The document discusses master limited partnerships (MLPs) and compares them to sausage making and laws. Some key points: 1) MLPs involve a complex assembly process like sausage making, with defects that can be hard to spot, but they provide needed energy infrastructure services and yield attractive returns. 2) MLPs have significantly outperformed other asset classes in recent decades, but high valuations mean lower future returns are likely. There is also risk from rising interest rates and falling energy prices. 3) General partners of MLPs receive incentive distribution rights that pay them an increasing share of cash flows as the MLP grows, which can dilute returns for limited partners but reward the general partners.

1. Inside the MLP Factory
Igor Greenwald
The Wealth Summit
May 2014

2. Do You Like Sausage?

3. I know I do; let me count the ways:
• Grilled, with onions
• Smoked with sauerkraut
• On a stick, fried in pancake batter
(Not really, but someone out there does.)

4. What does sausage have to do
with master limited partnerships?
Only this:
The end result is much more appealing than the preparation process

5. Why the bad rap for sausage factories?
“If you like laws and sausages,
You should never watch
either one being made.”
─ Otto von Bismarck, maybe
Another thing The Iron Chancellor
probably didn‟t say:
“If you like pithy quotes, don‟t
worry too much about attribution.”
Blame this man:

6. How are MLPs like laws and sausages?
Complex process
Assembled by specialists
Defects hard to spot
Fill a need for the public
Producers can profit by fooling consumers

7. The insinuation: If only you knew
“The $500 billion master-limited-partnership
sector is the sausage maker of the investment
world. Buyers love the yields ─ now averaging
about 6% ─ but many know little about how the
yields are generated. And Kinder Morgan, the
country's largest energy-infrastructure company,
may be the biggest sausage maker of them all.”
“Kinder Morgan: Trouble in the Pipelines?”
Barron’s, Feb. 22, 2014

8. And yet, here‟s what we know:
• Sausage is tasty
• Laws keep anarchy at bay
• MLPs have been the best
investment so far in this century

9. Deal of the Century

10. Source: Pension Consulting Alliance

11. Source: Pension Consulting Alliance

12. Source: Pension Consulting Alliance

13. Source: Pension Consulting Alliance

14. How Fresh Is That Sausage?
• Past performance does not predict future
• Outperformance won‟t last forever
• Risk of reversion rises over time
• The role of sentiment in market cycles

15. Reality Check
Source: William Blair

16. The People’s Choice
 Predictable tax-deferred income
 Exempt from corporate income tax
 Long-term contracts, regulated tariffs
 Yield above bonds, REITs, utilities
 Growth industry amid US shale boom
 Great long-term track record

17. No Contest
Source: Alerian

18. Drill, Baby, Drill
Source: US Energy Information Administration
Projected US energy production

19. Moveable Feast
Source: RBN Energy
Government shale forecasts keep missing low

20. Good Times, Not So Bad Times
Five Best Years
2009: 76%
2000: 46%
2003: 45%
2001: 44%
2010: 36%
Selected Alerian MLP Index annual returns since 1996
Five Worst Years
2008: -37%
1999: -8%
2002: -3%
1998: -3%
2012: 5% Sources: Alerian, Hinds Howard

21. The Price of Success

24. MLP Bulls Come Lately
New investment vehicles by year of launch

25. Drilling for Cheap Capital
Source: Hinds Howard

26. C-Corps ♥ Selling MLPs
Recent Spinoffs:
 Phillips 66 Partners (PSXP) from Phillips 66 (PSX) – top „13 MLP IPO
 Valero Energy Partners (VLP) from Valero Energy (VLO)
 Western Refining Logistics (WNRL) from Western Refining (WNR)
 EnLink Midstream Partners (ENLK) from Devon (DVN) and Crosstex (XTXI)
 Enable Midstream (ENBL) from CenterPoint (CNP) and OGE Energy (OGE)
More In Store:
 Dominion Midstream LNG MLP from Dominion (D)
 Antero Resources Midstream MLP from Antero Resources (AR)
 LNG tanker MLP from GasLog (GLOG)
 Offshore drilling rig MLP from Transocean (RIG)
 LNG processing MLP from Energy Transfer Equity (ETE)

