A publication of
WACHOVIA CAPITAL MARKETS, LLC
MLP Primer -- Third Edition
Everything You Wanted To Know About MLPs, But Were Afraid To Ask • Primer Third Edition – A Framework For Investment. This report is an update to our second master limited partnership (MLP) primer. In this third edition, we have added new information based on questions and feedback received from investors over the past three years. Included in this edition are updated data about MLPs’ relative performance, the growth of MLPs as an asset class, and developments within the MLP sector (e.g., legislation, fund flow).
July 14, 2008
Master Limited Partnerships Michael Blum, Senior Analyst
( 2 1 2 ) 2 1 4 - 5 0 3 7 / mi c h a e l . b l u m@ w a c h o v i a . c o m
Sharon Lui, CPA, Senior Analyst
(212) 214-5035 / firstname.lastname@example.org
Eric Shiu, Associate Analyst
(212) 214-5038 / email@example.com
Praneeth Satish, Associate Analyst
(212) 214-8056 / firstname.lastname@example.org
Ronald Londe, Senior Analyst
(314) 955-3829 / email@example.com
Jeffrey Morgan, CFA, Associate Analyst
(314) 955-6558 / firstname.lastname@example.org
Please see page 93 for rating definitions, important disclosures and required analyst certifications.
WCM does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report and investors should consider this report as only a single factor in making their investment decision.
MLP Primer -- Third Edition
WACHOVIA CAPITAL MARKETS, LLC EQUITY RESEARCH DEPARTMENT
Table Of Contents
I. II. Introduction -- A Framework For Investment........................................................................................................................ 5 Why Own MLPs? .................................................................................................................................................................. 5 A. Above-Average Performance And Good Portfolio Diversification......................................................................... 5 B. MLP Value Proposition -- Tax-Efficient Income Plus Growth ............................................................................... 8 C. MLPs Have Been Defensive During Economic Slowdowns................................................................................. 10 D. MLPs Are An Effective Hedge Against Inflation.................................................................................................. 11 E. Demographics........................................................................................................................................................ 11 F. MLPs Are An Emerging Asset Class .................................................................................................................... 12 Who Can Own MLPs? ......................................................................................................................................................... 16 A. Mutual Funds Can Own MLPs
… But Most Do Not ............................................................................................. 17 B. Challenges Remain For Mutual Fund Ownership Of MLPs.................................................................................. 17 C. Tax Exempt Vehicles Should Not Own MLPs ...................................................................................................... 17 How To Build An Effective MLP Portfolio......................................................................................................................... 18 Types Of Assets In Energy MLPs And Associated Commodity Exposure ......................................................................... 18 A. A Brief Review Of The Evolution Of The MLP Sector ........................................................................................ 18 B. Asset Overview ..................................................................................................................................................... 19 Midstream (e.g., Pipelines, Storage, And Gathering And Processing)............................................................. 20 Propane............................................................................................................................................................. 26 Shipping ........................................................................................................................................................... 27 Coal .................................................................................................................................................................. 29 Upstream .......................................................................................................................................................... 29 Refining............................................................................................................................................................ 30 Compression..................................................................................................................................................... 31 Liquefied Natural Gas (LNG) .......................................................................................................................... 31 General Partner Interest.................................................................................................................................... 31 The Basics............................................................................................................................................................................ 32 A. What Is An MLP?.................................................................................................................................................. 32 B. Why Create An MLP? ........................................................................................................................................... 33 C. What Qualifies As An MLP?................................................................................................................................. 33 D. What Are The Advantages Of The MLP Structure?.............................................................................................. 33 E. How Many MLPs Are There? ............................................................................................................................... 33 F. What Is The K-1 Statement?.................................................................................................................................. 34 G. What Is The Difference Between A LLC And MLP? ........................................................................................... 34 H. Are MLPs The Same As U.S. Royalty Trusts And Canadian Royalty Trusts? ..................................................... 34 I. What Are I-Shares? ............................................................................................................................................... 35 Drivers Of Performance....................................................................................................................................................... 37 A. Distribution Growth............................................................................................................................................... 37 B. Access To Capital.................................................................................................................................................. 37 C. Interest Rates ......................................................................................................................................................... 38 D. Commodity Prices ................................................................................................................................................. 39 Key Terms ........................................................................................................................................................................... 39 A. What Are Distributions.......................................................................................................................................... 39 B. What Are Incentive Distribution Rights (IDR)...................................................................................................... 39 C. Calculating Incentive Distribution Payments ........................................................................................................ 40 D. Available Cash Flow Versus Distributable Cash Flow.......................................................................................... 41 E. Are MLPs Required To Pay Out “All” Their Cash Flow? .................................................................................... 41 F. What Is The Distribution Coverage Ratio And Why Is It So Important? .............................................................. 41 G. What Is The Difference Between Maintenance Capex And Growth Capex? ........................................................ 42
................................................................................................................................................................................................ 46 FERC Includes MLPs In Determining Pipeline ROEs......................... Price-To-Distributable Cash Flow ..................................... Foreign Investor Ownership ............................
XI......................... Enterprise Value-To-Adjusted EBITDA ........................................ MLPs Continue To Enjoy Good Access To The Capital ....................... 42 A.... The Mechanics Of A Purchase And Sale Of MLP Units And The Tax Consequences .................................................................. 57 H................................................................................. 66 C......................................................................................................................... 65 Valuation Of MLPs......................................................... 67 Risks ................ 44 D................................................. MLPs Are Employing Creative Financing Solutions To Fund Growth..................... Shift In Supply Resources Is Driving Energy Infrastructure Investment.............................. Can MLPs Be Held In An IRA? ........................ 64 L............................................................................... 42 B.............................................................................................................. Emergence Of “Dropdown” MLPs..................................................................................... 46 Canadian Royalty Trusts Tax Status Expected To Change In 2011................................................................................................................ 60 I..................... Spread Versus The Ten-Year Treasury ........................ 67 F.................. 56 A Paradigm Shift In PIPE Dynamics ............................................................................. State and Local Taxes and State Filing Requirements..................... 46 What Is The NAPTP?......... 48 C................................................................... Current Tax and Legislative Issues............... Publicly Traded General Partners -...................... 47 MLPs Income Tax Allowance In Pipeline Ratemaking .......... 47 Sector Trends ........ Dramatic Growth Of MLPs .............................................................. 46 NAPTP Is Working To Ensure GPs Are Not Impacted By Carried Interest ........ 46 H.............................Master Limited Partnerships
WACHOVIA CAPITAL MARKETS.......................................................................................................................................................................... 66 B............................... 42 C.......................................................................... 46 G....... 46 What Is The Risk Of MLPs’ Losing Their Tax Advantaged Status...................................................................................................... 45 F................................ 71
X............................................................................ Who Pays Taxes?................................................................................................................................................................................ Two-Stage Distribution (Dividend) Discount Model ................................................... 66 E.................................................... Emergence Of MLP Indices ........................................................................................................................ Cost Of Capital Is Becoming A More Prominent Issue.......................................................... 66 D.................................................................................................................................................................................... LLC EQUITY RESEARCH DEPARTMENT
IX.... 57 Paid-In-Kind (PIK) Equity .................... Why? ............................................................ 57 GP Subsidies ........................................................................ 66 A......................................................................................Recognizing The Value Of The GP ..................................................................... 56 Hybrid Securities.............................................................................. What Is Maximum Potential Distribution (MPD)?............................................ Return Of Upstream MLPs.......... MLPs As An Estate Planning Tool.................... 69 Appendix............................ 45 E......................................................................................................... 58 Power Of The IDRs.................................................................................................................................................
............................ MLPs Have Been Successful In Making Acquisitions And Investing Organically...................... 51 E....................... 60 General Partners Are Held In Different Entities ...................................................................................
XII.................................................................................................................................................................................................................................................................................................................................... MLP Investor Base Is Changing................................. 48 A.................................................... 53 F........................................................................... Distribution Yield ....................................... 62 K.......................... 58 The Multiplier ....................................................... 56 PIPE Mania ................ 61 J............................................ 61 What Should Be The Criteria To Invest Today? ............................................................................ 61 Upstream MLPs Are Faced With Unique Challenges And Risks ............................................................................................................................... 61 Upstream MLPs Failed In The 1980s................ What Are The Tax Advantages For The LP Unitholder (The Investor)? ..................................................... Financial Products Facilitate Participation In MLPs ...................................................................... 58 Not All GPs Are Created Equal ............................ XIII......................................................................................................................................................................................................................................................................................................................................................
Tax And Legislative Issues........................................ 54 G.............................................................................................................................................. 50 D....................................................................................................... 48 B.................................................................................................................................
we have added new sections detailing upstream MLPs. fund flow. pure-play publicly traded general partners. dropdown stories. LLC EQUITY RESEARCH DEPARTMENT
I. Therefore. During this time frame. we think it is important to answer the fundamental question of why should investors care about MLPs? The case for MLP ownership can be grouped into the following broad categories: (1) Performance and diversification. A. feel free to call us with any questions or feedback. MLP Total Returns Versus S&P 500
50% 40% Percent total return 30% 20% 10% 0% (10%) (20%) (30%) 1990 2000 Index performance 1600 1200 800 400 0 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07
S&P 500 TR Index +9.2%. During the past three years. Why Own MLPs?
While interest and ownership of MLPs has certainly increased since the publication of our last primer. Introduction -.8%
WCM MLP Index (TR)
S&P 500 Index (TR)
Over the past five years. Wachovia MLP Index generated an average total return of 6%.9% for the S&P 500) with lower risk (beta of 0.
II. In addition. versus 2. versus 12% for the S&P 500 REIT Index and 6% for the S&P 500 Index. We provide a reference guide to familiarize investors with the MLP investment. Above-Average Performance And Good Portfolio Diversification From 1998 to 2007. Figure 1.
. and (6) An emerging asset class. In this third edition. During the past three years (2005-08).3%
(3%) (14%) (10%) (5%) (9%) (12%) (22%) 8% 10% 1% 2% (0%) (7%) (15%) 39% 30% 27% 38% 33% 32% 23% 19% 29% 21% 17% 11% 5% 5% 16% 12% 5% 43% 42% 45% 24% 29% 27%
WCM MLP Index (TR)
S&P 500 Index (TR)
Wachovia MLP TR Index +15. before delving into the details. (4) An effective way to hedge inflation. (5) Demographics trends. MLPs have delivered above-average total returns (an average of 17.5% for the S&P 500.MLP Primer -.3%. and developments within the MLP sector related to legislation. financing. versus 5.Third Edition
WACHOVIA CAPITAL MARKETS. respectively. (3) A defensive investment. we suspect that relative to other asset classes. As always. MLPs have also outpaced the broader market and most income-oriented investments with an average total return of 13%. MLPs are still relatively under-owned.31). we have added new information to our “basics” section based on questions and feedback we have received from investors over the past few years. etc. versus 3% and 3%. the Wachovia MLP Index has generated an average total return of 6. MLPs outperformed the S&P 500 in seven out of ten years. (2) Attractive value proposition of tax-efficient current income plus growth = a sustainable low-double-digit total return.A Framework For Investment
This report provides an update to our previous MLP primer published in August 2005.
For further information and historical performance data from 1990 (downloadable). please visit www. September. May. which was introduced in December 2006.wachoviaresearch. To be eligible for the index. LLC. The Index composition is determined by Wachovia Capital Markets. Total Return Performance Versus Other Indices
30% Wachovia MLP TR Index S&P 500 (TR) / Real Estate Investment Trusts 15% % total return S&P 500 (TR) / Utilities S&P 500 (TR) Index 0% (7%) (15%) (6%) (3%) (15%) 5% 6% 3% 12% 3% 13% 12% 6% 18%
(30%) YTD 1-year 3-year 5-year
Performance As Measured By The Wachovia MLP Index We gauge energy master limited partnerships’ (MLP) performance using our Wachovia MLP Composite Index. and is also subdivided into 13 subsectors.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. with changes effective after the close of trading on the third Friday of March. For each review date. Real-time price quotes for the index are available on Bloomberg and Reuters under the symbol WMLP (and WMLPT for total return) and on FactSet Marquee under the symbol WML-CME. and that meet market capitalization and other requirements. and December.
. the company must be structured as a limited partnership or limited-liability company and have a market capitalization of greater than $200 million. The Wachovia MLP Composite Index currently consists of 73 energy MLPs. June. including 11 general partnerships (GP). The index is designed to give investors and industry participants the ability to track both price and total return performance for energy MLPs relative to the broader market.com. LLC EQUITY RESEARCH DEPARTMENT
Figure 2. the American Stock Exchange (AMEX) or NASDAQ. and November). All other securities that meet all eligibility criteria are added to the Index and all securities included in the Index that do not continue to meet the eligibility requirements are removed from the Index. Following a review. The Index comprises energy master limited partnerships that are listed on the New York Stock Exchange (NYSE). and the Index is independently calculated by Standard and Poor’s using a float-adjusted market capitalization methodology. August. all securities already included in the Index that continue to meet the eligibility criteria remain in the Index. securities are evaluated based on the close of trading on the last trading day (the evaluation date) of the month preceding the review (February. The Index is reviewed quarterly.
Historically. Coal MLP Index 3. changes in investor
. but not that strong. the movements in MLP prices have not been highly correlated with changes in the broader stock market. Propane MLP Index 6.07. Refined Products MLP Index 7.50 over the last one-year. The correlation between MLPs and the S&P 500 over the one. Natural Gas MLP Index i. Midstream MLP Index Oil & Gas A. Processing. Historical Wachovia MLP Index Performance By Subsector
Wachovia MLP Index WCM MLP Indices Performance Since 2005 WCM MLP Index 1. the correlation to the overall market is still less than one-half (see Figure 4). LLC
Portfolio Diversification MLPs exhibit low correlation to most asset classes and thus.43 and 0. 2007 Natural Gas Natural Gas Pipelines Gathering. on an absolute basis.Third Edition
WACHOVIA CAPITAL MARKETS. LLC EQUITY RESEARCH DEPARTMENT
Total Return 10% 20% 13% 5% (4%) 6% 11% 12% 11% 18% 10% 9% 10% (18%) 3%
Figure 3. Although the historical correlation to actual interest rate trends has been relatively low.MLP Primer -. commodity prices or other yield-oriented investments. Low correlation with the ten-year treasury.36 and only 0. We believe a moderate rise in interest rates should be manageable for MLPs as any increase in rates should be partially offset by the increase in distributions throughout the year. Oil & Gas MLP Index Coal 4. Crude Oil MLP Index Propane ii. While this is high relative to other asset classes. the correlation between the MLPs and the ten-year treasury yield was 0. GP Composite Index General Partnerships 2. Natural Gas Pipelines MLP Index B. Relationship with the S&P 500 has been fairly consistent. Although the correlation between MLPs and the ten-year treasury has increased over time. respectively. Petroleum MLP Index i. in our view.and five-year periods was 0. Over the past one. it is still relatively low. The low degree of association reflects the transformation of MLPs from primarily ‘income’ investments to ‘growth and income’ investments. interest rates. and five-year periods.and five year periods. Oilfield Service Index Midstream S&P 500 Index Price 4% 16% 7% (3%) (10%) (1%) 5% 6% 4% 12% 4% 2% 4% (22%) 1%
Note: The WCM Oilfield Service Index is as of June 18. provide good portfolio diversification. and NGLs Petroleum Refined Products Oil Field Services Crude Oil
Source: Standard & Poor's and Wachovia Capital Markets. in our view. Marine Transportation MLP Index 5. The correlation between MLPs and these variables has been fairly consistent and below 0. threeyear.40. Gathering & Processing MLP Index Marine Transportation ii. respectively.
Investors also benefit from lower risk.59 0. in our view. energy infrastructure to deliver natural gas. and visible distribution growth. Relationship with other yield-oriented investments also trending lower.00) (0. the correlation between MLPs and Moody’s Corporate Bond Index was only about (0.36 0.2% and have increased dividends at an annual growth rate of approximately 9.S.30 0.2%.24 0. overall. crude oil. MLPs can increase distributions paid to unitholders and increase their asset base via acquisitions and/or internal growth projects.40 Natural Gas 0. annually. are the most comparable energy securities relative to the MLPs.31 and 0.
. MLPs provide investors with current income. The influence of commodity price movements on MLPs is also relatively low.38 0.05) (0. in our view.36 0.07 Utilities 0.26 0.13 0. Bonds (0.41 0.43 0. respectively.31 0.12) 0.10.34 and 0. For the past year.40 REITs 0.14.36 0. Over the past five years. we believe it is generally low relative to other companies in the energy industry.33 0.12 0. with a median yield of 7.Tax-Efficient Income Plus Growth MLPs provide an attractive value proposition.01) (0.02 0.34 0.07)
B. MLP Value Proposition -.34 0. LLC EQUITY RESEARCH DEPARTMENT
psychology toward potential movements in interest rates (both the magnitude and timing) can affect the shortterm performance of MLPs. in our view. in our view. MLP Correlation With Other Asset Classes
Correlation Of MLPs With Other Asset Classes S&P 500 2005 2006 2007 2008 YTD Last year Last 3 years Last 5 years Source: FactSet 0.47 0. As the number of publicly traded MLPs has grown in recent years and MLPs have established a track record of distribution increases.01) (0.14 Crude Oil 0. Utility stocks. and MLPs and the S&P Utilities Index were 0. MLP distributions have increased at a median five-year compound annual growth rate (CAGR) of 8.40. we highlight the median yield of MLPs relative to other indices and the upward trend of MLP distribution growth over the past eight years.31 10 Yr Treas (0.42 0. with high current and tax-deferred income.42 0. Link to bonds is diminishing.21 0. the movement of MLP unit prices have become tied more closely to the equities market than the bond markets. respectively. The correlation between MLPs and REITs was 0.29 0.10 0. and a partially tax-deferred distribution.43 0.03 (0. In Figures 5 and 6.41 0. Utilities provide a median yield of about 3. Given median yields of 6-8% and a long-term sustainable distribution growth rate of 4-6%.16 0. with their regulated earnings stream and significant dividend yields. respectively. the correlation with crude oil and natural gas prices was 0. Over the past one and five years.31 0. all else being equal.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS.36 0.14) 0. as measured by beta.6% (2003-07). in our view.8%.21 and 0. Relatively weak correlation with commodity prices.21 0.43 0. respectively. Unlike bonds with fixed interest payments. over the past five years. Figure 4.42 0.19 0. For the next three years. and refined products to a growing domestic market.35 0.29 and 0.32 Corp. MLPs should be able to deliver low-double-digit total returns. Clearly though. on average. Although MLPs’ exposure to commodity price risk varies.07). energy infrastructure. the perception of commodity price risk can influence stock prices (over the short-term). respectively.02 0.42 0. The MLP value proposition is underpinned by the sector’s growing role in providing the backbone of U.32 over the past one and five years. the correlation with crude oil and natural gas prices was 0.S. Current income plus growth. we forecast distribution growth of 9% (10% including GPs) supported by a large slate of organic investments tied to the ongoing buildout of U.01) and (0.
LLC EQUITY RESEARCH DEPARTMENT
Figure 5. oilfield services. and utilities have exhibited comparably more volatility with an average beta of 0.0% 6% 6.58 to 1.6% 3.0% 4.0% 8.36. MLPs offer investors a tax-efficient means to invest in the energy sector.0% Wachovia MLP Index
Source: Bloomberg and FactSet
7.95.31 for the Wachovia MLP Index.14 and 0.32 to 1.0% 2000A MLP Distribution Growth 2001A 2002A 2003A 2004A 2005A 2006A 2007A 3% 5% 5% 5% 9% 10% 9%
Source: Partnership reports
Tax efficient.09. 1.0% Yield 4.0% 12. over the past five years (2004-2008). The tax-deferred portion of the distribution is not taxable until the unitholder sells the security.56 and 1.Third Edition
WACHOVIA CAPITAL MARKETS. The beta for the S&P 500 Utilities Index was between 0.
6. MLP Annual Distribution Growth (2000-07)
Annual Distribution Growth (Excl.0% 0.30 over the past five years. respectively.0% 6.3% S&P 500 Index
FTSE NAREIT All REIT Index
S&P 500 Utilities Index
Figure 6. Low risk. while the beta for the S&P 500 Oil & Gas Equipment & Services Index ranged from 0. MLPs have averaged a beta of just 0. Traditional energy companies such as those involved in exploration and production.0% 10.01. An investor will typically receive a tax shield equivalent to (in most cases) 80-90% of cash distributions received in a given year. During this time frame.2% 2. and 0. This compares with a range of 0.9% Dow Jones Industrial 30 2.31 over the past year and an average beta of 0. the beta for the S&P 500 Oil & Gas Exploration & Production Index ranged from 0. Wachovia MLP Index Yield Versus Other Indices
8.0% 2.75.0% 2.0% 0. GPs) (% 14.MLP Primer -. MLPs offer investors an alternative way to invest in energy with lower fundamental risk.
59 0.Energy) Source: Bloomberg.66 0.60 0.83 0. there were four periods during which GDP growth was 2% or less: Q1-Q4 1995.00
0. Over the past 15 years. the data do suggest that MLPs are defensive in nature given their relatively high yields and prospects for distribution growth. MLPs Have Been Defensive During Economic Slowdowns Our colleagues (Wachovia’s E&P energy research team) examined the performance of energy stocks and the energy subsector's performance during periods of slowing GDP growth.09 0.00 0.3% during all four periods (the S&P 500’s total return during these four periods was 12.98 0.20 0.01 0. Q4 2002 to Q3 2003. and Q2 2006 to Q1 2007. MLP (WCM Index Wachovia) Total Energy (S&P 500 .1 4
C.80 MLP Composite 1. there were just seven MLPs. periods during which the GDP was 2% or less were analyzed. a decline in GDP for two or more consecutive quarters).60
S&P 500 Oil & Gas Exploration & Production
S&P 500 Oil & Gas Equipment & Services S&P 500 Utilities
1 .1 10 .2% in 2007. The median distribution growth was 9.64 0.28 0. That year.56 0.25 0.33 0.78 0. Thus. We caution that these data do need to be viewed with a skeptic’s eye. there are currently 78 MLPs with a combined market cap of approximately $134 billion.61 0. FactSet. as the MLP sector has changed dramatically during the past 15 years.1 9 0.1 4 0.57 0. and Wachovia Economics Group
. Utilities (UTIL). in our view. Drillers (SPOILD).08 0.81 0.1 4
0.22 0.76 0.60 1.36 1 .34 0. MLPs have outperformed the market (S&P 500) in three of four periods of economic slowdown.. rather than just periods of true economic recession (i.68 0.47 0. Integrated (XOI). MLP Beta Relative To Other Energy Sectors
1.30 0. on average). LLC EQUITY RESEARCH DEPARTMENT
Figure 7. Energy Sub-Sector Performance During Economic Slowdowns
Note: Index Reference: E&P Index (S15OILP).80 0.1 1 .64 0.7%. In 1994.77 0.71 0.32 0.1 1 0. with total sector market cap of $2. Over the past 15 years. with a combined higher total return of 13.39 0.25
0.31 14 .20 0. Service (S15OILE).20 Beta 1.1 billion.20
0.40 1. For purposes of this study.66 0. Q2 2001 to Q2 2002.e.34 0. MLPs grew distributions by 7. Wachovia Capital Markets LLC.32 1 .28 1 .98 0. In contrast.2%.58 0. Figure 8.40 0.39 0.42 0.26 0.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS.39 0.
