HOUSTON BOSTON curbstonegroup.com MLP 101: INTRODUCTION TO MASTER LIMITED PARTNERSHIPS

HOUSTON BOSTON curbstonegroup.com MLP 101: INTRODUCTION TO MASTER LIMITED PARTNERSHIPS

What are MLPs? MLPs are an investment in real energy infrastructure assets of national importance MLPs are publicly traded partnerships (limited partnerships or LLCs taxed as partnerships) that are traded on U.S. securities exchanges (NYSE or NASDAQ) Regulated by the SEC (Must file 10-Ks, 10-Qs like any publicly traded company) As partnerships, MLPs do not pay corporate income tax All tax items, including deductions like depreciation, flow through to partners (unitholders), who pay tax on the net income MLP sector has market cap approximately $200 billion and includes more than 70 public companies MLPs produce regular, quarterly income for investors through tax-deferred cash distributions Average distribution yield past 10 years for MLPs: 7.4% 2

Origins The first MLP was launched in 1981: Apache Oil Company Purpose was to raise capital from retail investors by offering them a partnership vehicle in an affordable and liquid security Other oil and gas MLPs and real estate MLPs followed There were more than 100 MLPs by the mid-1980s Other industries began to list as MLPs, including restaurants, farms, amusement parks, cable TV providers, even the Boston Celtics Congress began to worry about widespread disincorporation leading to large loss of tax revenue In 1987, congress passed legislation to define and limit the scope of MLPs Created section 7704 of the Tax Code, limiting MLP structure to companies earning > 90% of income from specific sources Existing MLPs were grandfathered and able to continue as MLPs, most are gone today, but a few still exist Source: National Association of Publicly Traded Partnerships. 3

What qualifies? All MLPs are governed by section 7704 of the tax code, enacted in 1987 Section 7704 states that publicly traded partnerships will be taxed as corporations unless they at least 90% of their income is one of the specific types listed in that section 90% of an MLPs income must come from: Income and capital gains from natural resources activities (most MLPs today); Interest, dividends, and capital gains; Rental income and capital gains from real estate; Income from commodity investments; or Capital gains from sale of assets used to generate the above types of income Qualifying natural resources activities include: Exploration, development & production Mining Gathering and processing Refining Compression Transportation (pipeline, ship, truck) Storage, marketing, distribution Butnotretailsales(nogasstations) Qualifying natural resources: Oil, gas and petroleum products Coal and other minerals Timber Any other resource that is depletable under section 613 of the federal tax code Industrial source carbon dioxide (added in 2008) Ethanol, biodiesel, and other alternative fuels transportation and storage only (added in 2008) 4

MLPs over Time Late 1980s and 1990s Most original oil and gas MLPs disappeared, unable to maintain distributions as oil prices dropped Most original real estate MLPs disappeared during the real estate slump or converted to REITs Integrated energy companies began selling or spinning off midstream assets to MLPs to pursue more profitable investments One of these integrated companies was Enron, which sold some of its midstream assets into an MLP in 1992 That MLP (originally called Enron Liquids) grew to be the second largest ($30bn market cap) in existence: Kinder Morgan Energy Partners During the 2000s: Number of MLPs in oil and gas midstream businesses steadily increased Several MLPs that provide marine transportation of petroleum products and in petroleum distribution went public Beginning in 2006, E&P MLPs made a comeback, touting longer reserve lives and active hedging In 2005 and 2006, 10 MLP general partners went public as MLPs themselves Number of Energy MLPs in Each Subsector Source: National Association of Publicly Traded Partnerships. Sector 1990 2009 Oil & Gas Midstream 27.0% 54.5% Oil & Gas Exploration & Production 56.8% 14.3% Oil & Gas Marine Transportation 2.7% 10.4% Propane & Heating Oil 11.7% Coal 6.5% Other Minerals, Timber 13.5% 2.6% Total 100.0% 100.0% 5