27. Devon‟s Sweet Deal

28. • Devon valued (still!) at less than 5x EV/EBITDA
• Deal valued auxiliary midstream assets at 11x EBITDA
• Devon‟s contribution to MLP valued at $4.8 billion
• Market has since repriced to more than $7 billion, or 16x
EBITDA
• MLP trading at three times Devon‟s cash flow multiple
MLP Alchemy

29. PSX vs. PSXP
PSX
EV = $49.3B
EBITDA = $3.4B
EV/EBITDA = 14.5
The high cost of the extra “P”
PSXP
EV = $3.5B
EBITDA = $67.7M
EV/EBITDA = 51.7
• PSX owns 72% of PSXP LP units plus 2% GP interest
• Investors paying more than triple for PSXP over PSX
• Fast distribution growth is nice, but at 1.6% yield, not fast enough
• PSXP up 93% in 9 months since IPO, 48% year-to-date
• Troubling faith in perpetual growth

30. A Different Yardstick

31. Bonds Have More Fun
• Fixed income in fourth decade of bull market
• Government bonds don‟t have business risk
• On plus side, bond coupons don‟t grow like MLP payouts
• If rates rise, MLP yields could follow via capital losses
Why comparisons with credit yields may prove misleading

32. What‟s Wrong
With This Picture?
 Anchoring bias assumes starting
price is the right one
 No guarantee distribution growth
builds partnership value
 No guarantee yield is justified by
business prospects
 Many MLPs are beyond reproach
and have very bright prospects, but
the exceptions to this rule can be
very costly

33. The MLP Profits Philosophy
 We recommend investments, not tax shelters
 We do so based on long-term fundamentals, not yield
 We‟re bullish on many strong MLPs and GPs
 But we‟re also not afraid to sell and criticize
 Or to admit mistakes and change course

34. Strong Performance Record
• Last year’s picks returned nearly 40% annualized by year-end
• Portfolio comfortably beat MLP benchmark as well as S&P 500
Timely buys:
Energy Transfer Equity (ETE) +66% since 6/7/13
EQT Midstream Partners (EQM) +64% since 8/12/13
Sunoco Logistics Partners (SXL) +42% since 8/12/13
Targa Resources (TRGP) +35% since 11/15/13
Timely sells:
Eagle Rock Partners (EROC) -49% since 5/29/13
Boardwalk Pipeline Partners (BWP) -42% since 11/15/13
Timely re-buys:
Boardwalk Pipeline Partners (BWP) +15% since 4/4/14

35. Key MLP Profits Growth Themes
• LPG Exports (EPD, TRGP, NGLS)
• LNG Exports (ETE, WMB, KMI, TGP)
• Oil, Fuels Surge (MMP, SXL, BPL, OILT)
• Northeast Energy (EQM, WMB, MWE)
• GPs With IDRs (ETE, KMI, WMB, AHGP)
• Propane Logistics (APU, NGL)

36. A Margin Of Safety
Top 3 Best Buys (EPD, MMP, SXL)
averaged excess coverage of more than
50% of distributions at end of 2013
Excess coverage can fund capital projects in
place of equity/debt issuance, aiding returns
Top 3 up 16% YTD, 38% in year before yield

37. Let’s Talk Incentives
Incentive Distribution Rights (IDRs) pay general partner (GP) growing
percentage of MLP cash flow
Typical: 15% of payout above X, 25% above Y, 50% above Z, per unit
Stated rationale: incents GP to grow MLP
Unmentioned: dilutes rewards of growth for limited partners
Perverse: Top hedge funders charge 2/20 fees; many GPs 2/50
Means GP can profit even from losing investment; fund with debt then
collect almost 50% of notional cash flow boost. A sweet deal.
Or fund with equity and collect extra IDRs on new units long before any
return. Also why some GPs turn their MLPs into serial acquirers
IDRs can have huge effect on returns and are main reason we tend to
favor GPs over affiliated MLPs

38. Follow the Bouncing IDRs

39. In Summary
 MLPs in sweet spot of domestic energy boom
 Lofty valuations suggest increased risk
 Downside from higher rates, lower energy prices
 Returns can be tasty, but insiders eat first
 We watch sausage get made so you can enjoy

40. Thank You.