4% 13. We believe MLPs represent an attractive investment class for retirees due to their significant (and growing) income stream.S. utilities. when the entire Baby Boom generation has reached the age of 65. and high-yield bonds have outperformed the market over the past few years. Population Over The Age Of 65
Population (in thousands) 100.0% 71. Figure 9. For example.632 12.S.4% 20. Census Bureau
. In addition.453 80. Demographics Demographics should continue to drive demand for income-oriented investments. Many income-oriented investments such as REITs. According to the U. In Our View MLPs current (and growing) income stream can provide an effective hedge against inflation. relatively low risk (beta). By 2030.000 60. MLPs are an effective estate planning tool.000 40. and taxadvantaged structure.049 86.1% in 2007 (as measured by the CPI).000 80. the number of seniors (ages 65 and older) will increase sharply beginning after 2010 as the Baby Boom generation (those born between 1946 and 1964) begins to turn 65 years of age.705 19.7% 25% 20% 15% 10% 5% 0%
Source: U.S.061 40.Third Edition
WACHOVIA CAPITAL MARKETS. population 35. in our opinion. population. seniors are expected to account for about 20% of the U. We estimate 10% distribution growth (12% including GPs) in 2008 and 9% growth (10% including GPs) in 2009. in our view. inflation was 4.S. Projected U.243 54. as retiring Baby Boomers seek current income in a tax-efficient structure.MLP Primer -.S. Census Bureau. as MLP units can be passed to heirs with significant tax savings. while MLPs increased distributions at a median of 9% (11% including GPs).3% 20.000 20.000 0 2000A 2010E 2020E 65+ 2030E 2040E 2050E % of total U. GPs) (%) 10% 8% 6% 6% 4% 4% 2% 0% 1998A 1999A 2000A CPI 2001A 2002A 2003A 2004A 2005A 2006A 2007A 4% 3% 5% 5% 5% 10% 9% 9%
MLP Distribution Grow th
Source: Bureau of Economic Analysis and Bureau of Labor Statistics and Partnership reports
E. LLC EQUITY RESEARCH DEPARTMENT
D.7% 16. Figure 10. Historical MLP Distribution Growth (Excluding GPs) Versus The CPI
12% Distribution Growth (Excl. Current yields range from 5% to 13% (excluding GPs). MLPs Are An Effective Hedge Against Inflation.
Master Limited Partnerships
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F. MLPs Are An Emerging Asset Class MLPs are emerging as a distinct asset class, akin to the development in the 1990s of real estate investment trusts (REIT). This is evident by the growth exhibited by MLPs over the past ten years in terms of number, size, and liquidity. In 1994, there were just seven energy MLPs with an aggregate market capitalization of approximately $1 billion. Currently, there are 78 energy MLPs, with a total market capitalization of approximately $134 billion. In 1994, average trading volume of our MLP universe was just 34,819 units per day. Year to date, our MLP Composite is trading an average of 153,442 units per day. Figure 11. Number And Market Capitalization Of Energy MLPs
$160 Total market capitalization of energy MLPs $140 Market capitalization ($ in billions) $120 $100 $80 $60 $40 $20 $0 9 $2 1995 12 $3 1996 12 $5 1997 15 $8 17 $8 18 $11 29 23 $18 $19 7 $1 1994 30 $30 Number of energy MLPs $112 73 $147 $134 78 100 90 80 70 60 50 40 30 20 10 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008YTD Number of MLPs
1 83 1 52
60 $70 42 34 $38
Source: FactSet and National Association of Publicly Traded Partnerships
Could The MLP Sector Develop Like The REITs? The modern-day REIT was created through the real estate investment trust tax provision, which established REITs as pass-through entities, thus eliminating double taxation of dividends. In the 1980s, certain real estate tax shelters were eliminated, increasing the investment in REITs. The Tax Reform Act of 1986 enabled REITs to manage properties directly, creating further incentives for the creation of additional REITs. Finally, in 1993, REITs’ investment barriers to pension funds were eliminated. This trend of reforms continued to increase the interest in and value of REIT investments. At the end of 2007, there were 152 publicly traded REITs operating in the United States with a total market capitalization of approximately $312 billion. (Source: National Association of Real Estate Investment Trusts) Figure 12. Historical Number Of REITs And Market Capitalization
$500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0
53 53 62 46 69 71 71 75 76 82 66 59 59 $ 224 $1 $2 $1 $2 $2 $2 $3 $4 $5 $8 $1 $1 $1 $1 $9 0 0 1 2 $ 1 $ 1 $ 32 $ 44 $ 58 3 6 $ 89 $1 $1 $1 $1 $1 $1 41 38 24 39 55 62 $ 308 $ 331 226 1 89
Total market capitalization of REITs Number of REITs
42 1 38 1 96 10 1 17 1 1 20 19 1
21 9 1 99
21 21 1 0
203 1 89 1 82 1 76 1 71
97 1 93 1
$ 438 $ 31 2
150 125 100 75 50 25 0
Source: National Association of Real Estate Investment Trusts®, Inc.
Number of REITs
$ in billions
MLP Primer -- Third Edition
WACHOVIA CAPITAL MARKETS, LLC EQUITY RESEARCH DEPARTMENT
Figure 13. Historical And Projected MLP Market Capitalization
$400 Total market capitalization of energy MLPs $350 $300 $ in billions $250
73 78 ? ? ?
140 120 100 80 Number of MLPs
Number of energy MLPs
$200 $150 $100 $50 $0
7 $1 9 $2 12 $3 12 $5 15 $8 17 $8 18 $11 23 $18 29 30 34 42
60 ? $147 ? $134
60 40 20 0
1994 1995 1996 1997
1998 1999 2000 2001 2002
2003 2004 2005 2006
2007 2008 2009E 2010E 2011E YTD
Source: National Association of Publicly Traded Partnerships and Wachovia Capital Markets, LLC estimates
Could MLPs Be On A Similar Trajectory? We think it is possible. The MLP sector has achieved several milestones that closely parallel milestones achieved by the REIT sector. These milestones led to the growth and prominence of the REIT industry, in our view. Figure 14 outlines the REIT/MLP parallels: Figure 14. REIT Versus MLP Milestones
REITs - Omnibus Reconciliation Act of 1993 allowed pension funds to own REITs - REIT Modernization Act of 1999 - Equity Office Properties Trust (EOP) was the first REIT added to the S&P 500 Index on October 1, 2001 - NAREIT All REIT Index yield has compressed to 6.6% from 8.0% in 2000 MLPs - With the passage of the American Jobs Creation Act in October 2004, mutual funds are now allowed to own MLPs - EPD has made the case to qualify for inclusion into the S&P 500 Index - The midstream MLP yield has compressed to 7.8% from an average of 9.1% in 2000
Source: FactSet and National Association of Real Estate Investment Trusts
As more assets are placed into the structure, we expect MLPs to proliferate. Two notable areas of potential growth are pipelines, and oil and gas reserves. Currently, about 37% of all energy pipelines in the United States are held by MLPs, implying room for consolidation within the sector. Increasingly, pipeline companies are recognizing that the MLP structure is most efficient for holding midstream assets. This is evident by the sale of two interstate pipelines to MLPs in 2006-07 and three initial public offerings of interstate pipeline MLPs over the past two years. Figure 15. U.S. Pipelines Owned By MLPs
MLP owned pipeline miles 37%
Note: Based on crude oil, natural gas, natural gas liquids, refined products pipeline miles Source: Department of Transportation, American Petroleum Institute (API), Association of Oil Pipe Lines (AOPL), and Partnership reports
On December 22, 2006, El Paso sold ANR Pipeline to TransCanada Corp. and TC Pipelines, L.P. (TCLP) for $3.3 billion. On September 15, 2006, GE Energy Financial Services and Southern Union Company sold Transwestern Pipeline to Energy Transfer Partners for $1.0 billion. According to the National Association of Publicly Traded Partnership estimates, energy related MLPs, currently own approximately 200,000 miles of
Master Limited Partnerships
WACHOVIA CAPITAL MARKETS, LLC EQUITY RESEARCH DEPARTMENT
pipelines: gathering and transmission, onshore and offshore pipelines, carrying natural gas, natural gas liquids, crude oil, and refined products (See Figure 16). El Paso Pipeline Partners, L.P. (EPB), Spectra Energy Partners, L.P. (SEP), and Williams Pipeline Partners, L.P. (WMZ) are three interstate pipeline MLPs, that held successful initial public offerings on November 16, 2007, June 27, 2007, and January 18, 2008, respectively. EPB sold approximately 33.2% of the partnership or 28.75 million common units at $20 per unit. SEP sold about 17% of the partnership or 11.5 million common units at $22 per unit, and WMZ sold approximately 47.5% of the partnership, or 16.25 million common units at $20 per unit. Figure 16. Miles Of Pipeline Owned By Energy MLPs
Total MLP pipeline miles owned Natural gas pipelines Refined products pipelines NGL/LPG pipelines Crude oil pipelines Total pipelines 70,000 40,000 20,000 70,000 200,000
Source: U.S. Department of Transportation, American Petroleum Institute (API), the Association of Oil Pipe Lines (AOPL), and Partnership reports
MLPs are the logical structure to house interstate pipelines and other midstream assets, in our view, due to their low-maintenance capital requirements and tax-advantaged status, which enables cash flow to be distributed to investors in a tax-efficient manner. Because MLPs do not pay corporate income tax, they can generate more free cash flow than a corporation given the same amount of operating income. Assets that generate stable cash flow and that require minimal capital reinvestment to sustain are ideally suited for the MLP structure, which pays the majority of its cash flow to unitholders on a quarterly basis. MLPs Are Also Suitable Investment Vehicles For Certain Oil And Gas Assets Upstream MLPs can play an important role in the recycling of cash flow associated with the exploration (at the C-Corp level) and production of oil and gas assets in the United States. By selling mature production/reserves to MLPs, E&P companies are able to reinvest cash proceeds into properties that have better geologic upside potential to which they can significantly add value by drilling wells. This process allows E&P companies to efficiently explore for new reserves without having to invest significant resources in the upkeep of mature reserves. The mature, low-decline production is placed into the MLP structure, where reserves can be harvested to support steady cash flow and divestitures. Upstream MLPs also benefit from this process as most E&P companies have historically underexploited mature fields, given the opportunity for higher returns (and higher risk) elsewhere. As a result, upstream MLPs receive not only a base of stable producing assets, but also an inventory of low-risk development drilling opportunities through which to maintain or modestly increase production.
WACHOVIA CAPITAL MARKETS. but decline rapidly for several years before leveling off. Upstream MLPs do not pay corporate taxes and the majority of partnerships do not have incentive distribution rights (IDR) or management incentive interests (MII) (those that do have a max tier of 25%). Upstream MLPs Fill A Niche
Oil & Gas Company (CCorp) discovers new reserves via exploratory drilling Oil & Gas Company develops reserves and captures higher initial production and cash flow (and higher decline rates)
Oil & Gas Company redeploys capital received from MLP
Upstream MLP distributes predictable cash flow to unitholders from proved developed producing reserves
Oil & Gas Company sells the mature reserves to an Upstream MLP after production rates have declined to a more manageable and stable level (5-6%)
Common unitholders receive distributions
Source: Wachovia Capital Markets. Accordingly. in our view. while
. LLC EQUITY RESEARCH DEPARTMENT
Figure 17. initial production rates from new wells are high. Figure 18. LLC
Upstream MLPs Well Positioned To Compete For Mature Reserves Upstream MLPs are better positioned to compete in the oil and gas market for mature reserves than E&P companies. At this point. Appropriate Production Profile For The MLP Structure
C-Corp Structure Oil And Natural Gas Production Curve MLP Structure
Source: Wachovia Capital Markets.MLP Primer -. LLC
Typically. these partnerships should be able to outbid E&P companies for acquisitions. it makes sense for E&P companies to sell their mature properties and redeploy the proceeds into new plays with higher potential returns.
we expect mature reserves held in the MLP structure to trade at a slight premium to the same set of reserves under a C-Corp structure given the elimination of corporate level taxation.
. Institutional And Retail Ownership Of MLPs
Note: Retail percentage include 7% ownership by foreign investors Source: Vinson and Elkins and Wachovia Capital Markets.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. reserves (excluding offshore and Alaska) are proved developed producing (PDP) and about 50% of this amount is suitable for the MLP structure. both of which are likely not suitable for the MLP structure. Potential Oil And Natural Gas Reserves Suitable For The MLP Structure
Est. Figure 20. oil reserves in MLP structure 6%
Est.8 billion barrels of proved reserves located offshore and in Alaska. with the remaining 31% of units held by institutions. proved natural gas reserves totaled 182 Tcf and proved crude oil reserves totaled 20 billion barrels in 2006 for the onshore/lower 48 states. Total crude oil and gas reserves in the MLP structure currently total only 3. natural gas reserves in MLP structure 7%
Note: Assumes 50% of total proved U. LLC estimates
III. LLC estimates
Until 2004.0 billion barrels of proved crude oil reserves in the United States (as of December 31. institutional investors such as mutual funds and other registered investment companies (RIC) were restricted from investing in MLPs because distributions and allocated income from publicly traded partnerships were considered non-qualifying income.
Who Can Own MLPs?
MLPs have traditionally been owned by retail investors. LLC EQUITY RESEARCH DEPARTMENT
still generating a similar level of cash flow accretion to unitholders.3 Tcf of natural gas and 299 million barrels of crude oil. Figure 19. and Wachovia Capital Markets. Based on the average PDP ratio of large independent E&P companies in the United States. To retain their special tax status as regulated investment companies (RIC). All else being equal. This is still true today. Of Which MLPs Own 7% According to the Energy Information Administration (EIA). 2006). there are approximately 211. we estimate that approximately half of these reserves are proved developed producing.1 trillion cubic feet (Tcf) of proved natural gas reserves and 21. or approximately 152 Tcfe (91 Tcf of natural gas and 10 BBbls of crude oil/NGLs). This implies that of the “MLP-able” reserves. Source: EIA. Partnership reports. This includes approximately 29 Tcf and 0. Market For MLP Suitable Oil & Gas Reserves Exceeds 75 Tcfe. mutual funds are required to receive at least 90% of their income from qualifying sources listed in the tax laws. After stripping these reserves out. Approximately 69% of total MLP units outstanding are currently held by retail investors. only 6% of crude oil and 7% of natural gas have been placed in the structure.S. Even assuming only 50% of these PDP reserves are suitable for the MLP structure implies a total potential reserve base of 46 Tcf of natural gas and 5 billion barrels of crude oil.
Since some MLPs have operations (e. including the ability to participate in MLPs without the burden of K-1s (processed by the funds--investors receive a 1099).. For example. We recommend consulting a tax advisor before investing in MLPs within any of these structures. Massachusetts (a state that is home to many mutual funds) has not adopted the federal Mutual Fund Act as law. some states have not adopted the legislation as law. These closed-end funds offer investors a number of advantages. Mutual funds begin processing their investors’ 1099s in November. this could lead to excise tax liability for the mutual fund or a mutual fund investor paying taxes not owed. high net worth brokers. mutual funds have not participated in the MLP sector in large numbers to date. A. Challenges Remain For Mutual Fund Ownership Of MLPs Despite the passage of the American Jobs Creation Act. in our view. and access to private market transactions typically at discounts to the market price. B. and endowment funds should not own MLP units because MLPs generate unrelated business taxable income (UBTI). While the mutual fund provision was adopted as federal law. In certain instances. Tax-Exempt Vehicles Should Not Own MLPs Tax-exempt investment vehicles such as pension accounts. C. hedge funds. IRAs. long-term capital gains. Please see the Appendix for a list of states in which each MLP operates. Mutual Funds Can Own MLPs
…But Most Do Not With the passage of the American Jobs Creation Act in October 2004. there are some restrictions to investment: (1) no more than 25% of a fund’s asset value may be invested in MLPs and (2) a fund may not own more than 10% of any one MLP.. There are potential administrative burdens related to state filing requirements. a mutual fund owner of a partnership may be required to file income tax returns in every state in which the MLP conducts business (even if no taxes are owed).000 per year. and the passage of legislation that allows mutual funds to own MLPs. and return of capital. However. However. a list of which follows: • Timing issues. Clearly. a mutual fund would have to make estimates that could prove incorrect. etc..g. mutual funds domiciled in certain states may still be restricted from owning MLPs. mutual funds can now own MLPs. professional investors with pools of private funds (e. professional management. income from an MLP) in excess of $1. creating potential legal issues for mutual funds domiciled in that state. If a taxexempt entity receives UBTI (e. As a result. This means MLP income is considered income earned from business activities unrelated to the entity’s tax-exempt purpose. • State filing requirements. pipelines and storage tanks) in many states. without the K-1s.
.g. but may not receive their MLP K-1s until late February or early March. the investor would be required to file IRS form 990-T and may be liable for tax on the UBTI.MLP Primer -. 401-Ks.Third Edition
WACHOVIA CAPITAL MARKETS.7 billion of equity raised). This is due to a number of administrative challenges. Mutual funds are required to designate investors’ income as ordinary income. Institutional interest in MLPs has increased with the formation of 11 MLP-focused closed-end funds ($4. In addition. the administrative burden required for such an undertaking could be prohibitive.) have increased participation in the sector. LLC EQUITY RESEARCH DEPARTMENT
Institutional Interest Is Growing MLPs are undergoing a transition in ownership from a predominantly retail base to more institutional ownership. • Federal/state law discrepancies.g.
” These sources were generally limited to natural resources or mineral activities including exploration. but potentially lower-return MLPs and higher-risk MLPs with potentially higher returns. gain from the sale of assets. or marketing. these MLPs are typically large-cap companies that have grown and diversified their asset base to limit cash flow volatility during changes in economic cycles.
A.e. and other consumer activities. These factors include the following: • “Anchor tenants. (commodity related) forwards. Risk And Growth
Risk .e.” Investing in “anchor” or core MLPs is an effective way to build a solid foundation for an MLP portfolio. the predecessor upstream MLPs were essentially selfliquidating partnerships and were unable to sustain their distributions. Like all investments. futures. These assets were typically spun out of larger entities that could realize a higher value from these assets as publicly traded MLPs.Leverage . In assessing risk/reward. which relied on exploratory drilling to sustain cash flow (current upstream MLPs own longer life reserves and employ a lower-risk. were victims of low commodity prices. In addition. and options (with certain limitations). LLC EQUITY RESEARCH DEPARTMENT
IV. • Invest with top management. process. a balanced portfolio.
.Capital requirements . In the late 1980s. refining.Track record .Size . • Balance risk and growth.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS.
How To Build An Effective MLP Portfolio
In building an effective MLP portfolio. should be considered.Stock liquidity . more factory-like. The anchor tenants are companies that have established a successful track record of delivering solid and sustainable results year after year. The modern day MLP got its start in 1986-87. and depleting reserve base. income from the sale of stock. These businesses were more cyclical in nature. we believe there are three primary factors that investors should take into consideration. mining.Visibility . or in the case of E&P companies. The new laws stated that to qualify as a master limited partnership. processing.
Types Of Assets In Energy MLPs And Associated Commodity Exposure
A Brief Review Of The Evolution Of The MLP Sector
In the 1980s.Strength of sponsor
V. Other qualifying income includes interest. (2) project management capabilities (i. dividend. The early MLPs consisted primarily of refined-product pipelines that were characterized as mature assets that required modest maintenance capital and generated stable cash flow that was distributed to unitholders with very modest growth expectations..Weather
Source: Wachovia Capital Markets. a volatile natural gas market.Commodity exposure . LLC
and . aligned with those of the unitholder).Organic versus acquisition dependent . real property rents. individuals should evaluate the strength of the company’s management team. MLPs were reincarnated as entities that generally own midstream assets that are used to transport. and (3) ownership interests (i. sports teams. MLPs were involved in various businesses including exploration and production (E&P) of oil and natural gas.. MLPs present risk/reward propositions. Investors should consider their risk-tolerance level and make investments accordingly. transportation. Without reinvestment. prospective investors should consider factors outlined in Figure 21 when building an MLP portfolio: Figure 21. restaurants. development. In general. ability to keep projects on time and on budget). and gains from commodities. which includes lower-risk. Investors should consider a management team’s (1) track record in successfully managing its business. and store natural gas. crude oil. an entity had to earn at least 90% of its income from “qualified sources. and refined petroleum products and have limited exposure to commodity price risk.Market position
Growth . when Congress passed the Tax Reform Act of 1986 and the Revenue Act of 1987.Execution . exploitation and production operation). income from the sale of property. Prior to making any investment.
etc. reserve. to achieve returns superior to those of corporations. we outline the effect of commodity prices on each major asset class owned by MLPs. The MLP structure has evolved from stable cash flow generating assets (i. Beginning in the late 1990s. refined products. This change in focus was partially due to the sudden availability of midstream assets on the market. storage assets. and lower cost of capital. Although investors are becoming more comfortable with the MLP investment structure. Thus.MLP Primer -. These include onshore and offshore pipelines that transport natural gas. LLC
. pursuing internal growth projects. the MLP structure has evolved to include assets that operate progressively closer to the wellhead. making significant acquisitions. For example. asphalt. or restructured. the prototypical energy asset with the greatest degree of commodity. the majority of energy assets introduced into the MLP structure since 1986 have evolved from more stable pipelines to increasingly more volatile cash flow businesses with greater risk. marketing businesses. Currently. the impact of commodity prices on MLP cash flow varies according to asset class. LNG. majors and large diversified energy players decided to monetize their mature assets with the intent of redeploying proceeds from the sale into higher-return investments.) with higher risk. in part. drilling. Figure 22. with varying degrees of commodity price sensitivity. Specifically. across all commodities. the master limited partnership universe is made up of approximately 102 companies that are classified as publicly traded partnerships. in our view. with 78 being energy related. and aggressively raising distributions. In a sense. pipelines and storage) to more commodity-sensitive businesses (e. MLPs began reorienting their focus toward growth. propane distribution. In the following sections. MLP Risk Profiles
Less risk Pipelines and Storage/Terminals BWP BPL DEP EEP EPB EPD ETP GEL HEP KMP OKS MMP NS PAA SEP SGLP SXL TCLP TLP TPP WMZ Gathering & Processing APL CPNO DPM EROC HLND KGS MWE NGLS RGNC WES WPZ XTEX MMLP Propane and Heating Oil APU FGP GLP NRGY SGU SPH Shipping CPLP KSP NMM OSP TGP TOO USS Coal ARLP NRP PVR More risk Upstream ATN BBEP CEP DMLP ENP EVEP LGCY LINE PSE QELP VNR
Note: Classification does not take into account hedging activities or parent/sponsor relationships Source: Wachovia Capital Markets. Asset Overview
In aggregate. Some asset types such as refining. and waterborne transportation.P.g.. and ammonia. Nevertheless.. merged. L. oil and coal production. oil and natural gas assets.e. the risk profile of MLPs has been increasing. involved in the plastics and fertilizer industry did not survive as partnerships due. natural gas. gathering and processing operations.Third Edition
WACHOVIA CAPITAL MARKETS. MLPs own assets involved in almost all aspects of energy. Other MLPs. refining. B. and re-investment risk. fractionation facilities. in our view. These partnerships were dissolved. the cash flow of some MLPs has been becoming more sensitive to commodity prices. LLC EQUITY RESEARCH DEPARTMENT
The MLP has seen a progression of different types of assets placed into the structure. Currently. MLPs were able to take advantage of their unique tax-exempt structure. to the cyclical nature of their businesses.). with limited exposure to commodity price risk. beginning with refined products pipeline assets in 1986 (Buckeye Partners. and oil and gas reserves (introduced in the 1980s) were re-introduced to the MLP structure in 2006. MLPs are engaged in every aspect of the energy value chain. crude oil. MLPs formed in the late 1980s and early 1990s generally owned pipeline and storage assets that were largely fee-based.