MLPs Energy Infrastructure The majority of MLPs provide physical services and infrastructure to energy industry through ownership of midstream energy assets that sit in middle of the natural gas and crude oil value chains Natural Gas Value Chain Natural Gas Natural Gas Transmission and Storage Natural Gas End Users Exploration & Production (well head) Gathering and Compression Gas Processing Plants Mixed NGLs Fractionation Facilities Multiple NGLs Products (ethane, propane, normal butane, isobutane, natural gasoline) NGL Storage Facilities NGL Transmission Natural Gas Liquids End Users Crude Oil Value Chain Exploration & Production (well head) Crude Oil Gathering Crude Oil Transportation and Storage Refining Facilities Refined Products Transportation and Storage Refined Products End Users 6

MLP Structure Typical MLP MLPs Generally Have: General Partner: Manages the partnership Has a 2% ownership stake in the MLP Has incentive distribution rights (IDRs) Thousands of Limited Partners (LPs) / Unitholders Unitholders are limited partners who hold the publicly-traded units Provide capital Have no role in the management or operations Receive quarterly cash distributions Source: National Association of Publicly Traded Partnerships. 7

MLP Structure Typical MLP Basic (with private or corporate parent) With Publicly-Traded G.P. Corporate Parent or Sponsors L.P. Interest Corporate Parent or Sponsors Public Unitholders (Limited Partners) General Partner Public Unitholders (Limited Partners) Public General Partner 2% GP Interest and IDRs L.P. Interest 2% GP Interest and IDRs Public Unitholders (Limited Partners) L.P. Interest Public MLP Public MLP 100% Owned 100% Owned Operating Subsidiaries Operating Subsidiaries 8

MLP Structure Incentive Distributions Rights Incentive distribution rights (IDRs) are a share of cash distributions paid to GP As quarterly distributions to LPs increase, target distribution levels are reached, IDRs to GP increase with each marginal increase in distributions Rationale: IDRs provide management of the GP with incentive to grow the business 9

MLP Structure Issuer Perspective Benefits of organizing as an MLP: Pass-through tax structure (no double taxation) means lower cost of capital, providing advantage in acquiring and maintaining assets Can own rate-regulated assets and still give investors an attractive rate of return Public trading allows PTP to raise funds from broader range of investors than non-traded partnership Operating as an MLP rather than a corporation gives management greater control Lack of entity-level tax leaves more cash to distribute to investors Disadvantages of organizing as an MLP: Qualifying income restrictions limited to certain types of businesses Tax complexity and related administrative expense Few retained earnings must raise debt or equity for expansion or acquisition Disincentives for investors, including K-1 reporting and state taxes Limited investor pool because of tax laws applying to institutional investors Source: National Association of Publicly Traded Partnerships. 10

MLP Structure Investor Perspective Advantages of MLPs for Investors Yield: Source of regular income payments / Yield Growth: Combination of income and growth, which provides some inflation protection Tax Benefits: Favorable tax treatment allowing for deferral of taxes Great for estate planning: as with other securities, basis in MLP units is stepped up to fair market value at death, making the tax deferrals permanent Liquidity: Benefits of partnership investing with ability to sell anytime Uncrowded: There are restrictions for mutual fund participation, both regulatory and administrative, that limit institutional participation in MLPs Note on Tax Exempts MLPs are generally not recommended for tax-exempt accounts (including retirement accounts) If the tax-exempt account s share of partnership income is over $1,000 (income allocation, not distribution), additional income is subject to unrelated business taxable income (UBTI) UBTI is imposed on tax-exempt entities that earn income from a business not related to the purpose of their tax exemption UBTI has scared away many non-profit organizations, further limiting MLP institutional investor base Source: National Association of Publicly Traded Partnerships. 11

MLPs vs. Corporations Being an MLP unitholder is different from being a corporate stockholder Taxation is usually more investor-friendly As limited partners, unitholders typically do not have voting rights Key Differences Between Corporations and MLPs Corporations MLPs Security Type: Shares Units Income Stream: Dividends Distributions Taxation Level: Corp. and Investor Level Investor Level Only Tax Reporting: 1099 K-1 Tax Treatment: 15% QDI Rate 80-90% Tax Deferral Investor Base: Dominated by institutions Lack of large institutional participation General Partner: No Yes Voting Rights: Yes Limited 12

