Master Limited Partnerships: A Primer

1. Master Limited Partnerships: A Primer

2. A master limited partnership (MLP) is typicallya Delaware limited partnership with limited partner interests (called “common units” or “units”) tradedon a securities exchange (NYSE, Nasdaq, or AMEX), just like shares of common stock of a corporation Some MLPs have been structured as limited liability companies (LLCs) rather than partnerships; they have the same tax advantages as a limited partnership but are structured differently What is an MLP?

3. Typical MLP structure (basic) limited partner interest (common and subordinated units) Parent/Sponsor Entity Public Unitholders general partner interest and incentive distribution rights 100% limited partner interest (common units) MLP (Delaware LP) General Partner (often a Delaware LLC) 100% Operating Subsidiaries (usually LPs or LLCs) Assets

4. What entities are involved in an MLP? • Parent/sponsor • Forms the MLP; contributes the MLP’s intitial assets • Owns the general partner • General partner (GP) • Manages operations and activities of the MLP • Typically wholly-owned by ultimate parent or sponsor of MLP • The officers and directors of the GP typically have same authority and functions as the officers and directors of a publicly traded corporation

5. What entities are involved in an MLP? • MLP • The issuer of common units to public investors • Typically a holding company with no direct operating assets or employees • Employees providing services to the MLP are generally employed by the GP, the parent/sponsor or an affiliate • OLP • Typically a subsidiary of the MLP that owns the operating assets

6. What entities are involved in an MLP? • Public limited partners (LPs or Unitholders) • Public investors who provide capital to the MLP in exchange for common units • No vote on management of the MLP or election of GP board of directors other than on extraordinary matters • Receive cash distributions on their common units similar to corporate dividends • Historically, public limited partners were “retail investors” (i.e., individual investors) but now certain “institutional investors” such as mutual funds can invest subject to certain restrictions

7. How are MLPs formed? • The parent/sponsor forms a limited partnership and contributes assets to the MLP in exchange for a limited partner interest (common units and subordinated units) • Subordinated units are junior to the common units; for a certain period of time (the subordination period), they receive distributions only after the common units have been paid in full • Subordinated units serve as a form of guarantee to the public unitholders • The parent/sponsor also forms, owns and controls the GP (and therefore controls the MLP) • The GP retains a general partner interest (typically 1-2%) in the MLP • The MLP then “goes public” by conducting an IPO and issuing common units to the public

8. Typical MLP structure (basic) limited partner interest (common and subordinated units) Parent/Sponsor Entity Public Unitholders general partner interest and incentive distribution rights 100% limited partner interest (common units) MLP (Delaware LP) General Partner (often a Delaware LLC) 100% Operating Subsidiaries (usually LPs or LLCs) Assets

9. What are incentive distribution rights? • IDRs • Typically held by the GP or parent/sponsor • Sometimes referred to as the “high splits” • Entitle the holder to an increasing percentage of cash distributions as certain thresholds are met • Incentivize the GP to grow the MLP and manage the business efficiently

10. What are cash distributions? • Similar to corporate dividends paid to stockholders • Each quarter the MLP is required (by contract, not by law) to distribute to unitholders 100% of its available cash • “Available cash” is typically defined as cash flow minus discretionary reserves • The MLP “promises” to pay a minimum quarterly distribution each quarter, but the goal is to continually increase the quarterly distribution

11. What qualifies as an MLP? • Under the federal tax code, an MLP must receive at least 90% of its gross income from qualifying sources • Qualifying income includes “income and gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil or products thereof), or the marketing of any mineral or natural resource (including fertilizer, geothermal energy, and timber).” • MLPs are most commonly involved in natural resource extraction, processing and transportation and related businesses • The qualifying income definition was recently amended to include income derived from the storage and transportation of ethanol and biodiesel • Qualifying natural resource activities generally include: • Exploration • Development • Mining or production • Processing • Refining • Gathering and transportation • Marketing • Storage

12. What are the primary advantagesof the MLP structure? • Special tax treatment under the tax code – An MLP is not required to pay corporate income tax (no “double taxation”) • More cash is available for distribution than is available in a traditional corporation • Provides an MLP with a competitive advantage versus a traditional corporation • The cash distributions to investors are generally75-90% tax deferred until the sale of the common unit. • Cash distributions can (and typically do) exceed taxable income