jet fuel. Growth can be higher depending on regional demographic growth patterns and expansions. risks related to investing in midstream MLPs include an economic slowdown. which helps to provide a growing stream of income in excess of inflation trends. However. and storage/terminals) (2) Propane and heating oil (3) Shipping (marine transportation) (4) Coal and aggregates (operators and royalty model) (5) Upstream (exploration and production) (6) Refining (7) Compression (8) Liquefied natural gas (LNG) (9) General partner interests Midstream. energy infrastructure. a government body that regulates tariffs and allowed rates of returns for pipeline companies. gasoline.. Typically. inject. the pipeline is allowed to earn a reasonable return on its investment to cover operating costs. high commodity prices have minimal (if any) direct effect.g. Some crude oil pipelines operate under buy/sell arrangements. In general.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. gathering and processing. (3) Settlement rate. (1) rising raw material and labor costs. Commodity price sensitivity. and (4) Market-based rates. 2006. The FERC also regulates crude oil and refined products pipelines (e. diesel. Interstate natural gas pipelines are regulated by the Federal Energy Regulatory Commission (FERC). Finally. whereby shippers reserve capacity on the pipeline and must pay the tariff regardless of their actual use of the capacity. The rate is agreed upon by the pipeline’s customers.. transportation. Midstream MLPs are involved in the gathering and processing. MLPs with pipeline and storage assets do not take title to the commodity. storage assets (for natural gas. (2) an over build of U. and taxes. Midstream MLPs with pipeline and storage/terminal assets are typically characterized as generating stable. natural gas liquids (NGL). (2) Cost of service. In theory.3%) should be the oil pricing index for the five-year period beginning July 1. and refined products) typically have fee-based revenue structures whereby the customer reserves storage capacity and pays an additional fee to blend. natural gas pipelines receive demand charges. (3) regulatory risk related to allowed rates of return. This means shippers or the pipeline operator itself will purchase crude at one point on the pipeline and then simultaneously enter into a sales contract for that crude at another point on the pipeline. The rate is established by supply and demand dynamics in a competitive market. natural gas. Interstate natural gas
. fee-based cash flow with minimal volatility in earnings.3% (PPI plus 1. and (4) a decline in commodity prices (resulting in a decline in drilling activity). In general. The rate is based on the actual costs experienced by the pipeline. and hence. Railroad Commission of Texas). Historically these rates have averaged 11-13%. but overall operate in competitive markets with less regulatory oversight. Risks. The maximum rate a pipeline can charge is adjusted annually based on changes in the Producer Price Index (PPI). and/or storage of crude oil. LLC EQUITY RESEARCH DEPARTMENT
The types of assets in energy MLPs include the following: (1) Midstream (pipeline. which is in line with historical growth in demand for energy.S. energy demand typically tracks GDP growth. Intrastate natural gas pipelines are monitored by state agencies (e. or withdraw the product from storage. and/or refined petroleum products. distillates). depreciation. Rates for these pipelines are established in four ways: (1) Indexing. The growth in pipeline volumes typically average 2-3% per year. Drivers. which could negatively affect energy demand.g. Acquisitions and major organic growth projects are generally required to meaningfully increase overall growth. The FERC determined that the PPI for Finished Goods plus 1. crude oil.
rail.P. L. L. TEPPCO Partners. Ticker Primary Business Line BPL HEP Refined Products Refined Products
KMP Refined Products KMR Refined Products MMP Refined Products MMLP Refined Products NS SXL TPP TLP Refined Products Refined Products Refined Products Refined Products
Source: Partnership reports
. L. L.P.P. Martin Midstream Partners. depending upon economic cycles..P.3%). such as truck. El Paso Pipeline Partners.P. due to their low cost structure (versus other transporters. diesel. and terminals/truck racks. Natural Gas Pipeline MLPs
MLP Boardwalk Pipeline Partners.P. TransMontaigne Partners. L. Throughput can exhibit minor fluctuations. high prices could also have the effect of causing conservation and curtailing demand. electric power sector. then distribute the natural gas to residential and/or commercial customers. Interstate petroleum products pipelines may benefit from higher commodity prices via regulations that allow pipelines to annually increase tariffs at a rate of producers’ price index (PPI + 1. Kinder Morgan Management.P. and jet fuel. Thus. and barge) and government-regulated nature. Throughput in mainline natural gas transportation pipelines tends to be relatively stable due to continued growth in demand for natural gas from industrial. Kinder Morgan Energy Partners. commodity prices do have an indirect impact on pipeline volume. Earnings for crude and petroleum products pipelines are tied primarily to throughput (volume).P. L. diesel fuel. rail yards. L. L. and jet fuel) and refinery demand for crude oil are the main drivers of pipeline volume. L. such as gasoline.e.e.MLP Primer -. Utilities or local distribution companies. Refined product pipeline cash flow is stable based on the relatively inelastic baseload demand from end users of gasoline.P. Primary pipeline customers are refiners and marketers of the product being shipped.P. consumer demand for refined products (i. commercial.P. and residential end users. utility companies.P. for further distribution to retail outlets. However. L. High natural gas prices may spur drilling activity and benefit pipeline companies that can expand their systems that connect to basins of increasing supply. Holly Energy Partners.. Williams Pipeline Partners. L.P. L.Third Edition
WACHOVIA CAPITAL MARKETS. LLC EQUITY RESEARCH DEPARTMENT
pipelines’ earnings are typically based on demand charges (similar to rent) and a small portion of earnings may vary with volume. LLC Magellan Midstream Partners. End-user destinations include airports. L. downturns). Refined Products Pipeline MLPs
MLP Buckeye Partners. Ticker Primary Business Line BWP Natural Gas Pipelines EPB ETP SEP Natural Gas Pipelines Natural Gas Pipelines Natural Gas Pipelines
TCLP Natural Gas Pipelines WMZ Natural Gas Pipelines
Source: Partnership reports •
Refined products pipelines. etc.P. Natural gas transportation pipelines are generally large diameter interstate pipelines used for long-distance transportation. diesel fuel. L. Pipeline and storage assets have historically been less exposed to economic cycles (i. Spectra Energy Partners. The following is a summary of the sub-sectors of the midstream segment: • Natural gas pipelines. L. Refined products pipelines are common carrier transporters of refined petroleum products. Figure 24. gasoline.P. Figure 23. Natural gas transportation pipelines receive natural gas from gathering systems and other pipelines and deliver it to industrial end users. or storage facilities. however. Sunoco Logistics Partners. Energy Transfer Partners. NuStar Energy. TC Pipelines.
steel. Marine terminals. such as retail gasoline stations. gathering systems. petrochemicals.P. which are stored in above-ground facilities. natural gasoline. Genesis Energy. NGL pipelines typically move NGLs from natural gas processing plants. and domestic production. and pipeline connections). petroleum coke. Terminals consist of either inland or marine terminals. Given the difficulty in building new refineries in the United States. NGL pipeline fees are either contractual or regulated by a government agency (e. are large storage and distribution facilities that handle crude oil or refined petroleum products. In the latter case. L. iso-butane. industrial chemicals. L. LLC EQUITY RESEARCH DEPARTMENT
Crude oil pipelines. refiners are more dependent upon waterborne and Canadian imports because inland domestic crude oil production peaked during the 1970s.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. and other hydrocarbons. The advantages of a depleted natural gas or oil field are that it uses existing infrastructure (i. Crude oil pipelines provide stable. usually located near refineries. terminal cash flow is more subject to the operational expertise of the terminal operator/marketer. or (3) salt cavern formations. L. Terminal cash flow is affected by the amount of petroleum products stored. blending and other ancillary services to pipeline systems. LLC Enbridge Energy Partners. Main crude oil trunkline systems feed refiners from waterborne imports. natural gas is primarily stored underground using (1) depleted reservoirs. deliver them to end users.P. less productive wells where gathering pipelines are not economical. There are also terminalling facilities that handle products other than crude oil. in turn is dependent upon petroleum product pipeline throughput. L. Crude oil is also gathered via tank trucks from older.P. providing a steady source of demand for crude oil pipeline throughput. Crude Oil Pipeline MLPs
MLP Enbridge Energy Management. Most NGL pipelines generate cash flow based on a fixed fee per gallon of liquids transported and volumes delivered. natural gas can also be stored in liquid form (LNG) using above-ground storage facilities. Crude oil gathering pipelines transport crude from the wellhead to larger mainlines.. Inland terminals generally receive product from pipelines and distribute them to third parties at the terminal. as well as the amount of blending activity that takes place at the facility. coal. in turn. These other products include asphalt. Crude Oil Value Chain
Source: Plains All American Pipeline. natural gas. Figure 25. propane. refineries. such as ethane.
. Ticker Primary Business Line EEQ Crude Oil EEP GEL PAA Crude Oil Crude Oil Crude Oil
SGLP Crude Oil
Source: Partnership reports
Figure 26. L. and import terminals to fractionation plants and storage facilities.P. which. Unlike refined products and crude oil storage. butane. (2) aquifers. FERC). ore. U.P. •
NGL pipelines. wells. distribution.g.e. and other dry-bulk materials. fee-based cash flow. Canadian imports. and some are located near consuming markets. Terminalling operations provide storage. which. The most common form of natural gas storage in the United States is the use of depleted natural gas or crude oil fields because of their availability. SemGroup Energy Partners. Plains All American Pipeline. However.S. fertilizers. Storage/terminals. Crude oil terminal operators may use terminals as a natural extension of their pipeline system or may actively seek terminal throughput from third parties. Natural gas liquids (NGL) pipelines transport mixed NGL products. and refined products. vegetable oil products. existing refining capacity tends to be consistently used.
Ticker Primary Business Line APL Gathering.P. Processing.P. L. Processing. Quicksilver Gas Service. carbon dioxide. and hydrogen sulfide. L. L. Processing. Eagle Rock Energy Partners. L.P Copano Energy. and NGLs OKS Gathering. and NGLs
EROC Gathering. Williams Partners. and NGLs NGLS Gathering.P. and/or processed to remove natural gas liquids. Processing. and NGLs
Source: Partnership reports
Figure 28.P.. the future delivery price of the commodity (i. Natural gas gathering pipelines consist of small diameter (4”-6”) pipelines that connect completed natural gas wells to larger diameter (10”-30+”) natural gas pipelines.P. As natural gas wells age. commonly referred to as NGL raw mix or ‘y’ grade.P. the future delivery price of the commodity is above the current spot price. Figure 27. In a contango market. L. Regency Energy Partners. and NGLs KGS Gathering. LLC EQUITY RESEARCH DEPARTMENT
Terminals are affected by backwardated and contango markets. MarkWest Energy Partners. To offset this decline and maintain overall gathering system volume. and NGL MLPs
MLP Atlas Pipeline Partners. L. Processing. Western Gas Partners. production naturally declines. Processing. Natural gas prices influence producer drilling activity and the type of contract pricing. Hiland Partners. giving producers and marketers incentive to store the commodity. Duncan Energy Partners L. Processing.P. Processing. Gathering. or refined. in part. and NGLs MWE Gathering.Third Edition
WACHOVIA CAPITAL MARKETS. L. and NGLs EPD Gathering.
Natural gas gathering. In a backwardated market. and NGLs DPM Gathering. Processing. and NGLs RGNC Gathering. Enterprise Products Partners. Processing. treated to remove chemical impurities. DCP Midstream Partners. and NGLs DEP Gathering. Processing. L. Gathering And Processing Value Chain
Raw NGL mix Natural gas processing and treating Residue gas and raw NGL mix transportation
Natural gas production
Gathering and compression
Source: Targa Resources Partners. L.P. Processing. and NGLs WES Gathering. natural gas or crude oil) is below the current spot price.MLP Primer -. and NGLs WPZ Gathering. L. Targa Resources Partners L. Processing. L. sulfur.P. •
Natural gas processing and fractionation. LLC Crosstex Energy. resulting in less incentive to store the commodity.P. and NGLs
CPNO Gathering. ONEOK Partners. and NGLs XTEX Gathering.P. Prior to long-haul transportation. The cash flow stability of natural gas gathering and processing systems is dictated. Processing. Processing. L. Processing. L.P.P. natural gas from the wellhead must often be processed. Natural gas is gathered at the wellhead and then collected at central delivery points and transported to treating and processing plants.P. the natural gas gathering system must hook up additional wells. by natural gas prices.
. Raw natural gas may be dehydrated to remove water.e. and NGLs
HLND Gathering. to remove impurities in order to meet requirements for pipeline transportation.
synthetic lubricants. Ethylene is used in the production of detergents. but as a feedstock for the production of ethylene. partnerships with gathering and processing assets have more commodity price exposure and tend to benefit during periods of high commodity prices.” while decreases in the price of NGLs relative to natural gas reduces gross margin. A list of some of the most common types of contracts follows: • Fee-based contracts. In general. • Propane is used for heating homes. NGLs are hydrocarbons that are separated from natural gas through various processes at natural gas processing plants. The MLP sells the resulting residue gas (dry. • Natural gasoline is used primarily in motor gasoline blending and as a petrochemical feedstock. It is also used as vehicle fuel and petrochemical feedstock. normal butane. Fractionation. The partnership gathers natural gas from the producer. and other chemical products. for the production of isooctane--a clean source of octane enhancement for gasoline). A typical contract would entitle the producer to 80% of the proceeds from the sale of natural gas and NGLs through the plant. butane.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. The natural gas processor purchases natural gas at a percentage discount to a specified index price or a specified index price less a fixed amount. pipeline quality gas) and NGLs at market prices and remits to the producer an agreed upon percentage of the proceeds based on an index price. drying clothes. commonly referred to as the “frac spread. which should. heating water. insulation.e. cooking and refrigerating food. These liquids include ethane. iso-butane. The remaining 20% would be captured by the processing plant operator. MLPs receive a fee for the volume of natural gas or NGLs that flows through its systems. • Percent-of-proceeds contracts. The processor gathers and delivers the natural gas to pipelines where the company resells the natural gas at the index price. Because the extraction of the NGLs from the natural gas stream reduces the energy (Btu) content of the natural gas. and natural gasoline) at fractionation facilities. Gross margin is directly related to the volume.e. • Keep-whole contracts.. refrigerators and freezers). • Ethane is not used as a fuel. • Normal butane is typically used for motor gasoline blending and as a feedstock for the production of plastics.. in turn. the liquids serve a variety of purposes. The processor either purchases natural gas at the market price to return to the producer or makes a cash payment to the producer equal to the reduced energy content. propane.e. Increases in the price of NGLs relative to natural gas increases gross margin. Put another way. not the price. of the commodity flowing through the system and the contracted fixed rate. The partnerships gather and process natural gas on behalf of producers. High prices are likely to stimulate drilling activity and should increase production. Under the percentage discount. • Percent-of-index contracts. a propellant in aerosol sprays. Natural gas is typically processed under three primary contracts that expose the processor to varying degrees of commodity price risk. and as a feedstock for the petrochemical industry (i. iso-butane. NGLs are then further refined or fractionated into separate liquids (i. the processor must keep the producer “whole” on his natural gas that goes in and comes out of the processing plant.. Gross margin increases as natural gas prices and NGL prices increase and decrease as natural gas prices and NGL prices decrease. LLC EQUITY RESEARCH DEPARTMENT
Natural gas liquids. and natural gasoline. ethane. plastic packaging materials. propane. • Iso-butane is used as a gas in refrigeration systems (i. and sells the resulting NGLs to third parties at market prices. gross margin increases when the price of natural gas increases and decreases when the price of natural gas decreases.
. the processor must replace the natural gas (on the basis) that was extracted while processing. Once separated. increase volume on gathering systems. Gas processors with primarily keep-whole contracts benefit most in an environment of high commodity prices because they are direct sellers of natural gas liquids. and fueling gas fireplaces and barbecue grills. Commodity price sensitivity. processes the natural gas.
the use of dirty hedges could prove ineffective if the correlation between NGL and crude oil prices deteriorates. on a 3-5 year basis.00
70% Data Missing 60%
Mark-to-market hedge accounting. the futures contract is assigned a value based on current market prices. The impact of mark-to-marketing accounting affects different parts of a company’s financial statements depending on whether the derivative is classified as “trading” or “other than trading. calls. approximately 68% correlated with crude prices.. Partnerships use a variety of derivative contracts and option strategies to mitigate their exposure. including swaps. the value of a futures contract with an expiration date of one year from today is not known until it expires. a majority of the volatility is usually non-cash. Figure 29. however. Over the past three years. Some gathering and processing MLPs prefer to use dirty hedges to manage their NGL exposure due to a more liquid crude oil derivatives market (i. puts. This price relationship between natural gas liquids and crude oil is meaningful for gathering and processing MLPs that use “dirty” crude oil hedges as a proxy to hedge NGL exposure (as opposed to hedging the individual NGL components). Hedge accounting. the NGL market has limited liquidity) and a historically strong correlation between crude oil and NGL prices.e. Realized gains and losses would be included in earnings.96 Current oil price ($/Bbl): $140. LLC EQUITY RESEARCH DEPARTMENT
Hedging commodity price exposure.MLP Primer -. We do not pay as close attention to earnings per unit (EPU). MLPs. Mark-to-market hedge accounting assigns a value to a company’s derivatives positions based on the current market prices for those derivative instruments. Financial Accounting Standards Board (FASB) Statement No. Gathering and processing MLPs with commodity price exposure typically have hedging programs to mitigate a substantial portion of that price risk. as we believe the focus for MLPs should be on cash flow rather than earnings. if the contract is marked-to-market. In order to offset the mark-to-market movement of derivatives.Third Edition
WACHOVIA CAPITAL MARKETS. Derivatives classified as other than trading are also measured at fair value and recognized as assets or liabilities. in general. For example. on average. NGL prices have been. with the changes in value included as a component of stockholders’ equity until realized. The changes in the fair value of the derivatives are recognized in the company’s earnings over time unless certain hedging criteria are met. to a lesser degree. some companies may employ hedge accounting (i.” Derivatives classified as trading are recognized as assets or liabilities with the corresponding loss or gain recognized in the income statement..0% Current NGL price ($/g): 1. However. Price relationship between crude oil and natural gas liquids. if the company is able to qualify). However. etc. collars. Historical NGL-To-Crude Oil Ratio
100% NGL (Mt.
. tend to hedge 70-80% of their near-term exposure and. 133 allows companies to recognize all derivatives as assets or liabilities and at fair value.e. Belvieu) To Crude Oil (WTI) Ratio (%) 2004 Average: 73% 2005 Average: 67% 2006 Average: 63% 90% 2007 Average: 70% (*) 2008 YTD Avg: 59% Current: 59. A company that uses mark-to-market accounting could report significant earnings’ volatility.
declining wholesale propane prices aid earnings because retail prices tend to lag costs. Suburban Propane Ticker Primary Business Line APU FGP GLP Propane Propane Gasoline and heating oil
NRGY Propane SGU Propane SPH Propane
Source: Partnership reports
Figure 31. and the company must have hedge documentation in place at the inception of the hedge. The gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged..e.S. Propane is a by-product of natural gas processing and crude oil refining.P. Star Gas Partners. A net investment hedge attempts to mitigate foreign currency exposure of a net investment in a foreign operation. Propane MLPs distribute propane via truck to residential. Residential heating sales command the highest margin and are the greatest source of profit for propane distributors.
Since propane distribution is a cost plus margin-type business. A cash flow hedge attempts to mitigate the exposure to changes in cash flow of a forecasted transaction. The ineffective portion of the gain or loss is reported in earnings for the period in which the ineffectiveness occurs. L. rising wholesale propane prices can squeeze margins when retail prices lag cost
. hedge accounting cannot be applied. The effective portion of the derivative’s gain or loss is initially reported in other comprehensive income (outside earnings) and subsequently reclassified into earnings (as either gains or losses in operating revenue) as the forecasted transactions occur. L. Although. A fair value hedge attempts to mitigate the exposure to changes in the fair value of a recognized asset. In general. Industrial customers use propane primarily as a fuel for forklifts and stationary engines. quick changes in propane costs can affect short-term results. and as a fuel for barbecues.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. the hedged item) and its hedging instrument must have a correlation ratio between 80% and 125%. The gain or loss of a derivative designated as hedging the foreign currency exposure of a net investment in a foreign operation is reported in other comprehensive income (outside earnings) as part of the cumulative translation adjustment. household energy needs. If these criteria are not met. tobacco curing. liability. Propane MLPs
MLP AmeriGas Partners L. industrial. which could lead to significant volatility in a company’s earnings.P.P. primarily for home and water heating. L. L. L. There are three different types of hedge accounting: • Fair value hedges. LLC EQUITY RESEARCH DEPARTMENT
To qualify for FAS 133 hedge accounting. or firm commitment. a commodity (i. Global Partners.P. Propane MLPs.P Ferrellgas Partners. and agricultural customers. It is also an important feedstock used in the production of various chemicals and plastics. Inergy. (source FASB) • Cash flow hedges. Figure 30. Propane serves approximately 3% of total U.P. commercial. Propane Energy Value Chain
Source: Inergy. (source FASB) • Net investment hedges. and chicken brooding. while agricultural customers use propane for crop drying.
Navios Maritime Partners. asphalt. OSG America. Shipping Partners. sulfur. accretive acquisitions of smaller propane companies are a key to enhancing long-term performance. However. L. Teekay LNG Partners. MLPs with propane assets are generally indifferent to price fluctuations as long as they can pass on price increases to customers. Shipping MLPs. Shipping partnerships are subject to various governmental and industry regulations. petrochemical and commodity specialty products. Shipping MLPs transport energy products primarily via tankers or barges. LLC EQUITY RESEARCH DEPARTMENT
increases.000 0 1981 1983 1985 1987 1989 Source: Energy Information Administration 1991 1993 1995 1997 1999 2001 2003 2005 2007
Risks. K-Sea Transportation Partners. Propane prices fluctuate based on winter heating demand.P.Third Edition
WACHOVIA CAPITAL MARKETS. extremely high propane prices may cause conservation and may expose distributors to higher bad debt expense. liquefied natural gas. significant variations can occur in any given year.MLP Primer -. In addition. Shipping MLPs
MLP Capital Product Partners. with the top ten retailers controlling approximately 39% of the propane market and more than 5. 61%. diesel fuel. 2006 and 2007 experienced some of the warmest average annual temperatures ever recorded during the winter heating season. Figure 32.000 200.000 retailers holding the remaining market share. approximately 70% of annual cash flow is earned during the winter heating season (October through March). The primary customers for shipping MLPs include large oil refiners.S. rising retail propane prices can lead to consumer conservation. Products shipped typically include refined petroleum products and by-products such as gasoline. The propane industry remains extremely fragmented. as propane companies generate a majority of their revenue during the winter heating season. consumer conservation. L. heating oil. L. oil price trends.P. Teekay Offshore Partners L. depending on the type of vessel and location. chemical producers. L.P. Since the overall long-term growth rate for the propane distribution industry is less than 2% annually. Propane remains a very seasonal business. in recent years the changing nature of competition has allowed margins to expand in the face of record propane prices. propane does have defensive characteristics similar to other utility services because residential and commercial customers require propane for basic needs such as space and water heating. integrated oil & gas companies and energy marketing companies. fuel oil.P. Consumption Of Propane
500.000 Thousand barrels 400. and the inability to pass higher costs on to consumers. as propane is used primarily for heating. U. Drivers. and crude oil. L. and chemical demand. Although influenced by weather.P. lubricants. The more significant driver of propane consumption is weather. Historical U.000 300. Figure 33.P. Ticker Primary Business Line CPLP International product tankers KSP Domestic tank vessels
NMM International dry bulk OSP Domestic tank vessels TGP LNG vessels
TOO Crude oil shuttle tankers and floating storage and offtake units USS Domestic tank vessels
Source: Partnership reports
. Under normal circumstances. Propane distributors tend also to have higher working capital requirements when prices are very high.S.000 100. Although average annual temperatures have been fairly constant over the past 30 years. Risks to propane MLPs include warmer-than-normal weather. in our view. Commodity price sensitivity. L. jet fuel.P. For example.