MLP Tax Information MLPs provide investors with annual tax deferrals that are recouped upon sale MLPs are not taxable entities, incur no federal income tax liability MLPs issue a Schedule K-1 each year that provides annual accounting of each partner s share of an MLP s income, gain, loss, and deductions from preceding taxable year Distributions from MLPs are typically 70%-90% tax deferred As result of high non-cash items such as depreciation, distributions are typically in excess of allocated net income Distributions reduce investor s basis and taxable income increases the basis Upon liquidation of MLP Ordinary income tax will be recaptured on the difference between adjusted cost basis and original cost basis Any additional gain beyond the original cost basis is taxed as capital gains Example: investor buys a unit of an MLP that yields 10% for $20.00 Distributions assumed to be 80% tax deferred Investor sells the MLP at the end of one year for $21.00 Income Taxes Cost Basis At Time of Sale Distributions Received: $2.00 Price Paid for Unit: $20.00 Sale Price $21.00 Allocation of Net Income: $0.40 Distributions Received: $2.00 Total Gain: $2.60 Taxes Paid (35% of $0.40): ($0.14) Allocation of Net Income: $0.40 Capital Gains (15%): $1.00 ($0.15) Net Cash Received by Investor: $1.86 Adjsuted Cost Basis: $18.40 Ordinary Income (35%): $1.60 ($0.56) After Tax Proceeds from Sale: $20.29 13

Energy MLPs: Long-Term Outperformance Since 2000, MLP Index has produced total returns of 542% (17.4% annually) compared with -14% for the S&P 500 Monthly Indexed Total Return: 1/1/2000 through 6/30/2010 (1) 650% 550% S&P 500 MLP Index MLPs: +542% 450% 350% 250% 150% 50% S&P 500: -14% (50)% 1. Past performance is not indicative of future results. MLP Index refers to the Alerian MLP Index, a composite of the 50 largest energy MLPs calculated by S&P. 14

Energy MLPs: Track Record of Consistent Distribution Growth MLPs have shown consistent distribution growth, providing stable, growing cash flows to investors As an example, if you bought an average MLP like BPL (which grew distributions at an annual rate of 5.5% per year since 2000), you would have earned distributions totaling 122% of your initial investment, coupled with 132% price appreciation While MLPs have grown distributions, professional management is more important than ever Distinction between growth MLPs and MLPs that are at risk of distribution cuts is increasingly subtle Market is starting to pay more attention to risk profiles of individual MLPs and price accordingly MLP Index: Distribution vs. Price Chart (12/29/95 6/30/10) 350% 325% 300% 275% 250% 225% 200% 175% 150% 125% 100% 75% MLP Prices Distributions Source: Bloomberg. 15

Contact Information Partners Mike Catalano mike@curbstonegroup.com Hinds Howard hinds@curbstonegroup.com Ryan Krueger ryan@curbstonegroup.com Offices Houston Office 7700 San Felipe, Suite 461 Houston, TX 77063 Boston Office 1050 Winter St., Suite 1000 Waltham, MA 02451 (781) 333-4449 16

Disclaimers Historical performance results for investment indices and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Each of these indices is a Total Return index, calculated as though all cash flows from the asset are reinvested. Any information contained herein or referenced regarding the past performance of a security is not indicative of future results and there can be no assurance the mentioned security will achieve similar returns in the future or avoid losses. Depending on the particulars of any specific individual's account, actually investment returns may vary materially from the returns stated in this presentation. This information is provided for informational purposes only and does not constitute an offer to sell or a solicitation to purchase any security. This investment evaluation is directed only to the client and/or interested party for whom this evaluation was created. The underlying data has been obtained from sources considered to be reliable: the information is believed to be accurate, but there is no assurance that it is so. This evaluation is for informational purposes only and is not intended to be an offer, solicitation or recommendation with respect to the purchase or sale of any security, or a recommendation of the services supplied by any money management organization. Past performance is not an indication, nor a guarantee of future results. 17