Tulsa MLP Conference November 2015
What is an MLP? MLP = master limited partnership For this presentation, MLPs may also be referred to as publicly traded partnerships ( PTPs ) Limited partnership (or limited liability company) that has interests that are traded on a public exchange (e.g., NYSE, NASDAQ, etc.) or an over-the-counter ( OTC ) market Most PTPs are taxed as corporations under 7704 Special exception for partnerships that meet the qualifying income exception If 90% of a PTP s gross income is qualifying income, then the PTP will not pay any corporate level tax Page 1
MLPs Representative Transaction Steps Step 1: Sponsors form a new master limited partnership (MLP) / PTP Step 2: Sponsors transfer entire interest in OpCo to MLP in exchange for a general partner interest ( GP Interest ), subordinated limited partner interests ( Subordinated Units ), limited partner units ( Common Units ), and Incentive Distribution Rights ( IDRs ) in MLP Sponsors 2 100% interest in OpCo 1 Cash GP Interest + Subordinated + Common Units + IDRs PTP/MLP Public 3 Common Units Step 3: MLP issues Common Units to the Public in an initial public offering OpCo Page 2
What is an MLP? Typical classes of interests Common units Publicly traded Senior to other classes of units Subordinated units Issued to sponsor in exchange for property contributions and to financial investors in some private placements Subordinated right to distributions for period of years Convertible over time as performance measures are achieved General partner interests 1 or 2 percent sharing ratio Generally pari passu with common units Incentive distribution rights Issued to sponsor Share in up to 50% of partnership profits Resets and other strategies Page 3
Why use an MLP? Sponsor s economic perspective Tax-efficient access to capital for publicly traded corporate sponsor New source of capital for growing business Preferred stock equivalent Gain-deferral opportunities Unlock value of selected assets Incentive distribution rights Costs of formation and operations Financial reporting and SEC compliance Investor tax reporting Governance Page 4
Why use an MLP? Investor s economic perspective Typical investor profile Attractive to individuals Barriers for tax-exempt and foreign entities Income stream MLP yield compares favorably to alternative investments Tax shield Growth potential Particularly publicly traded general partner/idr interests Quarantined passive income and losses Administrative Complexities (and related costs) K-1 vs. 1099 State tax compliance Page 5
Qualification as an MLP 90% or more of gross income from qualifying sources Qualifying income includes: Interest Dividends Real property rents and gains Capital gains Certain income from the exploration, development, extraction, processing, refining, marketing or transportation of certain minerals and natural resources Page 6
Qualifying income natural resource summary Downstream Upstream Refining & Processing: Qualified Income! Exploration & Production: Qualified Income! Transportation to Refineries: Qualified Income! Refined Product Transportation, Storage & Distribution: Pipeline: Qualified Income! Other Mode: Less Certain Retail Sales: Not Qualified Income Page 7
MLPs Proposed Regulations Issued on Qualifying Income Proposed regulations (REG-132634-14) provide guidance on publicly traded partnerships activities regarding minerals or natural resources Qualifying income includes income generated from exclusive list of section 7704(d)(1)(E) activities, which represent different stages between extraction and delivery to market, and intrinsic activities List of activities may be expanded Guidance on transportation and storage of fuel under Section 6426 and biodiesel fuel under Section 40A is not provided Query extent to which PLRs will be granted in this area once regulations are finalized Page 8
Formation considerations & opportunities Tax deferral Typical use of offering proceeds Distributed to sponsor Repayment of sponsor debt Reimbursement of pre-formation expenditures Retained to fund acquisitions and future growth Page 9
Formation considerations & opportunities Tax deferral disguised sale considerations Disguised sale rules act to recharacterize all or part of the contribution to the partnership as a sale to the partnership Transfers to a partnership from a partner and related transfers from the partnership to the partner occurring within the two-year period are presumed to be disguised sales Exceptions to disguised sale for: Operating cash flow distributions Exception to the disguised sale rule for reimbursement of pre-formation capital expenditures Contribution of encumbered property may also cause a disguised sale No disguised sale if distribution is a debt-financed distribution Assets Property Contributor JV Partnership interest and cash (or other property) Issue: should the contribution and distribution transactions be integrated and treated as a disguised sale of property to the partnership? Page 10
Formation considerations & opportunities Tax deferral disguised sale considerations (cont.) Exceptions to disguised sale for: Guaranteed payments Preferred returns Operating cash flow distributions Regulations set forth the equation for determining operating cash flow Exception to the disguised sale rule for reimbursement of pre-formation capital expenditures CAPEX incurred within two years prior to the contribution of the property shields what would otherwise be treated as disguised sale Limited to 20% of the FMV of contributed property Differing views on what contributed property means in this context 20% limit not to apply when FMV does not exceed 120% of the properties adjusted basis to the partner See Treas. Reg. 1.707-4 Page 11
Formation considerations & opportunities Tax deferral disguised sale considerations (cont.) Contributions of encumbered property Four categories of qualified liabilities Liability incurred more than two years prior to formation of partnership and encumbered the transferred property throughout the two-year period, Liability incurred less than two years prior to formation of partnership but that was not incurred in anticipation of the transfer and encumbered the transferred property since it was incurred, Liability allocable to capital expenditures with respect to transferred property, or Liability incurred in the ordinary course of business of the transferred property if all of the assets material to the continuation of such trade or business are transferred to partnership Where the liability is "qualified" and the contribution is not otherwise treated as a sale, the partnership's assumption of or taking subject to the liability is not treated as part of a sale Page 12
Formation considerations & opportunities Tax deferral debt financed distributions If a partnership incurs a liability and distributes the proceeds to a contributing partner within 90 days of incurring the liability, then only the portion of the distribution that exceeds the partner s share of the liability is subject to the disguised sale rules A partner s share of the liability is determined under the disguised sale rules rather than purely under 752 See Treas. Reg. 1.707-5(b) Page 13
MLPs Fungibility Considerations Partners don t know from whom they are buying units in the market Tax consequences per unit must be identical no matter whose unit is purchased Unit fungibility is generally maintained via Section 704(c) remedial allocations and Section 743(b) adjustments Ability to have fungible units is challenged some scenarios Page 14
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