Master Limited Partnerships
WACHOVIA CAPITAL MARKETS, LLC EQUITY RESEARCH DEPARTMENT
The shipping category encompasses several different MLPs with distinctly different business models and operating environments. These business models include the following: • International product tankers. Product tankers typically transport refined petroleum products, typically gasoline, jet fuel, kerosene, fuel oil, naphtha and other soft chemicals and edible oils. The marine transport of petroleum products between receipt and delivery points addresses the demand and supply imbalances for the refined product, which is usually caused by a lack of resources or refining capacity in the consuming country. • Domestic tank vessels. Tank vessels, which include tank barges and tankers, transport gasoline, diesel, jet fuel, kerosene, heating oil, asphalt, and other products from refineries and storage facilities to other refineries, distribution terminals, power plants, and ships. The demand for domestic tank vessels is driven by the U.S. demand for refined petroleum products, which can be categorized by either clean oil (e.g., motor gasoline, diesel, heating oil, jet fuel, and kerosene) or black oil products (e.g., asphalt, petrochemical feedstocks, and bunker fuel). Clean oil demand is primarily driven by vehicle usage, air travel, and weather, while black oil demand is typically driven by oil refinery requirements and turnarounds, asphalt use, use of residual fuel by electric utilities, and bunker fuel consumption. • International dry bulk. Dry bulk vessels transport cargoes that consist primarily of major and minor bulk commodities. Major bulk commodities include coal, iron ore, and grain, while minor bulk commodities include steel products, forest products, agricultural products, bauxite and alumina, phosphates, petcoke, cement, sugar, salt, minerals, scrap metal, and pig iron. The demand for dry bulk trade is driven primarily by the demand for the underlying dry bulk product, which is, in turn, influenced by growth in global economic activity. • Liquefied natural gas vessels. Liquefied natural gas is transported by specially designed double-hulled ships from producing to growing nations. The vast majority of LNG shipments occur in Europe and Asia. LNG vessels receive liquefied natural gas from liquefaction facilities for transport to regasification facilities at the receiving terminal. LNG demand is driven by countries that consume significant quantities of natural gas but lack the local production and/or pipeline infrastructure to deliver natural gas to its markets. • Crude oil shuttle tankers and floating storage and offtake units. Shuttle tankers, which are commonly described as “floating pipelines,” are specially designed ships that transport crude oil and condensates from offshore oil field installations to onshore terminals and refineries. The primary differences between shuttle tankers and conventional crude oil tankers are that shuttle tankers are used in regions with harsh weather conditions (e.g., the North Sea) and have voyages that are shorter in duration. Floating storage and offtake (FSO) units provide on-site storage for offshore oil field installations. FSOs are secured to the seabed and receive crude oil from the production facility via a dedicated loading system. FSOs transfer crude oil to shuttle and conventional tankers through its export system. Shipping and marine transportation services are typically performed under spot and term contracts set under a competitive bidding process. The rates charged under these contracts can be based either on a daily basis or on a volume transported basis. The terms and awarding of contracts is based on (1) vessel availability and capabilities, (2) timing of customer’s schedule, (3) price, (4) safety record, (5) experience and reputation, (6) vessel quality, and (7) the supply and demand of products being shipped. Shipping contracts can vary in length depending upon the type of ship and operating market. Most contracts under the MLP (versus corporate) structure are longer term in nature (e.g., LNG contracts are typically under ten-year terms or more), which provides a shipping MLP with some cash flow stability. These longer-term contracts tend to have escalation clauses whereby certain cost increases such as labor and fuel are passed on to the customer. Shipping is subject to prevailing market trends, which tends to make spot market activity (i.e., for short-term contracts), and is volatile and therefore, less suitable for the MLP structure, in our view. Shipping MLPs, like pipeline MLPs, do not assume ownership of the products shipped. U.S. point-to-point shipping competition is somewhat limited from foreign competitors due to the Jones Act, which restricts such shipping to vessels operating under the U.S. flag, built in the United States, at least 75% owned and operated by U.S. citizens, and manned by U.S. crews. Drivers. The shipping industry is highly fragmented, which lends itself to consolidation. The current tight vessel supply and demand market condition should keep charter rates firm to increasing over the foreseeable future. As the industry rebuilds to meet government double-hull regulations, and as the 2015 deadline approaches, new larger, more efficient barges with long-term contracts should enhance the earnings stability
MLP Primer -- Third Edition
WACHOVIA CAPITAL MARKETS, LLC EQUITY RESEARCH DEPARTMENT
and cash return on investment. Stringent safety requirements by customers should continue to work to the benefit of larger vessel operators spawning mergers within the industry. The potential to acquire dock, terminal, storage facilities, and other harbor-based facilities could help to vertically integrate or diversify the business model of vessel operators. Risks. Investments in shipping MLPs can be considered a higher-risk investment relative to pipeline MLPs, due to the following factors: (1) regulatory requirements (e.g., OPA 90 requires single-hulled vessels to be phased out by 2015); (2) short-term nature of contracts (versus pipeline MLPs); (3) spot market volatility; (4) competitiveness of the contract bidding process; (5) new build risk (i.e., up-front significant capital); (6) decline in demand for shipped products; and (7) potential repeal of the Jones Act. Commodity price sensitivity. Like pipeline MLPs, shipping MLPs typically do not take title to the product shipped; therefore, changes in commodity prices have a minimal direct impact on these companies. Shipping MLPs could potentially be indirectly affected by a (sustained) high commodity price environment (on the products transported), which ultimately results in a decrease in the demand for the products shipped (i.e., consumer conservation). Shipping MLPs’ earnings are more directly tied to the demand for the product shipped. Coal MLPs. The universe of coal MLPs consist of one coal producer and two coal royalty businesses that own, lease, and manage coal reserves. The royalty-oriented partnerships enter into long-term leases that provide the coal operators the right to mine coal reserves on the partnerships’ properties in exchange for royalty payments. A coal MLP’s royalty payments are based on the volume of coal produced and the price at which it is sold. In addition, since coal royalty MLPs do not operate any of the mines, their operating costs are typically limited to corporate and administrative expenses. Figure 34. Coal MLPs
MLP Alliance Resource Partners, L.P. Natural Resource Partners, L.P. Penn Virginia Resource Partners, L.P. Ticker Primary Business Line ARLP Coal operator NRP Coal royalty model PVR Coal royalty model
Source: Partnership reports
Drivers. The demand for and the price of coal is driven by a number of factors, both domestic and international. Domestically, demand is driven by (1) electricity demand because electric utility companies are the primary consumers of coal (more than 90%); (2) the relative price of natural gas and crude oil, as some power producers can alternate their fuel consumption based on the relative price of different fuels; (3) weather, which can influence electricity demand and hydro-electric production; and (4) environmental regulations. The demand for electricity is generally influenced by economic growth, weather patterns, and coal customer inventory trends. Internationally, demand for coal is also influenced by worldwide electricity demand, the value of the dollar, economic growth in developing countries, and demand for steel, which is derived from metallurgical coal (commonly referred to as met coal). Risks. Risks to both coal producer and royalty-based MLPs include declining coal prices, operational and geological issues, and regulatory issues (specifically environmental). Risks specific to coal royalty MLPs include (1) reliance on lessees to operate and produce on its reserves (i.e., the rate of production is dictated by the producer); and (2) no direct control over pricing (i.e., lessees negotiate new contracts with utilities and other end users directly). Commodity price sensitivity. MLPs with coal assets directly benefit during periods of high commodity prices. Coal MLPs own coal reserves and either lease their reserves and collect a royalty stream or mine the coal reserves directly. Since most coal is sold under long-term (1-3 year) contracts, higher coal spot prices do not immediately affect coal sales prices. When contracts roll over, they are typically renegotiated closer to prevailing spot prices. Upstream MLPs. Upstream MLPs are focused on the exploitation, development, and acquisition of oil and natural gas producing properties. These partnerships produce oil and natural gas at the wellhead for sale to various third parties. Typically, upstream MLPs do not partake in exploratory drilling, but rather own and operate assets in mature basins that exhibit low decline rates and long reserve lives. Accordingly, these assets require a relatively small amount of capital to fund low-risk development opportunities and have predictable production profiles.
Master Limited Partnerships
WACHOVIA CAPITAL MARKETS, LLC EQUITY RESEARCH DEPARTMENT
Figure 35. Upstream MLPs
MLP Atlas Energy Resources LLC BreitBurn Energy Partners, L.P. Constellation Energy Partners LLC Dorchester Minerals, L.P. Encore Energy Partners, L.P. EV Energy Partners, L.P. Legacy Reserves L.P. Linn Energy, LLC Pioneer Southwest Energy Partners, L.P. Quest Energy Partners, L.P. Vanguard Natural Resources, LLC Ticker Primary Business Line ATN 95% natural gas / 5% crude oil
BBEP 63% natural gas / 37% crude oil CEP 99% natural gas / 1% crude oil
DMLP Natural gas and crude oil royalty model ENP 32% natural gas / 68% crude oil
EVEP 76% natural gas / 24% crude oil LGCY 26% natural gas / 74% crude oil LINE 65% natural gas / 35% crude oil PSE 16% natural gas / 84% crude oil
QELP 99% natural gas / 1% crude oil VNR 74% natural gas / 26% crude oil
Source: Partnership reports
Upstream MLPs represent a lower-risk way to invest in oil and natural gas. Commodity risk is substantially mitigated via an actively managed hedging program. Most upstream MLPs have hedges that lock in prices for 70-90% of their anticipated production for 1-3 years. Upstream MLPs seek to address long-term commodity price and liquidity risk by maintaining conservative debt levels. Drivers. Because drilling and development activity of most upstream MLPs is focused primarily on maintaining, rather than increasing, production, most upstream MLPs rely on acquisitions funded with debt or equity to drive distribution growth. In addition, higher commodity prices should benefit the unhedged portion of upstream MLP production. This excess cash flow can be reinvested into acquiring mature reserves and/or help fund organic growth capex, both of which should support additional distribution growth. Risks. Some of the risks associated with investing in upstream MLPs include (1) declining commodity prices, (2) inability to hedge at attractive prices, and (3) a lack of acquisition opportunities. Commodity price sensitivity. MLPs that own oil and gas assets have the most direct exposure to commodity prices. Typically, these partnerships mitigate this exposure by hedging 70-90% of current production. Hedging serves to protect against decreases in commodity prices and hence, supports the consistency of distribution payments. However, a prolonged period of depressed commodity prices could force a partnership to reduce its distribution. Many upstream MLPs maintain a high coverage ratio in order to partially mitigate this risk. Refining. Refining MLPs produce specialty and fuel products from the refining of crude oil. Specialty products include lubricating oils, solvents, and waxes that are used as raw material components for basic industrial, consumer, and automotive products. Fuel products include unleaded gasoline, diesel fuel, and jet fuel. Figure 36. Refining MLPs
MLP Calumet Specialty Products Partners, L.P Ticker Primary Business Line CLMT Refining
Source: Partnership reports
There are also some MLPs that own asphalt storage assets. Asphalt is a darkish brown to black, sticky, and highly viscous substance produced from crude oil (i.e., the bottom of the barrel). Due to the consistency of asphalt, it is stored in heated terminals and transported via truck, rail, and/or barge, but not pipelines. Asphalt is used primarily for paving and roofing purposes. It is estimated that approximately 85% of asphalt consumed in the United States is used for road paving and about 10% is used for roofing products (i.e., shingles). The asphalt business is seasonal and must be applied to roads during warm weather conditions. Thus, asphalt companies typically experience higher demand from May to October and build inventory during the colder months (i.e., January through April). Drivers. Factors driving refining MLPs include (1) crack spreads (i.e., the spread between crude oil input prices and product output prices); (2) the demand for specialty and fuel products; (3) demand levels for road paving by government and municipalities; (4) demand for housing; and (5) economic activity.
. and (4) unscheduled refinery turnarounds. and (3) high natural gas prices. Factors driving compression MLP growth include (1) production from unconventional resources. Figure 37. lower domestic natural gas production. LNG describes the process whereby natural gas is transformed from a gaseous to liquid state and shipped via marine tankers to consuming markets. Significant declines in natural gas prices could make it uneconomical for liquefaction plants. of which 10 are structured as master limited partnerships. (2) demand for refined products.e. MLPs with compression assets have limited sensitivity (i. crude oil). environmental legislation (i. and (3) a slowdown in commercial and residential construction.e. However. Factors driving LNG growth includes global demand for natural gas. Figure 38. re-gasification). (2) throughout gathering and distribution systems. Compression MLPs
MLP Exterran Partners LP Ticker Primary Business Line EXLP Oilfield Services
Source: Partnership reports
Drivers. With respect to asphalt. which spur drilling activity.MLP Primer -. General partner interest. Commodity price sensitivity. the LNG is returned to its gaseous state (i. The primary risks associated with compression MLPs include a decline in drilling activity (i. relatively stable utilization rates) to commodity price fluctuations. a prolonged period of depressed natural gas prices could affect drilling activity and utilization rates. Natural gas is cooled into liquid form at a liquefaction facility and transported via specially designed ships to markets that have insufficient natural gas supplies or limited natural gas pipeline infrastructure. Commodity price sensitivity. decline in commodity prices) and the inability to pass through rising operating costs. (3) into and out of processing and storage facilities.Third Edition
WACHOVIA CAPITAL MARKETS. An investment in a GP security is a leveraged play on the underlying MLP as the GP’s financial performance and distributions are dependent upon the underlying partnership’s operations and distribution growth prospects. restricting construction of coal fired power plants). Some of the risks associated with investing in refining MLPs include (1) rising feedstock prices (i. the natural gas is stored in specially designed facilities or delivered to natural gas consumers through pipelines. Ticker Primary Business Line CQP LNG
Source: Partnership reports
Drivers. Once re-gasified. and (4) along intrastate and interstate pipelines. (2) acquisitions. The public GPs are typically corporate shells.P. Risks associated with investing in MLPs with domestic LNG assets include the LNG market not developing as quickly as anticipated and higher natural gas prices in international markets resulting in more LNG cargos delivered to Europe and Asia. LNG MLPs
MLP Cheniere Energy Partners L. Compression MLPs (also known as Oilfield Services MLPs) provide natural gas contract compression services.. Risks. There are 11 publicly traded general partnerships. and construction of additional liquefaction plants. Compression is often applied (1) at the wellhead.e. Compression.e..e.
. They do not take title to the natural gas they compress and typically charge fees for services regardless of throughput. (3) alternative/competing products. The IDRs entitle the GP to receive a disproportionate amount of incremental cash flow from the underlying MLP as it raises distributions to limited partners. Upon delivery of the LNG to the receiving terminal. which house the GP interest and IDRs of the underlying MLP. Some GPs also own LP units of the underlying MLP. Natural gas compressors are used to compress a volume of natural gas at an existing pressure to a higher pressure to facilitate delivery of the gas from one point to another. LLC EQUITY RESEARCH DEPARTMENT
Risks.. the primary risks include (1) volatility of asphalt prices (this includes seasonality).. The GP merely receives cash payments from the MLP and re-distributes these payments to its unitholders in the form of distributions after deducting public company expenses. Liquefied Natural Gas. Risks. (2) inability to hedge asphalt prices.
NASDAQ. (2) have no role in the partnership’s operations and management. The general partner (1) manages the daily operations of the partnership. MLPs do not pay corporate level taxes. Risks.P. LLC EQUITY RESEARCH DEPARTMENT
Figure 39. LLC Who Are The Owners Of The MLP? MLPs consist of a general partner (GP) and limited partners (LP). NYSE. The MLP Versus A Standard C Corp Structure Typical
Structure comparison Corporate level tax Unitholder / shareholder level tax Tax shield on distributions / dividends Tax reporting General partner Incentive distribution rights Voting rights K-1 1099 MLP C corp. Magellan Midstream Holdings. and (3) receive cash distributions. Figure 40. L. L. Hiland Holdings GP.
Source: Wachovia Capital Markets. (2) typically holds a 2% ownership stake in the partnership.P. Crosstex Energy. L. What Is An MLP? Master Limited Partnerships (MLPs) are companies that are structured as a limited partnership rather than a C corporation (C corp. Inc. L. Enterprise GP Holdings. The primary risk associated with investing in GP MLPs is operational challenges at the underlying MLP and the potential impact of indiscriminate carried interest legislation.e. GP MLPs
MLP Alliance Holdings GP. Energy Transfer Equity.P. The limited partners (or common unitholders) (1) provide capital.P. Instead.
VI. Limited partnership interests (limited partner units) are traded on public exchanges (i.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. L. and AMEX) just like corporate stock (shares). unlike a C corp. L. L. Buckeye GP Holdings.. LLC Inergy Holdings. taxes are paid (on a partially deferred basis) by limited partner unitholders.
A. and (3) is eligible to receive an incentive distribution. The key differentiating factor for an MLP is that. L.P. Factors driving GP MLP performance include (1) distribution increases at the underlying MLP and (2) equity issuances.P.
. Penn Virginia GP Holdings LP Atlas Pipeline Holdings.).P..P. Ticker Primary Business Line AHGP General partnership PVG General partnership AHD General partnership XTXI General partnership EPE General partnership
HPGP General partnership ETE General partnership
BGH General partnership MGG General partnership NSH General partnership NRGP General partnership
Source: Partnership reports
Drivers. NuStar GP Holdings.
transportation. gain on sale of assets. processing. due to their tax-advantaged status.7x TOO 7.MLP Primer -. income from sale of real property. and income and gain from commodities or commodity futures. This enhances the partnership's competitive position vis-à-vis corporations in the pursuit of expansion projects and acquisitions.1x TGP 13.1x. MLPs should be able to either (1) pay more for an acquisition than a corporation and realize the same cash flow accretion or (2) realize more accretion from an acquisition given the same acquisition price. MLP investors are not subject to double taxation on dividends. For example.7x EP 7.1x SE 6. E. a partnership must receive at least 90% of its income from qualifying sources such as natural resource activities.3x SEP 15. LLC EQUITY RESEARCH DEPARTMENT
B. except for WES and PSE.7x WPZ 10. in our opinion.
C. Figure 42. which makes financing acquisitions and organic projects feasible. and marketing of any mineral or natural resource. MLPs typically enjoy a competitive advantage relative to corporations. Why Create An MLP? An MLP provides a number of benefits to the sponsor.5x EXLP 11. development. refining.1x EXH 7. Valuation Arbitrage Between MLP And C-Corp
EPB EV/EBITDA MLP median C-corp median 15. A premium valuation. interest.1x 11. unlike corporate investors. LLC estimates • •
The ability to maintain control of the assets (via the GP interest). What Qualifies As An MLP? To qualify as an MLP. versus 6. MLPs with C corp sponsors currently trade at an estimated median 2008 enterprise value-to-adjusted EBITDA multiple of 11. Assets within the MLP structure typically trade at higher valuations in the market than those same assets within a C corp structure. Natural resource activities include exploration. In general. dividends. MLPs have traditionally enjoyed good access to capital. What Are The Advantages Of The MLP Structure? Due to its partnership structure.5x WES 9. 78 are energy related. In addition. Types Of Publicly Traded Partnerships
60 Count 30 14 2 0 Energy Minerals and Timber Real Estate Investment / Financial Other 5 3
Source: National Association of Publicly Traded Partnerships
D. most MLPs are involved in the energy markets. The opportunity to capture potential upside from incentive distribution rights (IDR).8x
Note: MLP ratios are EV/adjusted EBITDA Note: Data based on Q1 2008. Figure 41. real estate rents. How Many MLPs Are There? Currently.7x PSE 6.6x WMB 6.9x WMZ 11. which are based on respective IPOs in Q2 2008 Source: Partnership reports and Wachovia Capital Markets.5x for the associated C corp. Thus. Of those. storage.
. including the following:
A tax-advantaged structure with which to pursue growth opportunities.3x PXD 6. mining or production. Currently. MLPs generally do not pay entity-level income taxes. there are 102 MLPs traded on public exchanges.Third Edition
WACHOVIA CAPITAL MARKETS.7x APC 5.9x TK 10.1x 6.
cash flow is paid to investors as it is generated and only until the underlying asset is depleted.S. U. H.
. Thus. they do not make acquisitions or increase their asset base. L. Structure Comparison
Structure comparison Non-taxable entity Tax shield on distributions Tax reporting General partner Incentive distribution rights Management incentive interests Voting rights
Source: Wachovia Capital Markets. LLCs unitholders have voting rights. The investor pays tax on the portion of net income allocated to him or her (which is shielded by losses. and Teekay Offshore Partners. Copano Energy.S. deductions. the loss can be carried forward and used to offset future income from the same MLP. Linn Energy. In addition. and Vanguard Natural Resources are registered as a limited liability corporation (LLC).P. federal income tax purposes. royalty trusts are yield-oriented investments and have unique investment characteristics. U. The dividends are then taxed as personal income. federal income tax on distributions received from the MLPs and sales of the MLPs’ units. loss. Navios Maritime Partners.S. it is considered a “passive loss” under the tax code and may not be used to offset income from other sources. and credits. but will be subject to U. Instead.. there were 73 energy MLPs registered as a limited partnership (LP).S. What Is The Difference Between A LLC And MLP? As of July 2008. Unlike MLPs. Constellation Energy Partners. 90%) of profit is distributed to shareholders as dividends. federal income tax on the partnerships’ income. trusts are not actively managed entities. dividends from trusts fluctuate with cash flow and should eventually dissipate. including no corporate level of taxation and tax deferral for unitholders. Based on this election. However. LLC EQUITY RESEARCH DEPARTMENT
F. deductions. and some can be retrieved online (via the company’s website). The remaining portion of this distribution is to be treated first as a nontaxable return of capital to the extent of the purchaser’s tax basis in its common units on a dollar-for-dollar basis and thereafter as capital gain. holders will not directly be subject to U. In contrast. gain. If the partnership reports a net loss (after deductions). A U. LLC
C corp. G. The qualified dividend income would be taxable to the U. Six entities. It is similar to a Form 1099 received from a corporation. whereas MLP limited partner unitholders generally do not have voting rights. In addition. Atlas Energy Resources.S.P. common unitholder at the capital gains tax rate versus the ordinary income tax rate. Thus. however. Royalty Trusts? Canadian Royalty Trusts? No U. The primary differences between LLCs and MLPs are that LLCs do not have a GP or incentive distribution rights.. LLCs have all the tax advantages of MLPs. K-1 forms are usually distributed in late February or early March. A trust’s profit is not taxed at the corporate level provided a certain percentage (e.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. they are not MLPs. and credits) at his or her individual tax rate.. royalty trust is a type of corporate structure whereby a cash flow stream from a designated set of assets (typically oil and gas reserves) is paid to shareholders in the form of cash dividends. L.