13. What are the disadvantages of the MLP structure? • Structural complexity • An MLP must be vigilant about its qualifying income • MLPs cannot accumulate cash like a corporation and, therefore, are dependent on external sources of capital to fund growth • Lack of liquidity (obstacle to institutional ownership) • Some businesses that generate qualifying income are better suited to the MLP structure than others • Fee-based businesses (e.g., pipelines) provide a more dependable revenue stream than do businesses that have commodity price risk, production risk, or both

14. BGH GP Holdings, LLC(61.88% LimitedPartnership Interest) Public Unitholders(37.10% LimitedPartner Interest) Senior Management(1.01% LimitedPartner Interest) 100% Non-economicGeneral Partner Interestand 0.01%Limited Partner Interest MainLine Management LLC Buckeye GP Holdings L.P.NYSE Symbol: BGH(BGH) Employee Stock Ownership Plan 100% Stock Interest 100% Member Interest 100% Stock Interest MainLine GP, Inc. Buckeye GP LLC(the General Partner) Buckeye Pipe Line Services Company(Services Company) 99.999% Limited Partner Interest .001% General Partner Interest 0.5% General Partner Interest 4.8% Limited Partner Interest MainLine L.P. Buckeye Partners, L.P.NYSE Symbol: BPL(the Partnership) Public Unitholders 94.7% Limited Partner Interest 1% General Partner Interest 99% Limited Partner Interest 100% Member Interest Partnership SubsidiariesBuckeye Pipe Line Company, L.P.Laurel Pipe Line Company, L.P.Everglades Pipe Line Company, L.P.Buckeye Pipe Line Holdings, L.P. Limited Liability Company SubsidiariesWood River Pipe Lines LLCBuckeye Pipe Line Transportation LLCBuckeye NGL Pipe Lines LLCBuckeye Gas Storage LLCBuckeye Energy Holdings LLC Structural complexity!

15. History of MLPs • First MLP – Apache “roll up” of private partnerships (1981) • First “drop down” MLP – Transco Exploration Partners, Ltd. (July 1983) • Followed by many (>25) other oil and gas MLPs over the next five years, none of which survived – depleting asset base and short-lived reserves; commodity price risk (no hedges available); and high leverage • Timber MLPs followed – IP Timberlands, Ltd; Rayonnier Timberlands, Ltd; Mauna Loa Macadamia Nut Partners, Ltd; Plum Creek Timber • Other industries began to pursue MLPs – (amusement parks, fertilizer, barges, chemicals, snowmobiles, even professional sports (Boston Celtics)) • 1986 federal tax law changes – limited the tax benefits of the MLP structure to MLPs generating qualifying income • Pipeline MLPs followed – Buckeye Partners, L.P. (1986); Santa Fe Pacific Pipeline Partners (1988); Kaneb Pipeline Partners (1989); TEPPCO Products Pipelines (1990); Lakehead Pipeline Partners (n/k/a Enbride) (1991); Enron Liquids Pipelines (n/k/a Kinder Morgan) (1992); Leviathan Gas Pipeline Partners (1993); Northern Border Partners (1993) • Rebirth of E&P MLPs– Linn Energy, LLC (January 2006)

16. How has the MLP universe grown? • Since 1995, the MLP universe has grown substantially • In December 1995, the Alerian MLP Index, a widely-used MLP price index, had 12 constituent MLPs with an aggregate market capitalization of approximately $5.6 billion • In December 2008, the 50 most prominent MLPs making up the Alerian MLP Index had an aggregate market capitalization of approximately $80 billion ($126 billion as of December 2007) • The MLP market has attracted attention from all the major Wall Street investment banks and an increasing number of institutional investors

17. MLPs ― At the crossroads? • The Alerian MLP Index was down more than 36% in 2008 on a total return basis (vs. 37% for the S&P 500) • Low correlation to broader market? • Several MLPs have cut their distributions and/or dramatically reduced their capital expenditure budgets • Many MLPs are trading at yields in excess of 20% (and some have yields in excess of 50%) • An MLP’s “yield” is its current quarterly distribution (annualized) divided by the current trading price of its common units • As investors perceive that there is more risk associated with an MLP, they drive the price of its units down, which causes its yield to increase • During 2007, yields in the 6-8% range were more common

18. Return to retail / partial retreat by institutional investors Consolidation in the MLP sector MLPs can grow without having to access the capital markets by using common units to acquire other MLPs Some smaller MLPs are trading at very low valuations and their limited partners might be happy to take the units of a bigger, stronger MLP in exchange Increasing emphasis on MLPs with significant drop-down potential or well capitalized sponsors MLPs ― What does the future hold?