Recent Trends in MLP Transactions 8 th Annual Texas Journal of Oil, Gas and Energy Law Symposium

1. Recent Trends in MLP Transactions8th Annual Texas Journal of Oil, Gas and Energy Law Symposium Brett Braden January 18, 2013

2. Presentation Overview Part I – Getting (Back) Up to Speed – MLP 101 Part II – Current Trends and Factors Driving the MLP Marketplace • Evolution of the MLP Marketplace • Expanding the MLP Structure - Variable Distribution MLPs • Expanding the MLP Asset Classes - Continuing Impact of the Unconventional Resource Boom • Expanding the MLP Investor Base - “C-Corp” MLPs • Expanding MLP Investment Opportunities - GP Holdcos Poised to Make a Comeback? 2

3. Getting (Back) Up to Speed – MLP 101

4. Let’s Review 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 4

5. 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 5

6. What is an MLP? • An 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. • At least 90% of the MLP’s income (gross revenue or gross margin, depending on the nature of the business) must be “qualifying income” under IRC Section 7704 • Cash distributions are typically fully or partially shielded — i.e., the cash distribution amount typically exceeds the unitholder’s allocated taxable income • Discussed in IPO prospectus as “Ratio of Taxable Income to Distributions” 6

7. 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. 7

8. 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 production and sale 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. 8

9. Typical MLP Structure • 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) • Creates a public currency to finance growth • Can be an exit vehicle for a financial sponsor • Can be a vehicle to diversify strategic sponsor’s business into growing areas (e.g., refinery company creating a midstream MLP) and enhance shareholder value 9

10. Typical MLP Structure • General Partner (“GP”) • Manages and controls the MLP • Wholly owned by the sponsor, who appoints all directors on GP board • Holds incentive distribution rights (“IDRs”) • Legal employer of the MLP’s employees (for tax reasons) • 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; LLCs are now more common • Typically the issuer of debt within partnership group 10

11. Typical MLP Structure Public Sponsor L/SUB GP L/Common Units G/IDRs LP 100% OLLC Lenders = ownership = debt G = general partner interest L = limited partner interest IDRs = incentive distribution rights SUB = subordinated units Assets 11

12. MLP Governance • Directors of general partner typically appointed by sponsor (including independent directors); no public election of directors; no annual meetings; no annual proxy statement • 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. 12

13. MLP Governance • Section 17-1101(d) of DRULPA allows for the modification, restriction or elimination of fiduciary duties in the MLP partnership agreement • Freedom of contract; different than corporations • Gives flexibility to deal with conflicts of interest • Cannot eliminate the implied contractual covenant of good faith and fair dealing 13

14. 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 occurs when a distribution cut is announced • MLPs have historically managed cash flow stability through: (1) distribution coverage, (2) long-term, fee-based contracts and (3) hedging. 14

15. Minimum Quarterly Distribution (MQD) • 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 • Sponsor often holds “subordinated units” with subordinated cash distribution rights for a designated time period • Subordinated units receive no distributions until common units receive MQD • Typically 50/50 split between subordinated units/common units • Current standard: MLP must earn and pay MQD for each of three consecutive, non-overlapping four quarter periods • Early conversion: 100% conversion if MLP earns and pays 150% of MQD for four consecutive quarters 15

16. Incentive Distribution Rights (IDRs) • Incentive Distribution Rights • Definition: the right to receive an increasing share of cash distributions as target levels for limited partners are achieved • Tiers (example) • 98%/2% • 85%/15% • 75%/25% • 50%/50% • Rationale • Incentive for general partner to grow the MLP’s business • Compensation for subordination 16

17. 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 enumerated categories? 17

18. 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

19. 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

20. Current Trends and Factors Driving the MLP Marketplace

21. Current Trends and Factors • Evolution of the MLP Marketplace • Expanding the MLP Structure - Variable Distribution MLPs • Expanding the MLP Asset Classes – Continuing Impact of the Unconventional Resource Boom • Expanding the MLP Investor Base - The “C-Corp MLP” • Expanding MLP Investment Opportunities - GP Holdcos Making a Comeback? 21

