precedent: – Calumet Specialty Products (IPO Date: 1/31/06) – Pride Companies (IPO Date: 3/1/90) – El Paso Refinery (IPO Date: 10/1/89) – Huntway Partners (IPO Date: 11/1/88) – Borden Chemicals and Plastics (IPO Date: 11/1/87)

44

Non-Crude Refining & Processing MLPs

• Recent transactions: • PetroLogistics (IPO Date: 5/9/12)

• Refines propane into propylene • SunCoke Energy Partners (in registration)

• Processes metallurgical coal into metallurgical coke

• Also see acquisition of Geismar ethane cracker by WPZ

• Qualifying income:

• More broad than crude oil refining • Legislative history focuses on crude oil and

natural gas, but excludes plastics or similar petroleum derivatives

45

NGL Processing

• WMB sale of Geismar olefin plant to WPZ in November 2012.

• Shifting WPZ commodity price exposure from ethane to ethylene in light of weakening NGL market and stronger olefin market – direct result of shale gas boom and current market dynamics.

• PLR 201241004 - X will acquire an olefin plant that processes ethane and propane (“NGLs”) into olefins through a gas fired cracking process to decrease the size of the NGL molecules by removing hydrogen atoms. Olefins are produced as a byproduct and sold to third parties for use as feedstocks in the production of chemical derivatives. X also intends to acquire and operate olefin storage facilities and pipelines to transport olefins. X will then provide olefin storage and transportation services to third parties.

• Answer - processing NGLs into olefins and marketing, transporting, and storing olefins will constitute qualifying income

46

Wholesale Distribution

• Recent transactions: • Global Partners (IPO Date: 9/4/05) • Northern Tier Energy (IPO Date: 7/31/12) • Susser Petroleum Partners (IPO Date: 9/25/12) • Lehigh Gas Partners (IPO Date: 10/30/12) • Sprague Resources (in registration) • Maxum Energy Logistics Partners (in registration) • Traditional MLPs – common units, subordinated units, IDRs, but

potentially needing modifications around “earn” test for subordination

• Market precedent: • FFP Partners (IPO Date: 5/21/87) – owned and operated retail

convenience stores and other retail outlets

47

Wholesale Distribution (cont’d)

• Qualifying income: • Marketing of natural Resources

• Wholesale supply of gasoline and other fuels generates qualifying income • Includes wholesale supply of gasoline to related party, independent

dealers, or lessee dealers • No end user sales at the retail level

• Legislative history excludes only retail sales • Prior IRS ruling position appears to treat all end-users as retail

(purchasers who do not resell, refine or further process) • Rents from real property

• Leasing of retail gas stations generally constitutes qualifying income

• Related party rents are not qualifying income (sale/leaseback to sponsor doesn’t work)

48

Frac Sand MLPs

• Recent transaction:

• Hi-Crush Partners (IPO Date: 8/21/12) • Traditional MLP with IDRs and subordinated units • Long-term take-or-pay contracts; substantial reserves

• Market precedent (mining): • Alliance Resource (IPO Date: 8/20/99) • Rhino Resource (IPO Date: 10/5/10) • Oxford Resource (IPO Date: 7/19/10) • Foresight Energy (In registration – last filing 4/12)

49

The C-Corp MLP

• LinnCo (LNCO) $1.27 billion IPO – October 11, 2012 • Yield at IPO pricing 7.78% • Delaware LLC that has elected to be treated as a corporation for U.S. federal

income tax purposes • Sole purpose is to own LINN units • LNCO is required to own one LINN unit for each of its outstanding shares • When LINN makes distributions on the units, LNCO will pay a dividend on its

shares of the cash the Company receives in respect of its LINN units, net of reserves for income taxes payable by the Company

• LNCO expects to pay $2.84 annually, compared to LINE currently paying $2.90 on an annualized basis

• Allows LINN to expand its shareholder base through the creation of a 1099 security (Precedent: KMR and EEQ)

• Largest U.S. E&P IPO ever; third-largest U.S. energy IPO ever (behind Conoco and Kinder Morgan Inc.)

50

The C-Corp MLP

51

Public GP Holdcos – Making a comeback?

• GP holding companies (sometimes referred to as “GP MLPs” if they are structured as partnerships) are publicly traded companies whose primary or sole assets consist of ownership interests in an underlying MLP: • Incentive distribution rights (“IDRs”) • General partner interest (typically 2%) • Common units

• Gives investors the opportunity to invest alongside the sponsor/management and benefit from the IDR economics directly.

52

Public GP Holdcos – Making a comeback?

• IDR economics are very favorable to the IDR holder, and allow the GP holdco to leverage the MLP growth in two ways:

• Growth in distributions of the underlying MLP • Growth in the number of MLP units outstanding (IDRs are never

diluted, and get the same percentage of distributions on the additional MLP units)

• As a result, GP Holdcos typically trade at a significantly lower yield than their MLPs

• But IDRs are also a drag on the long term growth potential of the MLP

• MLP must payments on the IDRs must be factored in the cost of capital when evaluating any potential projects funded by MLP equity

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Public GP Holdcos – Making a comeback?

• GP Holdcos reached the height of their popularity in 2006, with eight GP Holdco IPOs that year.

• Of the 11 “original” GP Holdcos that went public from 2004 through 2006, only five remain.

• Beginning in 2008, six GP Holdcos were acquired by their

MLPs in exchange for common units (or were otherwise taken private) and the IDRs were eliminated.

• Financial crisis in 2008 – MLP growth slowed • Energy asset divestitures and intense competition among MLPs –

lower cost of capital gives ability to bid higher

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Public GP Holdcos – Making a comeback?

• This trend continued until late 2010, when the first GP Holdco IPO since 2006 occurred (TRGP)

• Targa Resoures Corp. (TRGP) – 2010 IPO • Kinder Morgan, Inc. (KMI)– 2011 IPO • Western Gas Equity Partners, LP (WGP) – 2012 IPO

• Today, there are six “pure play” GP Holdcos in existence that own only IDRs and other MLP interests and no operating assets.

• KMI and ETE recently completed mergers (EPB and SUN, respectively) that changed them from pure play into operating companies that also own IDRs.

• WMB is moving in the other direction by selling/spinning off its operating assets

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Public GP Holdcos – Making a comeback?

• What is driving the potential comeback of GP Holdcos? • Strong and growing overall MLP market since the lows of

2009 • Extremely compelling IDR economics • Relative scarcity of GP Holdco investment opportunities for

public since 2011 • Sponsors seeking to monetize a portion of their IDRs in a

high demand market • As these trends continue into 2013, expect to see more

GP Holdco IPOs come to market.

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Conclusion

Questions?

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