There are three shipping MLPs: Capital Product Partners L. Are MLPs The Same As U.S. which elected to be taxed as corporations for U. investors would receive a Form 1099 rather than a K-1.S. but may have management incentive interests (MII).P. What Is The K-1 Statement? The K-1 form is the statement that an MLP investor receives each year from the partnership that shows his or her share of the partnership’s income. since these MLPs are structured as corporations..S.S. NuStar GP Holdings. Figure 43.g. These MLPs also provide percentage estimates of total cash distributions made during a certain period that would be treated as “qualified dividend income” (this is similar to the percent estimate of federal taxable income-to-distributions provided by standard MLPs).
The cost basis of the initial investment does not change. the i-share security could be an appropriate investment. for investors who prefer to reinvest dividends.8% premium to EEP and KMR trades at a 5. Thus. The discrepancy between valuations can be attributed to a number of factors. Thus.e. • Liquidity. EEQ trades at a 3. is spread among more shares. the i-shares are not entirely pari passu with the MLP common units. I. the primary differences between upstream MLPs and Canadian royalty trusts are that the trusts (1) are involved in the exploration and production of crude oil and natural gas (whereas upstream MLPs are involved in exploitation and production) and (2) tend to hedge a smaller percentage of their current production volume (while upstream MLPs typically hedge approximately 70-90% of a current year’s production). in our view. i-shares can be owned in an IRA account without penalty. LLC (KMR).
. in our view.Third Edition
WACHOVIA CAPITAL MARKETS. I-shares have average trading volume of only 133. in May 2001. MLP distributions are managed to be steady and sustainable (and often growing). However. versus 383. LLC (EEQ). Unlike MLP securities. Thus. Distributions to i-shareholders are treated similar to stock splits. MLP units are difficult to sell short. Kinder Morgan was the first to offer i-shares with the creation and issuance of Kinder Morgan Management. no natural arbitrage opportunity exists. Currently. The i-share structure is analogous to an automatic dividend reinvestment plan. The ability to convert an i-share to a common unit was removed by the partnerships soon after the public offerings. Currently. • No natural arbitrage. but instead. On the other hand.. an investment vehicle similar to LP units was created known as i-shares (the "i" stands for institutional). both EEQ and KMR have traded at a discount to their MLP unit equivalent. though recently. What Are I-Shares?
In order to expand the universe of potential investors in MLPs to institutional investors and tax-deferred accounts such as IRAs. make acquisitions or investments to grow production). The i-shares are equivalent to MLP units in most aspects. LLC EQUITY RESEARCH DEPARTMENT
MLPs are actively managed entities that can make acquisitions and investments to increase their asset base and sustain (and grow) cash flow. except distributions are paid in stock instead of cash. Over the long term. a limited liability company.869. all gains (including the most recent share distribution) are treated as long-term capital gains. Canadian royalty trusts are more similar to upstream MLPs in that Canadian trusts are actively managed entities (i. Investors prefer cash distribution to stock dividends. including the following: • Cash is king. • No conversion provision. One year after purchase. which would cause the units to trade more closely.679 for the two MLP units. Hence. the only other i-share security is Enbridge Energy Management. Since inception. i-shares do not require the filing of K-1 statements and do not generate UBTI.3% discount to KMP.MLP Primer -. The i-share discount. EEQ has traded at a premium to EEP.
the first-in. first-out (FIFO) method is used.
. An investor’s tax basis is calculated as the initial amount paid for the shares divided by the total number of shares received both from the initial purchase and the subsequent quarterly distributions. The holding period for shares received as distributions is marked to the date at which the original investment in the shares was made. the basis of each lot of shares can be used separately in the allocation. EEP And KMP Relative To The Underlying I-Shares
EEP-to-EEQ .Premium / (Discount) Premium / (Discount) 16% 12% 8% 4% 0% (4%) (8%) 12/29/06 10/29/07 11/29/07 12/29/07 1/29/07 2/28/07 3/29/07 4/29/07 5/29/07 6/29/07 7/29/07 8/29/07 9/29/07 1/29/08 2/29/08 3/29/08 4/29/08 5/29/08
KMP-to-KMR . Otherwise. LLC EQUITY RESEARCH DEPARTMENT
Figure 44. (This is similar to the way a stock split is calculated.) If shares were acquired for different prices or at different times. An i-shareholder pays capital gains tax on the sale (long-term capital gains if the holding period is greater than one year). this does not trigger a taxable event.Premium / (Discount) Premium / (Discount) 20% 16% 12% 8% 4% 0% 1/29/07 2/28/07 3/29/07 4/29/07 5/29/07 6/29/07 7/29/07 8/29/07 9/29/07 1/29/08 2/29/08 3/29/08 4/29/08 12/29/06 10/29/07 11/29/07 12/29/07 6/29/08
What Are The Tax Consequences Of Owning I-Shares? When a shareholder receives a quarterly distribution in the form of additional i-shares.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. A taxable event occurs only when a shareholder sells his or her share.
An MLP generates value for unitholders by investing in projects that generate returns in excess of the partnership’s cost of capital.5% and trade at an above average yield of 9. This is due to the fact that MLPs distribute the majority of their cash flow in the form of distributions each quarter. In addition.2% and consequently trade at lower than average yield of 5. all else being equal. MLPs with investment grade credit ratings generally enjoy better access to capital at a lower cost.one standard deviation Source: FactSet and Wachovia Capital Markets. In comparison. or cost-saving synergies should benefit from an approximate 0. Fastergrowing MLPs have commanded lower yields. most MLPs have historically enjoyed good access to the capital markets. Empirical evidence suggests there is an inverse relationship between anticipated distribution growth and MLP yield. This level of correlation does not preclude an MLP with a forecasted distribution growth rate of 8% from trading at a similar yield to an MLP with a forecasted distribution growth rate of 10%.1781x + 0.
Drivers Of Performance
A. based on an estimated 0. propane MLPs have a forecasted three-year distribution CAGR of 5. An MLP that is able to increase its forecasted annual distribution growth rate by 1% via accretive acquisitions.0946 R2 = 0. the potential flaw with this analysis is that our distribution growth forecasts could be incorrect.e. LLC EQUITY RESEARCH DEPARTMENT
VII. Distribution Growth Distribution growth has been one of the primary drivers of MLP price performance.e. 55% of the variation is explained). organic growth projects. For example. Correlation Between Distribution Growth And Yield
12% y = -0.74 correlation between the two variables (i. Alternatively. new debt and equity)..MLP Primer -. Figure 45. publicly traded GPs have an average estimated three-year distribution growth CAGR of 21.Third Edition
WACHOVIA CAPITAL MARKETS.
.2% reduction in yield. while slower-growing MLPs have traded at higher yields. The following chart plots our three-year distribution growth CAGR estimates against current yields..1%. LLC estimates
B. the market may be forecasting different growth assumptions for certain MLPs or factoring in different levels of risk.7%. Access To Capital Access to capital remains the key to MLP distribution growth as acquisitions and organic investments are mostly funded with external capital (i.5479
9% Current Yield 6% 3% 0% 5% 10% 15% 20% 25% 30% 35% Estim ated 3-Year Distribution Grow th CAGR
Note: Dotted lines represent +/. However.
505 $9. This is due to the fact that MLPs are yield investments that were traditionally viewed as bond-like substitutes.000
$16. the correlation between the 10-year Treasury yield and MLPs has been only 0. LLC EQUITY RESEARCH DEPARTMENT
Figure 46.415 $5.975
$ in millions
$12.07. our MLP Composite declined 20. in 1999. As MLPs have accelerated distribution growth over the past ten years (19982007) to approximately 9% from 4%.206
$8. treasury (from 2000 to 2008 year to date).000
$5. the Fed increased the target rate three times to 5.00%.687
Source: Partnership reports
C.75% from 5.S.5%.000 $4. MLPs have underperformed during certain some periods of rapidly rising interest rates because as interest rates increase. investors are able to receive a higher risk-adjusted rate of return from government-backed debt or treasury securities.6% from an average of 7. the average spread between MLP yields and treasury yields declined to a low of 16 bps from a high of 512 bps. For example. Historical Equity And Debt Issuances
$4. MLPs have historically traded at an average spread of 251 basis points (bps) to the 10-year U. Over that same period. while the Composite yield increased to 10. Over the past five years. the impact of modest interest rate movements on MLP price performance has decreased.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS.598 $0 2004A 2005A $5.000 $4.965
.7%. As MLPs have become more growth oriented. Interest Rates The movement of interest rates has historically been an important driver of MLP performance.150 $14.
MLP Primer -. As the GP increases cash distributions to LPs. MLPs establish agreements between the general partner and the limited partners that outline the percentage of total cash distributions that are allocated between the GP and LP unitholders. LLC
VIII. but are likely to affect earnings (on the unhedged portion of production or volume processed) of upstream and gathering and processing MLPs. historically it has been low relative to other companies in the energy industry. as well. As a result. Impact Of Commodity Prices On MLPs
Short-Term Increase In Prices Natural Gas Pipeline MLPs Gathering & Processing MLPs 1 Upstream MLPs None Negative Positive Crude Oil None Positive Positive Sustained Increase In Prices Natural Gas Positive Negative Positive Crude Oil Positive Positive Positive
Note 1: For primarily keep-whole contracts Source: Wachovia Capital Markets. or “high splits” tier. in our view. Longer term. For a more detailed discussion of the impact of commodity prices. Near-term fluctuations in natural gas and crude oil prices are unlikely to have a material impact on pipeline MLPs. Key Terms
A. please see the “Asset Overview” section beginning on page 18. (Please see the Appendix for a list of energy MLPs and their incentive distribution rights levels. which benefits the LP unitholders. LLC EQUITY RESEARCH DEPARTMENT
Figure 47. The theory behind this arrangement is that the GP is motivated to build the partnership. Although MLPs’ exposure to commodity price risk varies overall. This is known as the 50/50. Commodity Prices The influence of commodity prices on MLPs varies significantly by sub-sector. and raise the quarterly cash distribution to reach higher tiers. What Are Distributions? Distributions are similar to dividends. a sustained reduction in natural gas or crude oil prices could curtail drilling by producers. Historical Midstream MLP Yield Spread To The 10-Year Treasury
600 As of 7/11/08 the spread was 388 bps MLP Yield Spread To 10-Yr Treasury (Bps) 500
D. increase the partnership’s cash flow. the GP receives an increasingly higher percentage of the incremental cash distributions. this agreement can reach a tier in which the GP is receiving 50% of every incremental dollar paid to the LP unitholders. even long-haul pipeline MLPs could be affected from reduced transportation volume and/or fewer infrastructure opportunities. What Are Incentive Distribution Rights (IDR)? At inception. MLPs typically pay cash distributions to unitholders on a quarterly basis. In most partnerships.)
. Figure 48.Third Edition
WACHOVIA CAPITAL MARKETS. B.
the adjusted yield of 10.0% reflects distributions made only to the LP unitholders (i.50 per unit.00.00 $0.6% reflects distribution payments to both the LP and GP (i. between $0. The GP receives 15% of the incremental cash flow. which is the incremental cash flow above $3. However.00 distribution to LP unitholders by 98% and then multiplying by 2% ([$2.00 $2.09 per unit. LLC
.50 $3.00 Cumulative Cumulative distribution allocation of cash flow (%) Distribution per unit per unit LP GP Total LP GP Total LP GP $2.00 in hand.00 to $5. Thus.00 $2.04 $0.13 $0.00 and the GP would receive an additional $1. Figure 49.30 per unit. Calculating Incentive Distribution Payments In the following table we illustrate the mechanics of how cash flow is allocated between the limited partners and the general partner based on a hypothetical incentive distribution rights schedule (see Figure 49). At this level. if the distribution is increased to $5.50 $0. which is the incremental cash flow above $2.00. The GP receives 25% of the incremental cash flow.00 ÷ $50.04 per unit.00.04 $2..30 10. Figure 50.00 $4. MLP XYZ Incentive Distribution Tiers
Distribution up to: $2.30 98% 95% 91% 76% 2% 5% 9% 24%
MLP XYZ Stock price Distribution to LPs Yield Total distributions Adjusted yield $50. At the declared distribution of $4. if the MLP wants to raise its distribution to limited partners by $1.30 = $5. Based on this schedule.00). is achieved when distributions are greater than $3.00 per LP unit. as well. Tier 1 includes all distributions less than or equal to $2.04 is derived by grossing up the $2. At Tier 2.30 $5. or approximately 9% of total distributions paid.30 ÷ $50.00 and less than or equal to $2. the LP unitholders would receive 76% of total cash distributions.50 per unit but less than or equal to $3.e.50 $3.00.50. and Tier 3 includes distributions greater than $2.00 per unit but less than or equal to $2. which equates to $0.00 ($4. MLP XYZ’s yield of 8. which equates to $1. or the high-splits tier. which represents 75% of the distribution at that tier. or $0.00 $0.00.00 per unit).00 per unit.00/98%] × 2%).00 per limited unit.00 8..30 $5.04 $0.50.04 $0. the LP receives $1.00 and $2.30 $1.00.00 $2. At Tier 3. $4.30 $2. it actually needs $2. and for the incremental $1. 50/50 splits).00 received by LP unitholders represents 98% of the total cash distribution paid to the GP and LP unitholders. At Tier 4. of that distribution at Tier 1.e.00.00 Above $3. This same formula is applied at the subsequent tiers. the LP receives $0. the GP would receive 50% of the incremental cash.50 $3. we assume MLP XYZ declares a distribution of $4..00 per unit.00 per unit.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. LLC EQUITY RESEARCH DEPARTMENT
C.e.00 in our example. which equates to $0.00 + $1. which is the incremental cash flow above $2. In other words.00 per unit.0% $5. This $0.50 and less than or equal to $3. As the cash distribution is increased beyond $4. Thus.00 $2.13 per unit.50 $0. which represents 85% of the distribution at that tier.00
Source: Wachovia Capital Markets. the LP receives $0. The GP receives 2%. which represents 98% of the distribution at that tier.00
Source: Wachovia Capital Markets. at Tier 1. the $2. the LP receives $2.00 $4.00.63 $3.50. $4. one to pay the LPs and one to pay the GP.09 $0. the formulas for Tiers 1-4 would apply. up to: $2.50 per unit and the GP receives $0. while the GP would receive 24%.00 $1. the LP receives $2. In other words. As outlined in Figure 50. MLP XYZ Distribution Tiers
LP% Tier 1 Tier 2 Tier 3 Tier 4 98% 85% 75% 50% GP% 2% 15% 25% 50% LP distr. the LP would receive $1.67 $2.59 $0.6% Tier 1 Tier 2 Tier 3 Thereafter
LP% 98% 85% 75% 50%
GP% 2% 15% 25% 50%
Above $3.00). LLC
In this example. The GP also receives 50% of the incremental cash flow. which represents 50% of the distribution at that tier.00 $2. the GP receives approximately 5% of the total distribution paid.17 $1. Tier 4 (i. Tier 2 includes distributions greater than $2.
however. PVR. cash flow accrues to the MIIs until they are eligible to receive the cash flow.e.1. thereby increasing the partnership’s base of sustainable earnings. Some MLPs have generated significant excess cash (or maintain higher distribution coverage ratios) for reinvestment in organic growth projects. high coal prices (ARLP. The MIIs entitle the holder (e. However. NRP) or wide commodity spreads (PAA).g. Distribution Coverage Ratio Calculation
Distributions paid (to GP and LP) Source: Wachovia Capital Markets. available cash flow for the GP and LP divided by distributions paid to the GP and LP). On the other hand. this “windfall” of cash is being used to pay down debt or to fund internal growth projects.. Thus. In contrast. respectively. the MIIs are not paid out to the holder until certain criteria are met (e. Are MLPs Required To Pay Out “All” Their Cash Flow? Under a typical partnership agreement.3x. most pipeline MLPs have coverage ratios in the 1.0. propane MLPs that have a cash flow stream that is sensitive to weather typically carry coverage ratios of at least 1.. Figure 52.g.
WACHOVIA CAPITAL MARKETS. What Is The Distribution Coverage Ratio And Why Is It So Important? A partnership’s distribution coverage ratio is the ratio of cash flow available to common unitholders and the general partner to the cash paid to an MLP’s common unitholders and the general partner (i. LLC Distribution coverage ratio = Available cash flow (to GP and LP)
Coverage ratios vary depending on the type of MLP and the inherent cash flow volatility in the underlying assets of the partnership. e. Management’s rationale for withholding cash flow is that the current earnings may not be sustainable due to unusual circumstances. What Is The Difference Between Available Cash Flow And Distributable Cash Flow? We define available cash flow as the cash flow that is available to the partnership to pay distributions to both LP unitholders and the GP. This usually includes all cash flow that would be required for “the proper conduct of the business. E. LLC EQUITY RESEARCH DEPARTMENT
Management Incentive Interests (MII) Are Similar To IDRs Management incentive interests (MII) function in the same way as incentive distribution rights. F. we calculate distributable cash flow as the cash flow available to the partnership to pay distributions less cash paid to the GP. management) to receive an increasingly greater proportion of the MLP’s cash flow as distributions exceed certain thresholds. For example.1x range. target distribution levels and distribution coverage ratios). fee-based cash flow that underpins their businesses. of incremental cash flow. Paying out the vast majority of cash flow is a strong discipline that incentivizes management to operate the partnership efficiently and to take extra precautions when contemplating acquisitions and/or organic capital projects.MLP Primer -. Constellation Energy Partners (CEP) and Atlas Energy Resources (ATN) are currently the only MLPs that have MIIs. Available And Distributable Cash Flow Calculation
Net income (+) depreciation and amortization (-) maintenance capex Available cash flow (-) Cash flow to general partner Distributable cash flow to LP unitholders OR EBITDA (-) interest expense (-) maintenance capex Available cash flow (-) Cash flow to general partner Distributable cash flow to LP unitholders
Source: Wachovia Capital Markets. the MLP is required to pay out all “available cash” to unitholders in the form of distributions..2-1.” including future capital expenditure and financing requirements.g. Available and distributable cash flow is commonly calculated in the following ways: Figure 51. management teams have significant discretion in determining what is considered available cash flow. reflecting the stable. LLC
Distributable cash flow can also include cash distributions received from equity interests and reflect adjustments for non-cash items such as mark-to-market adjustments for derivative activity. D. For both CEP and ATN.. CEP and ATN’s MIIs are capped at 15% and 25%.
Distributions reduce the unitholder’s original basis in his/her units (i. distributions are well in excess of any tax liability. who are then required to pay tax on his or her share of allocated net income regardless of whether they receive distributions. and deductions. The third definition is the least meaningful.
. thereby reducing the amount of current taxable income. The unitholder pays capital gains taxes as well as ordinary income tax on deferred income when he/she sells the security. Focusing just on maintaining production may not be sustainable over the long term. LLC EQUITY RESEARCH DEPARTMENT
The distribution coverage ratio is significant for two reasons: • Traditionally. For example. in our view. as it places a disproportionately large emphasis on commodity prices. return of capital).e. and stock price at that time B. the higher the ratio. Upstream MLPs are currently divided on how to define maintenance capex. These deductions often offset a majority of the allocated income. G. Thus. There are currently three prevailing maintenance capex definitions used by upstream MLPs: • Under the strictest sense.7% of its federal gross income apportioned to Texas. Taxes are not paid on the portion of allocated income that is shielded by deductions until the investor sells the security. an MLP with assets in Texas is required to pay margin taxes. The amount of taxes a LP unitholder pays is determined by several factors including the unitholder’s percentage ownership in the partnership. This is how it works: (1) LP unitholders receive quarterly cash distributions from the partnership each year. investors have considered the coverage ratio to be representative of the cushion that a partnership has in paying its cash distribution.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. maintenance capex can be defined as the capital required to maintain production and to replace reserves. Given its effect on distributable cash flow.
IX. and tax credits. However.
Tax And Legislative Issues
A. The unitholder is also allocated a share of the MLP’s deductions (such as depreciation and amortization). including accelerated depreciation and amortization deductions. an investor typically pays income taxes roughly equal to 10-20% of distributions received each year. losses. when the investment was made. which has a maximum effective tax rate of 0. there is some tax leakage at the MLP level if the partnership owns foreign assets and/or operates in a state with margin taxes. losses. an MLP does not pay corporate-level federal income taxes. as reserves would also need to be replaced at some point. Partners in an MLP (the limited partner unitholders and the GP) are required to pay tax on their allocable share of the partnership's income. maintenance capex can be viewed as the capital needed to sustain cash flow. • All else being equal. In general. What Are The Tax Advantages For The LP Unitholder (The Investor)? Limited partners typically receive a tax shield equivalent to (in most cases) 80-90% of their cash distributions in a given year. Growth capex is the investment a partnership can make to enhance or expand capacity and increase cash flow.. Who Pays Taxes? Because an MLP is a partnership and not a corporation. gains. as it fully reflects the cost of maintaining the asset base. (2) Net income from the partnership is allocated each year to unitholders. The tax-deferred portion of the distribution is not taxable until the unitholder sells the security. What Is The Difference Between Maintenance Capex And Growth Capex? Maintenance capital expenditure includes investments a partnership must make in order to sustain its current asset base and cash flow stream. In this context. a higher coverage ratio would give management increased flexibility to raise its distribution. We prefer the first definition. the greater the safety of the distribution. variance in the definition of maintenance capex can have significant ramifications for distribution policy and valuations. • A more lenient approach is to define the metric as the capital required to replace annual production • Finally.
When the investor sells the security. Since most MLPs in recent years have been growing via acquisitions and expansion projects. an investor will typically pay ordinary income tax equal to only 10-20% of cash distributions received. When the units are sold. A termination of the partnership occurs if more than 50% of the total outstanding units of the partnership changes hands in one year. While this all may seem a bit confusing. Figure 53.MLP Primer -. there is a recapture of the deductions (depreciation. the 80-90% tax deferral would typically be restored in the following year. MLP Tax Deferral Rates
Ticker Tax Deferral Rate AHD 75% AHGP 50% APL 80% APU 70-80% ARLP 70% ATN 60% BBEP 50% BGH 90% BPL 75% BWP 80% CEP 70% CLMT 80% CPLP 60% CPNO 80% CQP 80% DEP 80% DPM 70% EEP 90% EEQ NA ENP 80% EPB 80% EPD 90% EPE 90% EROC 80% ETE 60% ETP 80% Source: Partnership reports Ticker EVEP EXLP FGP GEL GLP HEP HLND HPGP KGS KMP KMR KSP LGCY LINE MGG MMLP MMP MWE NGLS NMM NRGP NRGY NRP NS NSH OKS Tax Deferral Rate 40% 80% 90% 90% 70% 80% 80% 90% 80% 95% NA 80% 90% 100% 90% 80% 51% 90% 80% 44% 50% 80% 70% 80% 80% 90% Ticker Tax Deferral Rate OSP 80% PAA 80% PSE 15% PVG 70% PVR 80% QELP 80% RGNC 80% RVEP NA SEP 80% SGLP 80% SGU 80% SPH 80% SXL 80% TCLP 80% TGP 80% TLP 80% TOO 30% TPP 90% USS 90% VNR 70% WES 70% WMZ 80% WPZ 80% XTEX 80% XTXI 0% Median 80%
. meaning the income that was deferred by the deductions becomes taxable income and is taxed as ordinary income.Third Edition
WACHOVIA CAPITAL MARKETS. the amount of depreciation allocated to the limited partners would be significantly less than the typical level and the tax shield on distributions would decrease. this has not yet become an issue. The remaining 80-90% is deferred until the investor sells the security. Tax Deferral Can Go Below 80-90% If an MLP does not continue making investments. Another circumstance in which an investor’s tax shield could go below 80-90% is a termination of the partnership. However. the amount of income in a given year that would be deferred would decrease over time below the typical 80-90% level. and upward by the allocation of income. the tax shield created by depreciation and other deductions decreases. An investor’s tax basis is adjusted downward by distributions and allocation of deductions (such as depreciation) and losses. The net effect (i. the difference between cash distributions and allocated taxable income) creates a tax deferral for the investor. In that case. When this occurs. Thus. the depreciation period for all of the assets within the MLP restarts.e. etc. LLC EQUITY RESEARCH DEPARTMENT
This is the tax-deferral benefit of owning a MLP. the bottom line is this: in any given year. a portion of the gain is paid at the capital gains rate and a portion of the gain (resulting from the tax shield created by allocated deductions) is taxed at the ordinary income tax rate..). Investors should consult with a tax advisor concerning their individual tax status.