22. MLP Market Capitalization Source: FactSet Research Systems Inc. as of January 11, 2013 22

23. MLP Initial Public Offerings: 1987-2012 TOO† PVG NMM† HHGP CPLP† BGH QELP NSH EPB VNR EOT ENP FGP CMLP CRO BKEP SEP CQP NGLS XTEX DEP USS MMLP LGCY CPNO NRP STON WES PPX TCLP UAN EEP EPD SFL PDE LEV APU HEP PSE MWE HWY TPP KMP TNH ARLP OKS SGU PAA KSP WMZ SXL Primary Industry at IPO: Exploration and Production Fertilizer Refining Coal OSP† NRGM Propane Midstream AHD MEMP WGP AHGP ALDW MCEP Wholesale Distribution Timber MGG DKL RRMS General Partner/Holding Co. Shipping ETE SXE RNF Other EPE CEP MPLX LRE NRGP ATN LGP OILT MAR DPM EROC KMI † SDLP TRGP † BWP EXLP PET XTXI† AMID SMLP QRE CAL SPH WPZ BBEP SUSP GSJK RNO VAL ETP MMP GLP EVEP HCLP NGL OXF FFP MRP EPR NPL NS TLP RGNC NKA TLLP NTI KPP GEL NRGY TGP CLMT WGP CHKM EQM GMLP† BCU PCL CNO TIMBZ APL PVR HLND LINE PNG PDH UAN 12 02 03 04 11 07 88 89 90 92 93 94 95 96 97 98 99 00 01 05 06 08 09 10 87 91 Years † Corporate IPO 23

24. MLPs Currently Traded WES TCLP EPD APU EEP PSE PAA SGU ARLP TNH TOO† Primary Industry at IPO: Exploration and Production Fertilizer Refining Coal NSH NRGM Propane Midstream NMM† AHD MEMP WGP AHGP CPLP† MCEP Wholesale Distribution Timber ALDW DKL RRMS General Partner/Holding Co. Shipping ETE EPB SXE RNF Other VNR CEP MPLX LRE LGP OILT CMLP DPM EROC KMI † SDLP TRGP † XTEX BWP EXLP BKEP XTXI† AMID SMLP QRE MMLP SEP SPH WPZ BBEP SUSP GSJK RNO ETP MMP GLP EVEP NRP CQP CPNO HCLP NGL OXF NGLS STON NS TLP RGNC NKA TLLP NTI GEL NRGY TGP CLMT MWE HEP FGP CHKM EQM GMLP† KMP OKS SXL LGCY APL PVR LINE PNG PDH UAN 12 02 03 04 11 07 88 89 90 92 93 94 95 96 97 98 99 00 01 05 06 08 09 10 87 91 Years † Corporate IPO 24

25. Recent Market Backdrop 2012 • 2012 was a record year for MLP equity offerings, with approximately 80 offerings for total proceeds of approximately $22 billion (almost 9% of all equity issuances in 2012) • 13 MLP IPOs priced for total proceeds of $3.7 billion • MPLX LP priced its IPO at $22, representing a 4.8% yield, the lowest ever MLP yield at IPO (average MLP yield is currently about 6.3%) • Western Gas Equity Partners LP priced their GP IPO at 10% above the midpoint of the range at a 3.0% yield • Three variable MLP IPOs priced in 2012 (PetroLogistics, Northern Tier, Alon) • Approx. 75 reported M&A transactions with total proceeds of $50 billion (over 100 reported transactions in 2001 with total proceeds of $72 billion) 2013 • The total return Alerian MLP index is up 7.4% year-to-date • Three MLP IPOs have launched, with expected total proceeds of approx. $970 million (Suncoke, CVR Refining, USA Compression) 25

26. Variable Distribution MLPs – Expanding the MLP Structure

27. Variable Distribution MLPs 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 27

28. Variable Distribution MLPs • 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 • 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 • Although there are over 90 MLPs currently traded on U.S. stock exchanges, there are only a very limited number of “variable” MLPs • As the name implies, variable MLPs are characterized by cyclical businesses with volatile 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 maintaining steady distribution growth (e.g., no coverage ratio) 28

