MLPs & Their Role In The Energy Infrastructure

Tom Long, Group CFO

Energy Transfer Equity

May 19, 2016

MASTER LIMITED PARTNERSHIPS 101

2

I. What is an MLP?

II. History of MLPs

III. How MLPs Work

IV. Investing in MLPs

What is an MLP?

3

An MLP is a publically traded partnership

MLPs operate active businesses, primarily energy related

Their operations are managed by a general partner (GP)

MLPs are traded on a public exchange (NYSE, NASDAQ, etc.) or over the counter

market

Shares in an MLP are called “units,” and shareholders are called “unitholders”

MLPs typically pay out the bulk of their operating cash flows on a quarterly basis in the

form of distributions (not dividends) to their limited and general partners

MLPs are relatively high-yielding securities whose primary objective is to grow cash

distributions over time

A key benefit of the MLP relates to pass-through taxation

History of MLPs

44

The first MLP was launched in 1981: Apache Oil Company

Other oil and gas MLPs soon followed and were joined by real estate MLPs

Their purpose was to raise capital from smaller investors by offering them a partnership

investment in an affordable and liquid security

In the 1980’s, MLPs began to be used in other industries: hotels and motels, restaurants,

cable TV, investment advisors, even an amusement park and the Boston Celtics

Section 7704 of the tax code outlines and limits partnership tax treatment to PTPs earning

>90 percent of their income from specific sources referred to as “qualifying income”

Through the passage of the Renewable Energy and Job Creation Act in September 2008,

qualifying income was expanded to include the transportation and storage of renewable

fleets

Practically speaking, the vast majority of MLPs operate what could be considered

infrastructure energy assets

History of MLPs

5Excludes cross-ownership

Source: Alerian – As of March 31, 2016

In 1995, there were 16 MLPs with a total market cap of $7 billion. As of March 31, 2016, there were 118

energy MLPs totaling $304 billion in market cap

MLPS By Group

6

2009 MLPs By Group 2016 MLPs By Group

Today’s MLPs primarily focus on energy-related industries and natural resources

Energy & Natural Resources

85%

Investment/Financial11%

Real Estate (Incl Mortg Securities) 2%

Other2%

Energy & Natural Resources

37%

Real Estate 31%

Other32%

Source: Citi – As of May 2016

Midstream MLPs10%

E&P (Upstream)21%

Marine Transportation1%

Natural Resources (Other)

5%

Real Estate Properties30%

Investment/Financial6%

Hotels, Motels, Restaurants

12%

Other15%

MLPs By Industry

7

Midstream MLPs44%

E&P (Upstream)9%

Downstream7%

Oilfield Svcs 2%

Propane & Refined Fuel 3%

Marine Transportation7%

Natural Resources (Coal)

5%

Natural Resources (Other)

8%

Real Estate Properties2%

Investment/Financial11%

Other2%

2009 MLPs By Industry 2016 MLPs By Industry

The majority of MLPs today engage in oil and gas midstream activities – gathering, processing, natural

gas compression, transportation and storage

Source: Citi – As of May 2016

MLP Structure and Distribution Mechanics

8

Sponsor

General

Partner

The MLP

Operating Subsidiaries

100%Ownership Interest

98% LP Interest

2% General Partner100% IDRs

100%

Lenders

Public

Common Units

GP Manages Partnership

Generally has ~2% ownership stake in

partnership

May have incentive distribution rights (IDRs)

An MLP is governed by a partnership agreement, which lays out the ownership rights and

obligations of both the limited partners (LPs) and the general partners (GPs)

One or More General Partners (GPs)

Thousands of Limited Partners (LPs)

Illustrative MLP Structure

Source: Citi – As of May 2016

Unitholders = LPs holding publicly-traded units

Provide capital

Have no role in partnership’s operations or

management

Receive quarterly cash distributions

Typical IDR Structure

LevelDistribution

Target

Share of Incremental Cash Flows

GP LPs

One Up to 115% 2% 98%

TwoOver 115%

Up to 125%15% 85%

ThreeOver 125%

Up to 150%25% 75%

FourIn excess of

150%50% 50%

How MLPs Work: IDRs

9

The Parent / Sponsor benefits from a GP promote

While the elimination of corporate level taxes is the driving factor behind value creation from contributing

assets to an MLP, characteristics of the MLP structure provide additional benefit to the parent / sponsor

The forced payout of all excess cash generated by the partnership imposes a higher level of discipline on

management

The tax-advantaged structure creates a more competitive acquisition vehicle for accretive growth, which

benefits the parent / sponsor through its general partner interest via the incentive distribution structure