20 $0. as we assume the distribution of $1.75 $1. the unitholder pays the same tax of only $0.07 $0.00 is maintained.0%) • Is 80% tax deferred At the end of year 1.e.07).00 × 80% $0.00 4. but also a capital gains tax of $0.e.00). as we assume the MLP unit price has appreciated 5%.00 distribution (i.20 $0. The Mechanics Of A Purchase And Sale Of MLP Units And The Tax Consequences We provide a simplified example illustrating the mechanics of a purchase and sale of an MLP unit and the associated tax consequences. Buy And Sell Mechanics Of An MLP Security
Simplified MLP Buy And Sell Mechanics Unit price Annual distribution Yield % of distribution tax deferred (tax shield) Ordinary (personal) income tax rate Capital gains tax rate Tax deferred portion of distribution Taxable portion of distribution Tax paid at the end of each year on distributions received (at 35%) Tax paid when units are sold at the end of year 5: Capital gains tax paid (on unit price increase to $25 from $20) Ordinary income tax paid (on deferred portion of distributions) Tax paid on year 5 distribution Total tax paid at the end of year 5 Source: Wachovia Capital Markets.4% Year 4 $24 $1.07 $0.07 on the $1.e. Tax-Deferral Calculation
Annual distribution Tax deferral rate Tax deferred portion of distribution Taxable portion of distribution Ordinary income tax rate Tax due on year 1 distribution received
Source: Wachovia Capital Markets.80 $0.07 $0.00 4.0%
At the start of year 1.20 $0. the unitholder is required to pay taxes of only $0.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. we assume the following about the MLP unit: • Is purchased for $20.. the MLP’s yield at the end of the year is 4. respectively.00 ÷ $21..8% (i. Figure 54.20 × 35% $0.80 $0.00 4. a $1. $1..22 (i. Figure 55.80 $0.0% 80% 35% 15% $0.6% Year 3 $23 $1.75 + recapture of deferred taxes on prior year distributions of $1.00 per unit increase in the unit price each year). We also assume no distribution increases over the five-year period and an ordinary income tax and long-term capital gains tax rate of 35% and 15%.75 ([$25 .07
Annual distribution minus tax deferred portion of distribution equals taxable portion of the distribution
At the end of years 2-4.00 per unit (and yields 5.07 $2.00 per unit.20 $0.8% Year 2 $22 $1.2% Sell Unit At The End Of Year 5 $25 $1.00 per unit (i.40 + tax due on year 5 distribution of $0. 7% rather than the ordinary income tax rate of 35%).07 $0.80 $0.07 Year 1 $21 $1.
.$20] × 15%) and recapture of the deferred tax related to distributions in years 1-5 of $1. In addition. Since we assume the unitholder sells the MLP unit at the end of year 5. capital gains tax of $0.07. due to the MLP’s tax-deferral rate of 80% (See Figure 55 for calculation).00 per unit • Has an annual distribution of $1.40 $0.00 4. LLC EQUITY RESEARCH DEPARTMENT
C.40 ($0. we assume one MLP unit is (1) purchased for $20. to $21 from $20 per unit. and (3) sold at the end of year five for $25..80 $0.00 5.80 $0.80 × 5 × 35%).20 $0. LLC estimates
$1. the unitholder not only pays the $0.e. (2) held for five years.00 4. In our example.07 tax on the distribution of $1. The total related taxes paid at the end of year 5 is $2.22 Unit Purchase Price $20 $1.00. LLC estimates $0.
40 $25 $20 $5 × 15% $0. Income from MLPs and other sources of UBTI that exceeds $1. LP unitholders may be required to file state and local income tax returns and pay state and local income taxes in some or all of the various jurisdictions in which an MLP conducts business or owns property..65 ([total distributions received – tax paid on annual distributions when received] × 5 years) ([$5.00 $5.00 $0. UBTI exceeding $1.15 $0.40 $4.80 × 5 × 35%) • The receipt of after-tax distributions of $4.00 $25.00]-1).00 50% After-Tax Calculation Unit purchase price (original cost basis) Unit sale price (at the end of year 5) (-) Capital gains tax (-) Recapture of deferred tax (+) After tax distributions received ($0.Third Edition
WACHOVIA CAPITAL MARKETS.75 $2. $25. E. State And Local Taxes.e.35] × 5) Figure 57. $20. but we would not recommend it.00 × 35% $1.00 ÷ $20. Please see the Appendix for a list of states in which each MLP operates.e. LLC estimates
$4. Can MLPs Be Held In An IRA? Technically yes.00 × 5) Total return on investment Percent total return on investment $20.40 ($0.75 $1.00 $30.
. $5. And Return Filing Requirements In addition to federal income taxes.MLP Primer -. The after-tax total return would be approximately 38% in this example.. Investors may be subject to state and local taxes and return filing requirements even if he or she does not live in any of those jurisdictions. Our after tax calculation reflects the following: • The investor payment of a capital gains tax of $0.00). [total return ÷ original cost basis]-1 [$30.22
In this simplified example.e. We recommend placing MLP units in traditional brokerage accounts to avoid this issue and to ensure that the investor receives the full tax advantages of the security. the investor would realize a before tax total return of 50% (i. Income from an MLP is considered UBTI for tax-exempt entities such as an IRA.. The investor’s total return of $30 is composed of the unit sales price at the end of year 5 (i. Therefore.93 × 5) Total return on investment Percent total return on investment $20..000 would be subject to tax.50 38%
Source: Wachovia Capital Markets. Taxes Paid At The End Of Year 5 (The Sale)
Total deferred portion of distribution (years 1-5) Ordinary income tax rate Recapture of deferred tax related to year 1-5 distributions Unit price at the end of year 5 Unit price at the start of year 1 Unit price appreciation Capital gains tax rate Capital gains tax paid on unit price appreciation Recapture and capital gains related taxes due Tax due on year 5 distribution received Total taxes paid at the end of year 5
Source: Wachovia Capital Markets.$20] × 15%) • The recapture of the deferred tax related to distributions in years 1-5 of $1.00 .65 $27. MLPs can be held in IRAs.$0.000 per year in an IRA would trigger adverse tax consequences for the plan sponsor. divided by the original purchase price (i.e. LLC EQUITY RESEARCH DEPARTMENT
Figure 56.07 $2.00). LLC estimates
D.00 $25. Estimated Total Return On Investment
Before Tax Calculation Unit purchase price (original cost basis) Unit sale price (at the end of year 5) Distributions received ($1.75 ([$25 .00) plus the total distributions received from years 1 to 5 (i.
the PTP structure has come under scrutiny by Congress. The issue is that fund managers at Blackstone receive compensation in the form of carried interest that is then taxed as capital gains (taxed at 15%) as opposed to ordinary income (i.naptp. through the passage of the Tax Reform Act of 1986 and the Revenue Act of 1987. states. Further. the tax liability created by the reduction of the original unitholders cost basis is eliminated. When an individual who owns an MLP dies. H. These bills exempted MLPs from corporate taxation. Canada’s Finance Minister. the cost basis of the MLP is reset to the price of the unit on the date of transfer. person are typically reduced by withholding taxes at the highest applicable effective tax rate. NAPTP Is Working To Ensure That GPs Are Not Affected By Carried Interest Legislation With the initial pubic offering (IPO) of the Blackstone Group in 2007.. Concern has also been raised over the fact that Blackstone is channeling its management fees (non-qualifying
. and pay federal income tax at regular rates on his or her share of net income or gain. at the full 31. What Is The Risk Of MLPs’ Losing Their Tax-Advantaged Status? There has been some concern among investors that MLPs could be at risk of losing their tax benefits. the individual’s MLP investments can be transferred to an heir. and U.5% rate.S. federal tax return to report his or her share of an MLP’s gain. MLPs have invested more than $23 billion on U. When doing so. processing. Canadian Royalty Trusts Tax Status Expected To Change In 2011 On October 31.S.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. or income deduction. Under this proposal. The incentives were put into place to attract sufficient capital to support infrastructure development (i. While most of the early trusts were confined to real estate and energy. In our opinion. as long as at least 90% of their income is derived from natural resource or mineral activities (including exploration. refining. James Flaherty. MLPs As An Estate Planning Tool MLPs can be used as a tax-efficient means of transferring wealth. However.org. The Canadian government has taken this action to close what amounts to a significant tax loophole (i.S.e. The association currently represents the interests of 73 publicly traded partnerships (PTPs). of which 70 are energy MLPs. energy infrastructure. In addition. The proposal is not yet law. mining. person who owns an interest in a MLP may be required to file a U. Current Tax And Legislative Issues What Is The National Association Of Publicly Traded Partnerships (NAPTP)? The NAPTP is a trade association formed in 1983 that represents the interests of publicly traded partnerships (including publicly traded LLCs taxed as partnerships) and their respective employees on legislative and regulatory issues in Washington. Congress will continue to support MLPs’ favorable tax treatment given their integral involvement in the buildout of U. The NAPTP hosts an annual conference that allows its PTP members to provide company presentations to current and prospective investors. etc. while others would begin paying taxes in 2007. the U.to late 1980s. transportation. G. Canadian royalty trusts would be taxed like all other Canadian corporations. 35%).S. the risk of MLPs losing their tax-advantaged status is low. LLC EQUITY RESEARCH DEPARTMENT
F.S. loss revenue due to the tax structure of a royalty trust). energy infrastructure in the past five years (2003-07) and are expected to invest significant amounts of capital over the foreseeable future. distributions to a non-U. loss. pipelines and storage facilities) that would efficiently move energy products to consuming markets. Mr. Foreign Investor Ownership A non-U.. Additional information in regards to the association can be found at www.C. 2006. or marketing. D. in our view.). development.S. as Congress could use these potential tax revenues to reduce current and future deficits.. announced a tax fairness plan proposal that would change the favorable tax status of Canadian royalty trusts by 2011. The advantages of the MLP tax structure were originally developed by Congress in mid. Thus. Trusts formed before November 2006 would be given a four-year reprieve until 2011. District Court of Appeals recently upheld a new ruling by the FERC that allows MLPs to include an income tax allowance in pipeline ratemaking. many companies in other sectors have converted or are contemplating conversion to the trust structure.e.e.S.
Specifically. This included both private equity funds and publicly traded GPs. The long-term implications of the FERC’s policy change will likely not come to light until it’s implemented in an actual rate case. private equity funds attempt to convert services (ordinary) income into capital gains income and thereby. as some rates are market based or negotiated with shippers.e.e.S. Such an example may be to house a foreign operation because the MLP structure may not be accepted in other countries. now that carried interest has made it onto a list of potential revenue offsets. in our view. On April 17. the FERC adopted a new policy to include MLPs as proxy pipeline companies in establishing the allowed ROEs charged by interstate natural gas and oil pipelines.S. the rates on new interstate pipeline systems are subject to FERC approval. LLC EQUITY RESEARCH DEPARTMENT
income) to corporate subsidiaries that then pay dividends back to the PTP (qualifying income). The FERC’s methodology for calculating ROE is the dividend yield plus the projected future growth rate of dividends (i. pay taxes at a lower rate.
. 2008. all MLPs but publicly traded GPs). It is unlikely that there will be any new legislation on carried interest in 2008. the carried interest of a publicly traded GP (IDR) is passed through as ordinary income and taxed at the higher rate at the unitholder level. MLPs Income Tax Allowance In Pipeline Ratemaking On May 29. given the increasing number of pipeline assets owned (and being constructed) by public MLPs. The NAPTP is working diligently with Committee staff and Treasury Department officials to help educate members about the differences in operations and income between publicly traded GPs and private equity funds. District Court of Appeals upheld a policy decision made by the Federal Energy Regulatory Commission in May 2005. An eligible unitholder is an individual or entity subject to U. Again. 2007. In determining an allowable pipeline rate.S. An entity not subject to U. the NAPTP has been working to educate Congress on the differences between energy GPs and private equity funds. federal income taxation. federal income tax on the income generated by the MLP. U.MLP Primer -. it can seek a rate case wherein the FERC acts as a mediator.S. Congress may disallow the use of “blocker corporations. it is likely to resurface in the future. In contrast. federal income tax on income generated by the MLP is also considered an eligible unitholder as long as all of the entity’s owners are subject to U. While not all interstate pipelines are subject to cost of service ratemaking. which receive carried interest in the form of incentive distribution payments. In addition.The carried interest issue has no bearing on conventional MLPs (i. if an MLP thinks it deserves to charge a higher rate on its pipeline. (unlike c-corps) an MLP’s long-term growth rate (using GDP as a proxy) will be adjusted by 50% in calculating the ROE. we believe Congress will be able to differentiate between tax avoidance and a legitimate business rationale for a corporate subsidiary for an energy MLP. However. the FERC uses a proxy group of several publicly traded companies in the same industry as a benchmark.. in our view.Third Edition
WACHOVIA CAPITAL MARKETS. The original policy allows pipelines owned by MLPs to include an allowance for income taxes in determining their pipeline tariffs as long as the partnerships can show that some entity pays federal income tax.” Some energy MLPs hold corporate subsidiaries for purposes ancillary to their MLPs. short-term growth rate two-thirds weighted + long-term growth rate one-third weighted).. The inclusion of MLPs is a positive. However. FERC Includes MLPs In Determining Pipeline ROEs The Federal Energy Regulatory Commission (FERC) is the regulatory body responsible for determining the allowed rate of return (ROE) charged by interstate natural gas and oil pipelines. MLPs that own FERC-regulated pipelines require their unitholders to be “eligible” holders. The income tax allowance is a major component for owners of interstate pipelines in determining a pipeline’s cost of service. The earlier bills were written so as to target any PTP that received compensation in the form of carried interest. However. Another potential issue is the creation of corporate subsidiaries to convert non-qualifying income (such as management fees) into qualifying income via the payment of dividends to the partnership.
These funds were early investors in the sector and now hold significant positions in a number of MLPs. the average market cap has increased to $1.
. as it is estimated that approximately 31% of MLP units (as measured by float) are currently held by institutions (i. to 11 from only 5 in 2004. Figure 58..9 billion from $307 million. to 78 in 2008 (to date) from 7 in 1994. the total market capitalization of the energy MLP universe has grown to roughly $147 billion in 2007 from approximately $1 billion in 1994.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. Over that time period.000 units per day to date in 2008 from an average volume of 35.e. Dramatic Growth Of MLPs Over the past ten years. Likewise. Domestic Retail Ownership Has Been Declining
100% 23% Percent Ownership 75% 7% 50% 76% 25% 0% Retail 2005 Foreign Investors Institutional 2006 2007 74% 62% 22% 31%
Source: Vinson and Elkins
Money managers and hedge funds are emerging as major MLP investors. LLC EQUITY RESEARCH DEPARTMENT
XI. The number of energy MLPs has increased more than tenfold. the MLP universe has grown by any measure.000 units per day in 1994. Number Of MLPs And Market Capitalization
$180 Market capitalization ($ in billions) $160 $140 $120 $100 $80 $60 $40 $20 $0 7 $1 1994 9 $2 1995 12 $3 1996 12 $5 1997 15 $8 1998 17 $8 1999 18 $11 2000 29 23 $30 2003 $38 30 34 $70 42 $112 Total market capitalization of energy MLPs Number of energy MLPs 60 73 $147 $134 78 80 70 Number of MLPs 60 50 40 30 20 $19 2002 10 0 2004 2005 2006 2007 2008YTD
Source: FactSet and National Association of Publicly Traded Partnerships
B. A growing group of hedged funds and closed-end funds have emerged as significant investors in MLPs. The number of MLP-focused closed-end funds has more than doubled. Institutional ownership in MLPs is growing. Figure 59. Sector Trends
A. MLP Investor Base Is Changing MLPs are still predominantly owned by retail investors. In addition. primarily hedge funds and closed-end funds). the MLP investor base is changing. increasing to 160. however. The funds also provide private funding for MLPs to supplement public equity offerings to finance growth initiatives. liquidity has improved dramatically for the MLP universe.
There are two closed-end funds that are now funding privately held MLPs that could ultimately become public entities when they mature. An investor in a closed-end fund receives a 1099 form. some funds may use the weakness as a buying opportunity. • Closed-end funds can engage in private market transactions that are not readily available to the public. • These funds can be invested within IRA accounts without being subject to UBTI. Finally. There are now 11 closed-end funds that invest solely in MLPs (and one with 25% invested in MLPs). 20 Jennison Associates LLC Note: Holder list does not include investors owning MLPs via total return swaps Source: FactSet
Emergence Of MLP Closed-End Funds Beginning with Tortoise Energy Infrastructure Corporation (TYG) in 2004. 15 Renaissance Technologies LLC 16 Energy Income Partners LLC 17 Magnetar Financial LLC 18 Eagle Global Advisors LLC 19 Glickenhaus & Co. 14 Omega Advisors. The funds often provide private funding for MLPs to supplement public equity offerings to finance growth initiatives.
. • Investors receive simplified tax reporting through a single 1099 rather than multiple K-1s.MLP Primer -. Benefits to investing in a MLP closed-end fund include the following: • These portfolios are professionally managed and provide diversification for investors. the MLP sector witnessed the creation of closed-end funds that invest primarily in MLP securities.) and thus. themselves. tax-exempt entities. when MLPs experience periods of weakness. thereby lending stability to MLP valuations.Third Edition
WACHOVIA CAPITAL MARKETS. The MLP closed-end funds pay a dividend that is meant to generate a yield on par with the MLP investments. LLC EQUITY RESEARCH DEPARTMENT
Figure 60. Closed-end funds are organized as corporations (as opposed to regulated investment companies. MLP closed-end funds are playing an increasingly prominent role in the MLP sector. Inc. in our view. 12 RR Advisors LLC 13 Fayez Sarofim & Co. Top 20 Institutional Holders
Top 20 Institutional Holders (3/31/08) 1 Kayne Anderson Capital Advisors LP 2 Neuberger Berman LLC 3 Tortoise Capital Advisors LLC 4 Swank Advisors 5 Lehman Brothers Asset Mgmt LLC 6 Fiduciary Asset Management LLC 7 Pictet Asset Management SA 8 Argyll Research LLC 9 Fidelity Management & Research 10 Macquarie Fund Adviser LLC 11 Macquarie Investment Management Ltd. are not subject to the restrictions related to qualifying income and UBIT. etc.
00 $20.00 $25.9%) (12.09 $17.93 $25.60 $23. and processing capacity.4% 7. Louisiana. including the following: (1) MLPs are gaining prominence in the energy sector as many traditional energy companies are contemplating or have announced plans to form MLPs.4% 9.S.040 $142 $356 $228 $1.00 $25. As more of the U. We expect mutual fund participation to increase over time for a couple of reasons.4% 7.40 Premium (Discount) Market Cap to NAV ($ In MM) (14.0% 7.80 Current Yield 4.4% 7.5%) (7. primarily pipelines.7%) $1.00 $20.00 $25.5% 7. increasing imports (both LNG and crude products).00
Source: Bloomberg and FactSet
Will Mutual Funds Get More Involved In The Sector? In 2007. Shift In Supply Sources Is Driving Energy Infrastructure Investment The recent development of several new resource plays. While still comparatively small (the market cap of Microsoft is $235 billion).00 $25. storage.93 $22.38 $28. and steadily increasing demand from traditional markets have created the need for significant energy infrastructure.S.22 $21. (2) The MLP universe has grown significantly.3% 8. Oklahoma. in our view.05 $19. with a market cap of $134 billion.35 N/A $30.00 $15.9% (11.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS.8%) (19.3% 6.4% 7.7%) (12. MLP Closed-End Funds
MLP Closed End Funds BlackRock Global Energy and Resources Trust Fiduciary Energy Income Growth Fund Fiduciary Claymore MLP Opportunity Fund Kayne Anderson Energy Development Company Kayne Anderson MLP Investment Company Kayne Anderson Energy Total Return Fund Cushing MLP Total Return Fund Tortoise Capital Resources Corporation Tortoise Energy Infrastructure Corporation Tortoise Energy Capital Corporation Tortoise North American Energy MLP Closed End Fund Average: MLP Closed End Fund Median: MLP Composite Median: Ticker BGR FEN FMO KED KYN KYE SRV TTO TYG TYY TYN Price 7/14/08 $34.00 $20. energy complex makes its way into the MLP structure. MLPs are playing and should continue to play a major role in this energy infrastructure boom. LLC EQUITY RESEARCH DEPARTMENT
Figure 61.85 $30.8% 7. The development of new resource plays in North Texas. pipeline system has historically been designed to transport natural gas and crude oil production from the Gulf Coast to markets in the Northeast and West. and the Rockies is creating the need for significant infrastructure development to transport supply from these new areas to the traditional consuming markets.251 $873 $151 $101 $548 $401 $105 IPO Date 12/23/04 6/24/04 12/22/04 9/21/06 9/27/04 6/27/05 8/27/07 2/2/07 2/24/04 5/26/05 10/27/05 IPO Price $25.66 $27.71 $22.3%) 2.
. Appalachia.9%) N/A (13.74 $17. The U.01 $22.00 $25. some mutual funds began to “dip their toes” in the MLP waters.39 $27.2% 8.0% 7.6%) (8.9%) (0.38 $26.90 $26.54 $24. traditional investors who want to own energy will need to seriously evaluate MLPs as an investment. the MLP sector is growing to a size that soon cannot be ignored. C.00 $25.6% NAV/ Share $40.20 $11.60 $28.7% 7.
Organic Investments Driven By The Buildout Of U. During this time frame. we estimate that our MLP universe will spend approximately $35 billion of growth-capital expenditure.S. in our view. as they typically provide (1) more attractive returns. or 18% of FY2007 total expenditure. MLPs spent an estimated $10. MLPs Have Been Successful In Making Acquisitions And Investing Organically Over the past five years.S. U.4 billion in 2005. annual growth and acquisition capital investment increased to $28 billion from $4 billion. Energy Infrastructure MLPs are involved in 15 of 33 new major pipeline projects on file at the FERC that could cost more than $14 billion in total. mostly centered on new interstate and intrastate pipelines. MLPs invested approximately $65 billion in organic expansion projects and acquisitions. Natural Gas Supply Basin Map
Source: Spectra Energy Corp.