29. Comparative Cash Distribution History $194.59 * $99.14 * $68.41 * * - Cumulativesplit-adjusted distributions IPO through Q3 2012 29

30. Characteristics of Variable MLPs • The following table sets forth the certain important characteristics of “traditional” MLPs and “variable” MLPs 30

31. Characteristics of Variable MLPs 31

32. Characteristics of Variable MLPs 32

33. Characteristics of Variable MLPs 33

34. Pros and Cons of Variable Distribution Structure 34 34

35. Pros and Cons of Traditional Distribution Policy 35

36. Variable MLPs – Expanding the MLP Structure to New Asset Classes • Variable MLPs have opened up new (or expanded existing) asset classes for MLP investment • Fertilizer • Refining/Petrochemicals • Marketing • Oilfield Services? • E&P? • What is on the horizon? • Potential expansion of MLP IPO and M&A activity within categories above • Look 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 36

37. 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 fuel distribution network • 19% yield at IPO (on a forecast basis), with a high institutional allocation • PetroLogistics LP (IPO Date: 5/9/12) • Processes 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 37

38. Variable MLP Unit Performance • Rentech Nitrogen Partners LP 38

39. Variable MLP Unit Performance • Northern Tier Energy LP 39

40. Variable MLP Unit Performance • Alon USA Partners LP 40

41. Variable MLP Unit Performance • CVR Partners LP 41

42. Continuing Impact of the Unconventional Resource Boom

43. Continuing Impact of the Unconventional Resource Boom • Impacts of the shale boom: • huge investment in infrastructure to develop and serve new areas of oil and gas production • huge investment in industries and facilities that use natural gas as a primary feedstock (petrochemicals, ammonia fertilizer, methanol) • 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 43

44. Continuing Impact of the Unconventional Resource Boom • Shale gas boom: • Really good for MLPs tied to industries that use natural gas or NGLs as a feedstock (e.g., fertilizer, petrochemicals) • Good for MLPs with assets focused on liquids-rich gas production (e.g., E&P, G&P) • Good for MLPs focused on transporting cheap natural gas to higher-priced markets (e.g., LNG liquefaction) • Not necessarily as good for MLPs with assets focused solely on dry gas production (e.g., E&P, gathering and transportation) • Not so good for coal MLPs 44

45. 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 (at least for those with favorable crude pricing access) 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 in part to mitigate refining margin risk (e.g., Tesoro, Marathon, Delek) • 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) 45

46. Nitrogen Fertilizer • 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” 46

47. Crude Refining • Recent/Pending transactions: • CVR Refining (in registration) • Alon USA Partners (IPO Date:11/26/12) • Northern Tier Energy (IPO Date: 7/31/12) • 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) 47

48. Non-Crude Refining & Processing • Recent transactions: • PetroLogistics (IPO Date: 5/9/12) • Processes propane into propylene • SunCoke Energy Partners (in registration) • Processes metallurgical coal into metallurgical coke • Qualifying income: • More broad than crude oil refining • Legislative history focuses on crude oil and natural gas, but excludes plastics or similar petroleum derivatives 48

49. NGL Processing • Recent transaction: • Williams Partners LP (November 2012) • $2.2 billion acquisition of Geismarolefin plant from Williams Companies • 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 Request - 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 49

50. Wholesale Distribution • Recent transactions: • Delek Logistics Partners (IPO Date: 11/07/12) • Lehigh Gas Partners (IPO Date: 10/30/12) • Susser Petroleum Partners (IPO Date: 9/25/12) • Northern Tier Energy (IPO Date: 7/31/12) • Global Partners (IPO Date: 9/4/05) • Traditional MLPs – common units, subordinated units, IDRs • Market precedent: • FFP Partners (IPO Date: 5/21/87) – owned and operated retail convenience stores and other retail outlets 50