As a result, the parent / sponsor captures an increasing percentage of the overall cash flow of the MLP

__ __ __ __ __1. Assumes GP splits as outlined to the left.

10%

20%

30%

40%

50%

$0 $200 $400 $600 $800 $1,000

% of Total DCF to GP

Hypothetical Impact of the GP Promote (1)

Total DCF

Characteristic MLP LLC Corporation

Taxable at entity level No No Yes

Tax items flow through Yes Yes No

Tax deferral on distributions Yes Yes No

Tax reporting K-1 K-1 Div-1099

General Partner Yes No No

IDRs Yes No No

Investor Voting Rights No Yes Yes

How MLPs Work: Taxation

10

Corporations are taxed at the corporate level and again at the shareholder level. MLPs are

taxed only once at the unitholder level and generally a portion of MLP cash distributions are

tax deferred

How MLPs Work: Taxation

11

Tax savings have motivated the rise of the $300+ billion market cap MLP asset class, driving a

meaningful amount of economic activity

According to the United States Joint Committee on Taxation, tax savings to investors as a result

of MLP-qualifying income is expected to continue increasing for the foreseeable future

0.1 0.1 0.1 0.1 0.1

1.1 1.2 1.2 1.2 1.2

$1.2 $1.3 $1.3 $1.3 $1.3

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2015E 2016E 2017E 2018E 2019E

Ta

x S

avin

gs, U

S$ in

bill

ions

E&M Other Energy-Related

Source: Citi as of May 2016

Annual US Income Tax Savings to Individual MLP Investors ($bn)

How MLPs Work: Qualifying Income

12

Qualifying Income Test: 90% or more of gross income from qualifying

activities

Failure of qualifying income test results in corporate treatment

• Non-qualifying income can be included in the MLP by using a C-corp

blocker

• Given the consequences if failed, MLPs maintain their non-qualifying

income assets well below the 10% limit

Lower-level entities, not the MLP, own the assets and conduct operations

Qualifying Income Test Overview

(1)

(1)

What Assets Are Best Suited For MLPs?

13

High Low

Key characteristics of “qualifying” assets

“Qualifying” assets that involve the extraction, transportation, storage, fractionation or distribution of a

natural resource make ideal candidates for an MLP

Numerous successful MLPs have been completed for a variety of industries

1. Depending on hedging profile.

Strong Cash Flow

ModestCapEx

SuitableVolatility

Growth Prospects

Asset Life

LNG

Terminal

FERC

Pipeline

Gathering

Pipeline

Long-

Lived E&P

Product

Pipelines /

Product

Terminals

Gas

Processing

/ NGL

Fractionation

Coal

Royalty

Coal

MiningFertilizer Timber Propane

Maritime

TransportRefining

MLP Tax Treatment Example

Year 1: 1,000 units purchased @ $20

- Investor receives cash distributions of

$3.00/unit

- Investor pays tax on net taxable income:

$2.00 of income and $1.50 of depreciation

($0.50/unit)

Basis Is: $20,000

-$3,000

+$500

Adj.

Basis:$17,500

Year 2: All units sold @ $25

- Gain per unit: $25 - $17.50 = $7.50

$25,000

$7,500

- Depreciation recaptured-taxed at ordinary

income rates

- Taxed at capital gain rates

$1,500

$6,000

Investing MLPs: Taxation

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The tax-deferred portion of the cash

distributions are recaptured at ordinary

income tax rate when an MLP investment is

sold

Any gain above the unitholders’ original cost

basis is taxed as a capital gain

The difference between the reduced cost

basis and the original cost basis is taxed as

ordinary income-this is called “recapture”

Taxation of MLP Distributions

Important Note

MLP Tax Treatment Example

A portion of cash distributions received from

MLPs are a return of capital and tax-deferred

Your basis is lowered each year by the

amount of the distributions minus your share

of net partnership income

The idea is that all income you receive from

the partnership is taxed once and only once –

either in the year you receive it, or when you

sell your units

Summary

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• Benefits

MLP can illuminate / highlight value of business(es) inside an integrated corporate structure

Creates a platform for growth through third party acquisitions and organic development

through access to low cost equity capital

Monetization at premium valuation (driven by yield rather than multiple)

Parent / Sponsor retains substantial upside potential through retained LP units and General

Partner “promote”

Parent / Sponsor retains operating control

Structures are available to mitigate and/or defer up-front taxable gain associated with IPO

proceeds

Flexible structuring vehicle

Establishes a “ready” buyer of additional assets owned by parent / sponsor

Benefits