D. and (2) greater visibility to distribution growth.Third Edition
WACHOVIA CAPITAL MARKETS. In 2007. From FY2003 to FY2007. (Please see the Appendix for a list of the announced/proposed pipeline projects.) We believe MLPs will continue to play an increasingly larger role in the growth of energy infrastructure in the United States. while cash paid for acquisitions tallied $41 billion. and processing plants. gathering systems. storage.
. Organic projects remain the investment of choice (as opposed to acquisitions). Between 2008 and 2012. cash deployed in internal growth projects totaled $24 billion (or about 37% of the total investment).MLP Primer -. up from $6. The top five MLPs that invested accounted for $12 billion. LLC EQUITY RESEARCH DEPARTMENT
Figure 62.8 billion on organic growth projects.4 billion in 2006 and $3.
Notwithstanding the market’s overall turbulence and the credit meltdown.4 $16. we are forecasting $32 billion of acquisitions for 2008 to 2012. 31%. up from 9. aggregate MLP acquisition capital deployed has increased at an annual CAGR of 63%.8 billion in 2006. The largest transactions in 2007 included LINE’s $2. 12.5x in H1 2008. In our models.0 $4. MLPs paid an average EBITDA multiple of 9.0 $12.
.5 billion in 2003.0 $2.2%.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. LLC EQUITY RESEARCH DEPARTMENT
Figure 63.4 $17. 43%.0 $16.6 billion in 2007 from $2.4x in 2005. to $17. implying ample room for consolidation by this sector.5%--includes primarily asphalt and compression acquisitions.4 2005A $10.0 $8. Historical Organic Capex Investments
$20. Historical Acquisitions
$20.7 2004A $6. particularly for gathering and processing assets.0 $0. other.8 $4.7 2004A $3.0 $12.0 $8. In 2007.6 billion. acquisition multiples continued to climb.0 $4. gathering and processing assets.0 $0. and coal properties. Acquisition activity was focused around oil and gas reserves.9
Total Capex ($B)
Source: Partnership reports
Acquisition Multiples Have Risen Excluding oil and gas reserves.85 billion acquisition of Anadarko’s gathering and processing assets in Kansas.1 billion in H2 2007. The increase is being driven by the proliferation of new MLPs and the growth orientation of most management teams.0 $1. 1. Figure 64.6 $10. approximately 37% of all energy pipelines in the United States are held by MLPs. LLC estimates
Acquisition Capital Deployed Has Been Steadily Rising Since 2003.2
Total Capex ($B)
Organic growth capex
Source: Partnership reports and Wachovia Capital Markets. Oklahoma.5 2003A $9. Currently.0 $16.05 billion acquisition of Dominion’s natural gas and oil exploration and production operations in the Mid-Continent Basin and APL’s $1.3 2003A $1.8 $6. up from $9. MLPs still announced acquisitions totaling $11. which largely include projected dropdown. MLPs made/announced 92 acquisitions totaling $17. and higher than the average multiple of 8. and Texas.and upstream-related transactions.1x in 2006.
in August 2005. in our opinion. Historical Acquisition Multiples
10x 8. Master limited partnerships that have “dropdown” opportunities trade at a median yield of 6. geographic). as returns will have to be higher to justify the increased cost of capital.MLP Primer -. even at higher multiples.9%. With so many new entrants to the MLP market (ten IPOs since 2005) competition for assets has been intense.P. In addition. L. as distribution growth has been one of the primary drivers of price performance. in our view. Since then.2x 9.Third Edition
WACHOVIA CAPITAL MARKETS. MLP management teams typically feel a certain pressure to increase distributions.9% and 11. E. While the timing of “dropdown” acquisitions is not always certain.). As interest rates inevitably rise and MLPs are successful in raising distributions and incentive distributions to the GP. This strategy bears watching.8x 9. Investors seem willing to pay a premium for the visibility of future visible growth. MLPs that have dropdown opportunities are not reliant on third-party acquisitions or on finding internal organic projects to fuel growth. which.g.
. LLC estimates
The increase in multiples can be attributed to a number of factors. returns are exceeding cost of capital. As this occurs. these MLPs have been able (and willing) to pay more because they have a lower cost of capital and/or because the assets represent a strategic investment for the partnership (e.3%.. has enabled them to make acquisitions even at higher multiples. Thus. in our view. in our view.1x 9. as evidenced by the premium valuations afforded in the market for MLPs with this business model.8% and 2009E enterprise value (EV)-to-adjusted EBITDA multiple of 11. in our view. Further. compression.5x
6x 2005 Average Weighted EBITDA Multiple 2006 Median EBITDA Multiple 2007 2008 YTD
Source: Partnership reports and Wachovia Capital Markets.4x. the market is clearly ascribing a certain value to the growth afforded by having a parent company with significant “MLP-able” assets. respectively for the midstream MLP peer group.0x
9. upstream. versus 7. we expect acquisition multiples to decrease. in our view. etc. there have been nine IPOs of dropdown MLPs. For perspective. The first dropdown MLP to launch an IPO was Williams Partners. Thus. LLC EQUITY RESEARCH DEPARTMENT
Figure 65. we expect their cost of capital will begin to increase.7x 8x 8. Dropdown MLPs have sponsor companies that own MLP qualifying assets. in our view. thereby making the acquisition look more attractive on a forwardlooking basis. in general. which can potentially be sold to the MLP to support future distribution growth. as we believe it introduces additional risk in the form of execution and timing. the median cost of capital of our MLP Composite is now 11.4x 8. there is less integration risk with “dropdown” assets than with third-party acquisitions. These partnerships can be involved in any area of the energy sector (midstream. newer MLPs are typically paying only 2% of their cash flow to the general partner.5x. with the ten-year treasury yield at just 3. The Emergence Of “Dropdown” MLPs Dropdown MLPs are a relatively new subsector of the MLP universe. shipping. The dropdown model has proven to be a successful strategy. Some MLPs have acquired assets at seemingly rich valuations with the intention of enhancing or investing in the assets to increase the EBITDA run rate. In addition. interest rates have remained relatively low.7x
…But Returns Still Exceeding Cost Of Capital MLPs continue to possess a competitive (and low) cost of capital.
549 $10. On the equity front.9 billion in 2006.836 $5. up from $14.701
$2.823 $1. and $3.756 $3.379 2005A 2006A 2007A $3.4x 11. size. The year 2007 marked another record in terms of capital-raising by MLPs. Total debt and equity issued topped $18.9% P/DCF 2008E 2009E 10. $3.4 billion.2 billion for IPOs. MLPs raised a total of $14. MLPs Continue To Enjoy Good Access To Capital The number. which was given partial equity credit by the rating agencies.000 $9. LLC estimates
F.259 $454 2004A $1.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS.8% 7.5 billion raised via direct placement of equity from institutional investors.5x
Source: FactSet and Wachovia Capital Markets.7 billion. In addition. there were three hybrid securities issued.8x 11.0 billion for secondary offerings.171 $817 2008YTD $2. LLC EQUITY RESEARCH DEPARTMENT
Figure 66.794 $5.781 $1. and total amount of capital raised by MLPs continue to increase.6x EV/Adjusted EBITDA 2008E 2009E 11.000 IPOs Private Placements Public Secondaries Units To Sponsor/Seller
$2. This included $8.802
Source: Partnership reports
$8. Dropdown MLPs Versus Midstream MLPs
Yield Dropdown MLPs Midstream MLPs 6.7 billion of equity.972 $3.7x 11.610 $5.5x 10.2x 9.000 Equity Proceeds ($MM)
$14.000 $4. Historical MLP Equity Offerings
Gross Proceeds From Equity Offerings
$20. Figure 67.1x 10. raising $1.
$3. investment grade rated MLPs continued to enjoy good access to capital as the high-grade debt market remained open and relatively unchanged as it relates to price.1 billion in new issues at an average interest rate of 6.95% 6. accessing credit facilities has been the best alternative for debt financing.05% 5.95% 5.Investment Grade Versus Non-Investment Grade During the recent credit crunch and economic slowdown.65% 6.030
$3. we have seen a stark dichotomy develop between investment grade and non-investment grade MLPs.340 $5.965 $1.750
$0 2004A 2005A 2006A 2007A 2008YTD
Source: Partnership reports
A Dichotomy In The Market -. Historical MLP Debt Offerings
Gross Proceeds From Debt Offerings
Debt Offerings ($MM)
$6. During the recent credit crunch.65% 6.50% 7.90% 6. investment grade MLPs have raised $7.975 $6.050
.50% 6. LLC EQUITY RESEARCH DEPARTMENT
$3.000 $4.50% 5.956
$8. the public debt markets have been volatile and more expensive. thus. For 2008.475
WACHOVIA CAPITAL MARKETS. Investment grade MLPs continue to have good access to the public markets for both debt and equity.50% 7. 2008 Year-To-Date Investment Grade Debt Offerings
Date Issuer 1/10/08 BPL 2/6/08 KMP 2/6/08 KMP 3/24/08 BWP 3/24/08 TPP 3/24/08 TPP 3/24/08 TPP 3/25/08 ETP 3/25/08 ETP 3/25/08 ETP 3/31/08 EPD 3/31/08 EPD 3/31/08 EEP 3/31/08 EEP 4/1/08 NS 4/18/08 PAA 7/9/08 MMP Average / Total Source: Partnership reports and FactSet Investment Grade MLP Debt Offerings Rate 6.675
$3.55% 6.000 Investment Grade Non-Investment Grade $8.800
$2.50% 6.70% 7.6%.475
$5.40% 6.65% 7. For non-investment grade MLPs.MLP Primer -.60% Term (Yrs) 10 10 30 5 5 10 30 5 10 30 5 10 10 30 10 10 10 Proceeds ($MM) $300 $600 $300 $250 $250 $350 $400 $350 $600 $550 $400 $700 $400 $400 $350 $600 $250 $7.50% 5.00% 6. Figure 69.
75% 8. PIPE investors who had purchased the stock at a discount to the previewed price would get a double boost in their returns. high yield debt markets remain open for MLPs. as the expected financings created an overhang on MLP unit prices. MLPs raised approximately $363 million of equity via PIPEs.75% 8. This dynamic has caused MLPs to be disciplined acquirers. The number of MLP equity deals steadily increased to 62 in 2007 from 37 in 2003. In 2007. non-investment grade MLPs have raised $2.0% Figure 70.. the MLP would announce a PIPE. After the announcement of the event.75% 8. in our view.156
MLPs have traditionally been disciplined acquirers. the median size of equity deals has increased to approximately $162 million year in 2007 from $79 million in 2003. 2008YTD High Yield Debt Offerings
Date Issuer 1/7/08 ATN 4/8/08 MWE 4/23/08 NRGY 5/6/08 ATN 5/13/08 CPNO 6/5/08 NGLS 6/16/08 LINE 6/23/08 APL Average / Total Source: Partnership reports and FactSet High Yield Offerings Rate 10. This shift in the financing paradigm can best be described as follows. organic and acquisitions). in our view. the MLP (1) announces an acquisition.25% 10. which provided the investors with additional return. no need for a roadshow) than secondary offerings. G. Nevertheless. In 2007. (2) in conjunction with the
. In the old paradigm. Since MLPs distribute all available cash to unitholders. and the current low interest rate environment explain.e.). thereby eliminating the equity overhang. fewer regulatory issues) and less costly (e.01% Term (Yrs) 10 10 8 10 10 10 10 10 Proceeds ($MM) $250 $500 $200 $150 $300 $250 $256 $250 $2. The MLP benefited by pre-funding an acquisition and thereby eliminating any potential overhang or erosion in the stock price as the market would normally anticipate an equity offering to fund the transaction. PIPEs became a preferred method for MLPs to finance (the equity portion of) expansion projects and acquisitions due to the easy access to large pools of capital. as management teams must demonstrate to unitholders that acquisitions and projects are accretive to justify financing. In the new paradigm.25% 9. Management teams are now more guarded when talking about equity needs and are exploring ways to avoid excessive equity issuances.g. the relatively attractive pricing (discounts of 6-7%). Growing institutional interest. and the opportunity to forego the sometimes tedious process of filing and marketing a secondary offering. etc. the stock typically responded favorably (assuming the deal was accretive.. as the high yield and term loan B credit markets remain volatile and expensive. (2) in conjunction with the acquisition. yield-seeking investors. PIPEs can be an effective way to raise capital as they are typically more time efficient (e.. Investors (in the PIPEs) benefited by purchasing the stock at a discount that was based on the preview price of the units. the increasing strong demand for MLP capital. MLPs with equity financing needs were punished in their valuations in H2 2007. an MLP would (1) announce an acquisition or large capex project. strategic.75% 7. Investors in many of the early PIPEs outperformed because the equity placements were typically tied to an event (acquisition or investment).2 billion in eight offerings at an average interest rate of 9. A PIPE is a direct equity investment in publicly traded equity.75% 9. MLPs’ favorable relative price performance.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. In addition. In 2008. MLPs raised more than $8. LLC EQUITY RESEARCH DEPARTMENT
Non-investment grade MLPs have relied mostly on revolving credit facilities to finance debt. in part. MLPs Are Employing Creative Financing Solutions To Fund Growth PIPE Mania The amount of equity raised from institutional investors participating in private investments in public equity (PIPE) has grown over time and reached an all-time high in 2007. In 2004.g.5 billion of equity via PIPEs. and (3) the stock price would respond positively. A Paradigm Shift In PIPE Dynamics Market psychology shifted in late 2007 as it related to PIPE issuances.88% 8. they must access the capital markets to finance growth (i.
However. Hybrid Securities A hybrid security is an investment vehicle that has characteristics of both a debt and equity security.MLP Primer -.Third Edition
WACHOVIA CAPITAL MARKETS. LLC
Although there has been a shift in the market psychology surrounding equity issuances. In addition. $200 million in August 2006. Paid-in-kind equity is typically eligible to convert into common units after a certain period.. This could be an indication of a high price being paid for an asset. and (3) the stock goes down because either there is an overhang to finance the transaction or the PIPE creates the overhang. and $50 million in September 2006). In these instances. The additional stock received by the unitholder is equivalent to the value of the quarterly distributions paid to common unitholders.. The reason is that the GP receives the benefit of higher distributions (as the LP raises the distribution). we believe management teams have become even more sensitive in projecting potential equity offerings for fear of creating additional selling pressure on their stock prices. hybrid) securities.e. In addition. the GP can afford to temporarily subsidize an acquisition to improve the accretion for the LP unitholder.A Perpetual Equity Overhang MLP announces an acquisition or organic growth project
MLP announces a PIPE thereby eliminating the equity overhang
MLP announces a PIPE thereby eliminating the equity overhang
MLP does not announce a PIPE or equity offering
Stock goes up on anticipation of a distribution increase
Stock goes down because investors focus on the lockup
Stock goes down because there is an overhang to finance transaction
Source: Wachovia Capital Markets. in our view. that is.e. junior subordinated notes) pay a fixed coupon rate for a stipulated period of time and then a floating coupon rate for balance of the term of the note (i. A MLP that raises capital through the issuance of PIK equity (1) minimizes cash outflow that helps bridge the time until a project or acquisition starts to generate meaningful cash flow and (2) removes any overhang related to potential equity offerings. similar to i-shares). but also realizes an increase in cash flow as the MLP issues additional equity to finance the transaction. Thus. we believe PIPEs will continue to play a role in financing MLP growth. raising $550 million via three tranches (i. Because acquisitions are so accretive to GP owners.e. it demonstrates the beneficial impact to the GP when the MLP makes an acquisition. future PIPEs will likely be smaller in size with fewer investor participants. PIPE Dynamics--Perpetual Equity Overhang
Old Paradigm MLP announces an acquisition or organic growth project New Paradigm -. the MLP announces a PIPE or instead announces that it will issue equity in conjunction with closing. EPD became the first MLP to issue junior subordinated (i.. Figure 71.. we may see more one-day-marketed or overnight secondary offerings versus traditional multi-day-marketed secondary offerings to reduce the negative impact of an impending equity offering. Hybrid securities are given partial equity credit by the rating agencies. We expect hybrid securities to become more prevalent due to the partial equity credit given by the rating agencies and the market’s acceptance of the security.e. GP Subsidies Another creative financing solution used by MLPs is to have the general partner effectively subsidize a transaction. the partnerships’ hybrid securities (i. everyone focuses on the lock-up expiration date. typically at LIBOR + bps premium). LLC EQUITY RESEARCH DEPARTMENT
acquisition. In the case of MLPs. Paid-In-Kind (PIK) Equity Paid-in-kind equity is an LP unit that receives distributions in the form of additional stock (i. the GP temporarily forgoes incentive distribution rights payments in order to make an acquisition immediately and sufficiently accretive to limited partnership unitholders. In 2006.e.
. $300 million in July 2006..
and Vanguard Natural Resources) established as LLCs (rather than the traditional LP structure) with no GP entity to maximize the long-term growth of the partnership. distribution growth for successful GPs can be significantly higher than that of LPs. The value of the GP lies in the fact that the GP receives a disproportionate amount of the incremental cash flow of the underlying partnership as LP distributions are increased due to the IDRs. Publicly Traded General Partners -. LLC EQUITY RESEARCH DEPARTMENT
Figure 72. from Anadarko Help finance $689MM Rainbow acquisition Help finance $200MM acq. Figure 73. Finally.Recognizing The Value Of The GP In January 2004. Copano Energy. from Shell Help finance $230MM Stagecoach acquisition Help finance $2. The role of the GP and the incentive distribution rights typically held by the GP have gained recognition.
.5 yrs 4 yrs Reason For Subsidy Help finance $530MM acq. from ExxonMobil
up to $20MM / $15MM 2 yrs / Forever
SXL Apr-08 Source: Partnership reports
H. Publicly Traded General Partners
GP Alliance Holdings GP LP Atlas Pipeline Holdings LP Buckeye GP Holdings LP Crosstex Energy Inc. Eleven GPs have been spun out as separate.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. of PPX Help finance $1. For example.8MM ~$1. a GP’s ownership of incentive distribution rights with a 50% tier creates the leverage that enables the GP to increase its distribution at a faster rate than the underlying MLP. Summary Of Past GP Subsidized Transactions
Date Announced MMP NRGY PAA (I) APL PAA (II) Nov-04 Aug-05 Jun-06 Jun-07 Apr-08 Annual Cash Subsidy $4. in our view. Other MLPs have chosen to amend the IDRs to limit the cash flow that goes to the GP.. Hence. buyers of GPs have recognized the value of the IDRs typically held by the GP.85B acq. Energy Transfer Equity LP Enterprise GP Holdings LP Hiland Holdings GP LP Inergy Holdings LP Magellan Midstream Holdings LP NuSTAR GP Holdings LLC Penn Virginia GP Holdings LP
Source: Partnership reports
Ticker AHGP AHD BGH XTXI ETE EPE HPGP NRGP MGG NSH PVG
IPO date May-06 Jul-06 Aug-06 Jan-04 Feb-06 Aug-05 Sep-06 Jun-05 Feb-06 Jul-06 Dec-06
Power Of The IDRs Clearly. Crosstex Energy. For example. GPs have been able to raise their distributions at a three-year CAGR of 32% (2005A to 2007A). The multiplier is determined by a number of structural characteristics related to the assets owned by the GP.5MM $20-15-15-10-5MM ~$6.e. publicly traded entities to highlight and maximize their value. there are three publicly traded partnerships (i. Inc. while the underlying MLPs have only been able to increase their distribution at a rate of 11%. held the first initial public offering for a stand-alone pure-play general partner interest. Linn Energy.4MM Length Of Subsidy 2 yrs 2 yrs 5 yrs 1 1. The Multiplier The multiplier represents the rate of cash flow growth to the GP relative to LP growth.7MM ~$1.4B acq.
0x AHD NRGP MGG NSH BGH Median Source: Partnership reports and Wachovia Capital Markets.0x 3.2x 3..e.8x $20 $20 $40 $2 $20 $0 $22 With 10% increase $220 $85 $305 $22 $85 $5 $102 % growth 10% 31% 15% 10% 31% 0% 28%
1. The GP’s leverage to the underlying MLP’s distribution growth can be defined as the ratio of the pure-play GP’s distribution growth rate relative to that of the underlying MLP.2x 2. LLC estimates PVG EPE XTXI ETE HPGP AHGP
How the math works.0 million of incremental SG&A expenses • 5 million underlying MLP units owned by the GP Figure 75.Third Edition
WACHOVIA CAPITAL MARKETS.9x
2. except per unit data) Current distribution per unit Units outstanding (in millions) Total distribution % of cash flow to GP MLP common units owned by GP ( in millions) GP distributable cash flow Cash flow to LP unitholders Cash flow to GP Total cash distribution to LP & GP Distributions to GP from LP units Distributions to GP from GP interest and IDRs Incremental SG&A expense GP distributable cash flow Multiplier effect Source: Wachovia Capital Markets. 50/50 tier) • Distribution tiers from Figure 49 And the following assumptions at the GP: • $5.7x 2.0x
1. Forward GP Multiplier Estimates
4.00 per unit • 50 million common units outstanding • A 10% distribution increase • High splits level (i. Our example assumes the following at the underlying MLP: • A current distribution of $4.9x
1.00 50 $200 24% 5 Current period Incremental $200 $65 $265 $20 $65 $5 $80 2.7x
Current period $4.8x
1. GP Multiplier
Underlying MLP ($ in millions.0x
0.0x Multiplier Effect 2.1x
2.MLP Primer -. LLC EQUITY RESEARCH DEPARTMENT
. meaning the GP can reach a level where it can receive 50% of the incremental cash flow (48% for the IDRs plus 2% for the GP interest). its growth rate slows and converges with the growth rate of the underlying MLP. if the MLP raises its distribution per unit by 10%. C-Corp versus MLP). Other GP interests are held within companies involved in other businesses or that own other energy assets. Over time. Not All GPs Are Created Equal When comparing publicly traded pure-play GPs and their leverage to the underlying MLPs (i. Thus. we believe the following factors should be considered: • Growth profile of the underlying MLP. its growth rate should equal the growth rate of the MLP. management’s decision to cap the IDRs may benefit the GP in the long run. (For a list of publicly traded entities holding GP interests.P. unit holders is generally slower than the growth rate achieved by the IDRs. the 2% GP interest and IDRs entitle the GP to receive a disproportionate amount of the MLP’s incremental cash flow (i.e. 50%).. the GP’s growth rate of 28% divided by the underlying MLP’s distribution growth of 10%). Some public securities hold only the GP interest along with a share of a MLP’s limited partner units (typically subordinated to the common units).)
. interest and SG&A expense and taxes). • Maximum IDR level. Hence. Thus. the underlying MLP should be able to increase its distributions at a faster rate and sustain its growth rate for a longer period of time. all 11 publicly traded pure-play GPs do not own any independent assets. and TPP are the only underlying MLPs with publicly traded GPs. All of the publicly traded pure-play GPs incur incremental SG&A expense. as the cumulative percentage of distributions to the GP increases. Thus. Their cash flow is based solely on distributions declared by the underlying MLPs.e.e. XTXI is the only publicly traded pure-play GP structured as a corporation. A GP’s potential leverage to the underlying MLP’s growth is based on the maximum incentive distribution level that is stipulated in the partnership agreement. EPD. the ratio of the pure-play GP’s distribution growth relative to that of the underlying MLP). NS. the cumulative percentage of distributions attributable to IDRs increases. Taken to the extreme. • Percentage of cash flow accruing to IDRs. the slower the growth. such as interest expense. which should enable it to compete more effectively for acquisitions and realize higher returns on all investments (acquisitions and expansion projects). • Percentage of GP’s cash flow attributable to LP units held..e. Corporate taxes. The greater the number of LP units held at the GP.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. reduce the cash available to pay the GP’s unit holders.e. all else being equal.. the multiplier effect is approximately 2. • Structure of the GP (i. LLC EQUITY RESEARCH DEPARTMENT
Based on these assumptions. if the GP is receiving 50% of the distributions of the underlying MLP. reduce the cash available to pay dividends. please see the Appendix. Hence. Currently. The underlying partnership should have a lower cost of capital (relative to MLPs with maximum IDRs of 48%). all else being equal. The incremental expenses at the GP level. publicly traded pure-play GPs typically own limited partnership units of the underlying MLP. • Incremental expense at the GP (i. With the exception of MGG. all else being equal.8x (i. However. Most IDRs are capped at 48%. General Partners Are Held In Different Entities Publicly traded GPs are housed in a variety of public entities. all else being equal. Since the underlying MLP is at the “high-splits” level. The reason is that the growth of distributions to L. the partnership would need to pay incremental distributions to LP unit holders and the GP of $20 million each. the IDRs of which are capped at 23%. a 10% distribution increase at the MLP would enable the GP to raise its distribution by approximately 28%. the distribution growth of a GP associated with a fast-growing underlying MLP should be higher than that of a GP and supported by one with modest growth prospects. in our view.
Return Of Upstream MLPs
The IPO of Linn Energy in January 2006. and • Vanguard Natural Resources. What Should Be The Criteria To Invest Today? Appropriate reserve base. • EV Energy Partners. the factory-like development of a well-known reserve base.2x). LLC (VNR) Upstream MLPs Failed in the 1980s. all else being equal. Upstream MLPs are suitable for yield-oriented investors that seek more direct exposure to oil and gas assets and have a higher risk tolerance. these partnerships relied on relatively risky drilling to sustain production. An incremental $20 million of cash flow on a base of $100 million is meaningful at 20%. The MLP mantra must be strictly adhered to. • Strong management team. Oil and gas MLPs should focus on exploitation. • Linn Energy LLC (LINE). • Encore Energy Partners. There are inherent challenges associated with a depleting asset base.. they will likely need to make ever larger acquisitions to sustain growth. • Commodity price exposure. i. • Pioneer Southwest Partners.
. can pressure earnings and narrow coverage ratios. (PSE). • Conservative balance sheet and high distribution coverage ratio. even at the expense of “leaving some upside on the table. modest debt) and a more robust distribution coverage ratio (i. The oil and gas MLP needs to be actively and conservatively managed to maintain reserves and roll over hedges. marked the return of oil & gas producing assets to the MLP structure. with slow depletion rates. Reserves suitable for the oil and gas MLP structure should be characterized as predominantly proved developed and long-lived. but on a base of $500 million is less so at 4%. L. • Legacy Reserves. ever cut the distribution. in our view. There are currently ten publicly traded upstream MLPs. As upstream MLPs increase in size. consisting of the following: • Atlas Energy Resources LLC (ATN). LLC EQUITY RESEARCH DEPARTMENT
I.e. “never. Absent acquisitions. • Dependence on acquisitions. low development costs. A displacement in either of these markets could hamper a partnership’s ability to pursue acquisitions and increase distributions. • Exploitation and not exploration--low drilling risk. Generally. MLPs with more volatility in their underlying businesses should maintain a more conservative balance sheet (i. LP (BBEP). balance sheets were over-leveraged.. a partnership’s asset base is eroding and reinvestment opportunities may be limited. instead of relying on exploration to support cash flow. • BreitBurn Energy Partners. Declining commodity prices. an oil and gas MLP can set distributions at a long-term sustainable level. Upstream MLPs are dependent on debt and equity markets to finance acquisitions. LP (EVEP).e. LP (ENP).e. Why? The business model was flawed and execution was poor.”
Upstream MLPs Are Faced With Unique Challenges And Risks • Depleting asset base. in our view.e.Third Edition
WACHOVIA CAPITAL MARKETS. Although an active hedging program mitigates commodity price risk. 70-90%) in order to lock in prices and reduce commodity price exposure.” With price certainty. even with hedges. • Financing growth. and hedging tools were not available to mitigate commodity price risk.P.MLP Primer -. • Active hedging strategy.. in our view. The partnerships should hedge a significant percentage of their expected production (i. in our view.. • Constellation Energy Partners LLC (CEP). Reserves in certain regions of the United States are more appropriate for the MLP structure. LP (LGCY). • Quest Energy Partners. We would prefer an oil and gas MLP to lock in prices for a multiyear time period (to the extent the market allows). a prolonged period of low commodity prices could force upstream MLPs to cut their distribution absent acquisitions. 1.
Cost of capital is therefore the weighted average cost of GP equity. the level of spending required to sustain production also increases. the cost of equity is understated and transactions that are initially accretive could become dilutive in later years as the partnership pays incremental distributions on the original units issued to finance the transaction. Properly defining and forecasting cost of equity has important ramifications for (1) making investment decisions. Competition. Because of this high degree of leverage. high drilling activity can lead to faster decline rates as new wells typically come online with steeper decline rates. but could be entitled to 50% of the MLP’s cash flow through IDRs. GP equity. The cost of LP equity is the forward yield (distributions paid to LP unitholders over the next four quarters) plus expected distribution growth. In Our View
J. its cost of capital increases and this advantage erodes away. Cost of GP equity. increases annual maintenance capital requirements.. In addition. However. Figure 76.
MLPs are generally thought to have a lower cost of capital than C-corps. The general partner typically has just a 2% interest in the assets of the MLP. In fact. The cost of GP equity is the forward GP yield (cash flow being paid to the GP over the next four quarters) plus the expected growth in cash flow payments to the GP as the MLP raises its distribution over time. in turn. or the forward cash yield (distributions paid to LP unitholders over the next four quarters adjusted for the GP cut) plus total distribution growth. as the MLP is more successful in raising distributions. in our view. and debt. this cost-ofcapital benefit is temporary and exists only when the MLP is at the lower incentive distribution level. This represents an LP unitholder’s expected return for the risk undertaken in owning LP units of an MLP (i. LLC EQUITY RESEARCH DEPARTMENT
High maintenance capex. Thus. we believe the cost of equity is best defined as adjusted yield (forward yield adjusted for GP promote) plus distribution growth. Cost of LP equity.e.
. There Are Three Components To An MLP’s Cost Of Capital MLPs have three principal sources of capital: LP equity. By ignoring the growth component. For an MLP. GP equity is substantially more expensive than LP equity. driving acquisition multiples higher and reducing potential accretion. As the MLP increases its distribution. it must pay a greater percentage of its total cash flow to the GP. which. The conventional methodology used to calculate an MLP’s cost of equity is flawed. an investor’s required rate of return). An MLP’s total cost of equity is the weighted cost of LP equity plus the weighted cost of GP equity. but also to future distributions that will presumably be higher. LP equity. all else being equal. As upstream MLPs increase in size and number. As an upstream MLP’s asset base increases in size. and debt. competition over MLP suitable assets could intensify. due to their taxadvantaged partnership structure and low cash flow outlay to the general partner. (2) setting distributions and (3) choosing among financing alternatives. as it incorrectly equates an MLP’s cash yield to the partnership’s cost of equity. Cost Of Capital Is Becoming A More Prominent Issue.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. An MLP’s hurdle rate for new investments should therefore be greater than the weighted average cost of these three capital sources. This advantage erodes over time due to the GP incentive distribution rights. we argue that today’s yield (the unit price) reflects some underlying distribution growth assumption. paradoxically. LLC estimates
Equity owners are entitled not only to the current distribution. Defining Cost Of Equity Conventional Thinking On Cost Of Equity
Cost of equity = Cash yield
WCM's Cost Of Equity Definition
Cost of equity = Forward cash yield + Growth
Cost of equity
Current yield Percentage cash flow to LP
Cost of equity
Forward yield (1) Percentage cash flow to LP
Note (1): Forward yield = next four quarterly distributions divided by current unit price Source: Wachovia Capital Markets. 2%.
If that were the case.0% Total Cost Of Equity 18. Alternatively. 2% of cash flow accrues to the general partner. implying that the partnership would need to target investments with returns in excess of approximately 18% in order to sustain the 10% return to investors. In other words. it is a mistake to think of cost of equity for a MLP as just the yield. For two MLPs targeting an equal rate of return to unitholders. Incentive Distribution Rights Increase Cost Of Capital IDRs create an increasingly large disconnect between an investors’ required rate of return (LP cost of equity) and an MLP’s total cost of equity. MLPs Have Three Main Sources Of Capital
Cost of GP equity = Implied GP yield + GP interest growth
Cost of LP equity = Forward yield + distribution growth Cost of debt
Source: Wachovia Capital Markets.0% 8. the GP commands 50% of available cash flow.MLP Primer -. Again. LLC EQUITY RESEARCH DEPARTMENT
Figure 77. in turn. At the extreme. an MLP without IDRs targeting a 10% return to investors would have a cost of equity approximately equal to 10% over the life of the partnership. when the MLP is first created. In other words. cost of equity should be higher than the cost of debt because creditors get paid before equity owners. we assume the MLP targets a 10% return to investors (6.5% premium over the 10% targeted return to investors. the cost of equity would be less than the cost of debt. which. For simplicity.0% 16. in many instances.0% 0% 10% 20% 30% % Cash Flow Paid To GP 40% 50% 60% Investor Return (LP cost of equity) IDR Premium (GP cost of equity)
Source: Wachovia Capital Markets. the partnership should have a cost of equity of approximately 11. As the partnership increases its distribution and triggers higher distribution tiers.5% equity hurdle rate. equity owners demand a higher return because of the higher incremental risk that they carry.7% forward yield + 3. an MLP with IDRs needs to make increasingly larger (or more accretive) investments in order to prevent erosion in investor returns. it would have to make investments in excess of this 11. the partnership with IDRs will have a higher cost of equity than an MLP without IDRs. the percentage of cash flow accruing to the general partner increases.0% Cost Of Equity 14. Lifecycle Of MLP With 50/50 Splits--IDR Premium
20. increases the partnership’s cost of equity. At year 0.0% 10. representing a 1.5%. if the partnership wanted to continue returning 10% to investors.3% perpetual distribution growth) over the life of the partnership. LLC estimates
Intuitively. As a result.Third Edition
WACHOVIA CAPITAL MARKETS.0% 12. Figure 78 illustrates the lifecycle of a hypothetical MLP with IDR tiers capped at 50% of cash flow. When 15% of cash flow is accruing to the GP. Figure 78. LLC estimates
we believe it provides a better guide for LP cost of equity (i. In other words. LLC EQUITY RESEARCH DEPARTMENT
CAPM Understates The Cost Of Equity As it relates to MLPs. four financial institutions (Wachovia.3). and ultimately. Citi. Comparison Of MLP Indices
Comparison of MLP indices Index launch date Ticker . For our MLPs under coverage. GPs. the calculation is not calibrated to capture the increasingly higher percentage of cash flow that accrues to an MLP’s general partner over time. our MLP index has delivered a historical ten-year average total return of approximately 18% (versus 6% for the S&P 500).e.
. in our view. and Standard & Poor’s
The primary advantage of the Wachovia MLP Index is that the broader index inclusion requirements (i. If the MLP increases its distribution at a greater rate. in our view. We believe another major benefit of the Wachovia MLP Index is that price and total return performance can also be obtained for 13 sub-indices. a market-risk premium of 5%. as a good portion of its perceived advantage becomes negated after factoring in distribution growth expectations set by investors and the effect of increasingly higher payments to the GP through IDRs. instead. it equates to excess returns for the investor. and Standard & Poor’s) have introduced MLP indices that allow investors to track the price and total return performance of the MLP sector. An investor requiring a 10% annual return might purchase an MLP yielding 6% under the assumption that the MLP will be able to grow its distribution at 4%. One explanation for the disparity between required rate of return and actual return is that investors could be underestimating future distribution growth. and an average beta of 0.. LLC. up from the historical 4-6% rate during 1998-2004. lower market capitalization threshold and unrestricted number of index constituents) provide a more representative picture of MLP industry performance. GPs. in our view. Alerian. an investor’s required rate of return). Is An MLP’s Cost-Of-Capital Advantage Overstated? Yes And No An MLP’s cost of capital advantage over a C-Corp could be exaggerated. Alerian Capital Management.e. the fact remains that MLPs are tax-efficient vehicles to pass cash flow to unit holders. in our view. However. We estimate our universe of MLPs will increase distributions by an average of 9-10% in 2007 and 2008. The following chart outlines the differences between the indices. which is significantly higher than the required rate of return as defined by CAPM methodology. the average cost of equity as defined by CAPM is about 7. and LLCs Standard & Poor's
MLPs.8% (assuming a risk-free rate of 4%. Citi.price performance / total return Market capitalization weighting Minimum market cap ($ in millions) Timing of rebalance Maximum index constituent weighting Index base Index base date Index sub sectors Number of current index members Constituent types Calculation Wachovia 12/11/2006 WMLP / WMLPT Float-adjusted $200 Quarterly None 100 12/31/1989 Yes 73 Alerian 6/1/2006 AMZ / AMZX Float-adjusted $500 Quarterly None 100 12/31/1995 No 50 (maximum) Citi 7/18/2006 CITIMLP / CITIMLPT Full market cap $500 Quarterly None 100 12/31/1999 No 47 MLPs only Dow Jones S&P 9/6/2007 SPMLP / SPMLPT Float-adjusted $300 Annual (in July) 15% 1000 7/20/2001 No 40 MLPs. GPs. it is this tax-advantaged structure that allows MLPs to trade at a premium to C-Corps. Figure 79. K. In comparison. we believe cost of equity under the capital asset pricing model (CAPM) does not capture the cost of GP equity. and LLCs MLPs.. and LLCs Standard & Poor's Standard & Poor's
Source: Wachovia Capital Markets.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. Emergence Of MLP Indices Due to the growth and prominence of the MLP sector over the past couple of years.
In October 2007. LLC
L. Financial Products Facilitate Participation In MLPs In the past few years. • BearLinx Alerian ETN. This includes any distributions generated by the underlying MLP and the benefit of the MLP’s price appreciation over the life of the swap. In a total return swap. However. WCM Refined Products MLP Index Bloomberg Index Tickers Price Performance Total Return WMLP WCHWGPS WCHWCOA WCHWEXP WCHWMAR WCHWPRO WCHWMID WCHWGAS WCHWGNP WCHWNGP WCHWPET WCHWCRD WCHWRFP WCHWMLPT WCHWGPST WCHWCOAT WCHWEXPT WCHWMART WCHWPROT WCHWMIDT WCHWGAST WCHWGNPT WCHWNGPT WCHWPETT WCHWCRDT WCHWRFPT
7. Wachovia introduced cash-settled call warrants linked to the performance of the Wachovia Composite MLP Index. WCM Coal MLP Index 3. new financial products have been created to facilitate investment in the MLP sector. Alerian Capital Management launched the BearLinx Alerian MLP Select Exchange Traded Note (ETN). WCM Crude Oil MLP Index ii. WCM Midstream MLP Index A. Investors can also gain exposure to an MLP without direct ownership via a total return swap agreement. the total return receiver will be required to pay the counterparty (usually a brokerage firm) the amount by which the asset has fallen in price. WCM Marine Transportation MLP Index 5. The Wachovia and Alerian instruments provide diversification for investors and are administratively less burdensome than direct ownership in MLPs (e. WCM Gathering & Processing MLP Index ii. WCM Propane MLP Index 6. net of fees.MLP Primer -. WCM GP Composite Index 2. an investor receives a synthetic security which mimics the performance of the underlying security. if the price of the MLP decreases over the swap's life. It was the first ETN linked to an MLP Index (the Alerian MLP Select Index) and is listed on the NYSE under the symbol “BSR. • Options.” BSR investors receive distributions in the form of a monthly coupon. No principal protection on the ETN exists. The counterparty owns the underlying MLP and receives payments from the investor over the life of the swap based on a set rate. WCM Petroleum MLP Index i..g. With more institutional investors involved in the sector. if the percentage change in the value of the index is positive. receive 1099s and not K-1 statements). In May 2007. investors receive a cash payment (settlement value) equal to the notional amount of the warrant multiplied by the percentage change. We expect additional structured products around the MLP market to be created over time to spur additional investment in the sector. LLC EQUITY RESEARCH DEPARTMENT
Figure 80. WCM Natural Gas MLP Index i. WCM Oil & Gas MLP Index 4.
. the MLPs have experienced an increase in options trading volume. WCM MLP Sub-Indices And Related Bloomberg Tickers
WCM MLP Sub-Indices WCM MLP Index 1.Third Edition
WACHOVIA CAPITAL MARKETS. net of fees. Source: Standard and Poor’s and Wachovia Capital Markets. WCM Oilfield Services MLP Index N/A N/A Note: WMLP index price performance quotes are real-time and all other index quotes are end of day. WCM Natural Gas Pipelines MLP Index B. The cash settlement amount at maturity equals to the principal amount multiplied by an index ratio based on the performance of the Alerian MLP Select Index. • Wachovia MLP index warrant. • Total return swaps. Upon exercise of the warrant.
and management team. Enterprise Value-To-Adjusted EBITDA When comparing MLPs’ value on the basis of an EV-to-EBITDA multiple. C. We believe the disparity in yield can also be partially explained by the growth profile of various MLPs. growth prospects. D.000 112. The disparity in yield among MLPs can be explained by several factors including risk profile (financial and operational). MLP Option Contract Trading Volume
225.500 Daily trading volume 150. For example. we use adjusted EBITDA rather than adjusted enterprise value.500 75. Distribution Yield MLPs can be valued using a number of techniques.000 37.0-11.5%. depending upon the individual MLPs outlook. See “Drivers of Performance – Distribution Growth” for additional information.0-3.3%.. or more variability in cash flow) typically trade at a higher yield in the market as investors require greater return to compensate for the increased risk. would translate into greater appreciation of the underlying security. Our DDM assumes a required rate of return (ROR) of 9.0%. and interest rate environment. Risk profile. Valuation Of MLPs
A. From 1998 to 2007. Distributable cash flow is defined as the cash available to be distributed to limited unitholders after payments are made for sustaining capital expenditures.500 0 Dec-06 Source: Bloomberg Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08
XI. Some investors will look at yield to determine relative value.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. and cash distributions to the GP.1%. Price-To-Distributable Cash Flow To determine relative value. B. Growth prospects. MLPs with profiles that are perceived to be riskier (e.g. other cash obligations. asset mix. We believe the focus for MLPs should be on cash flow rather than earnings (or P/E). assets subject to commodity price risk. faster-growing MLPs should command a lower yield because it is assumed that the growth in cash flow would generate increases in distributions that. higher leverage. LLC EQUITY RESEARCH DEPARTMENT
Figure 81. ranging from a high of 10. we focus on price-to-distributable cash flow (DCF) multiples. We then use a long-term growth rate of 0. Two-Stage Distribution (Dividend) Model Our primary tool for valuing MLPs is a two-stage distribution (dividend) discount model (DDM). which employs a risk-free rate (using the 10-year Treasury yield as our benchmark) and a market-risk premium. weather risk.000 187. in turn. Others will project a distribution for year-end and then apply a target yield to their projection to determine a fair value for the security. EBITDA generated by the partnership is used to support the cash distributions
. we project a distribution growth rate over five years. For our DDM model.8% to a low of 5. The most common valuation method typically focuses on yield due to the fact that MLPs are income-oriented securities. resulting in a higher total return. our MLP universe has had a median yield of 7.
4 EV-to-adjusted EBITDA EV-to-adjusted EBITDA EV-to-adjusted EBITDA 8. it is the distribution that could be paid such that the distribution coverage ratio equals 1.MLP Primer -.9x = = = = EV EV $200 $200 ÷ ÷ ÷ ÷ adjusted EBITDA EBITDA . We believe this is the most appropriate way to adjust EBITDA when comparing it to enterprise value.Third Edition
WACHOVIA CAPITAL MARKETS. For example. Yields on midstream MLPs have maintained spreads over the 10-year treasury as wide as 512 bps and as narrow as 16 bps. We view the spread versus the Treasury as a good measure of investors’ appetite for assuming risk over time as it relates to owning MLPs. if a partnership has an enterprise value of $200 million and is generating EBITDA of $25 million with 10% of its cash flow going to the general partner. LLC EQUITY RESEARCH DEPARTMENT
to both the limited and general partners. pay if it distributed all of its sustainable available cash flow. Figure 83. in order to produce an “apples-to-apples” comparison. Potential distribution upside based on MPD is a function of a partnership's sustainable cash flow. 3. LLC
E. However. we caution that measuring current spreads versus a historical average may not be valid as the number. Midstream MLP Spread To The 10-Year Treasury (1998-2007)
600 MLP Yield Spread To 10-Yr Treasury (Bps)
F. enterprise value reflects only the interest of the limited partners. size. Spread Versus The 10-Year Treasury The midstream MLP yield is currently trading at approximately 400bps above the 10-year treasury. with an average of 238 bps over the ten-year period from January 1998 to 2007. 2. the percentage of cash flow accruing to its general partner. Enterprise Value-To-Adjusted EBITDA Calculation
. we deduct the cash flow accruing to the general partner from EBITDA. This is the maximum distribution a partnership could. we would deduct approximately $2. and its current distribution coverage ratio. in theory.5 million from EBITDA in calculating our EV-to-adjusted EBITDA multiple. Alternatively. Therefore. Figure 82. However.($25 × 10%) $23
Source: Wachovia Capital Markets. What Is Maximum Potential Distribution? Maximum potential distribution (MPD). and growth orientation of MLP investments has changed over time.(EBITDA × % cash flow to GP) $25 .
In concert with MPD..Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. In other words.2-1. Thus. DCF is not equivalent to how high the distribution can be set. • Total distributions paid = Distributions paid to the partnership’s limited partners and general partner based on the average units outstanding at the end of each quarter for the trailing-12-month period.
. DCF should be more appropriately used as a measure to determine the safety of the declared distribution. and management team. propane MLPs. we consider price-to-MPD multiples in addition to price-to-DCF multiples. in our view. in general. growth outlook. This is to ensure that MPD is based on a sustainable cash flow base. and distributions paid to the general partner. For example. DCF is divided by the declared annual distribution. Consequently. cash interest expense. Caveat -. To do so. This excess cash flow is a cushion and suggests that the partnership’s distribution is safe in the event that cash flow decreases in the short term. their distribution coverage ratios are often above 1. A ratio of less than 1 indicates that the partnership may be borrowing to pay its distributions and that the current distribution may not be sustainable. The latter is typically the cash flow that is left after maintenance capital expenditure. MPD should not be used in isolation to analyze MLPs. other factors to consider before investing include a partnership’s risk profile (e. This calculation determines the distribution coverage ratio. financial leverage). reflecting their exposure to coal prices.2x or greater. while the latter measures excess cash flow available to pay both limited partners and the general partner. • Available cash flow = The partnership’s projected net income + DD&A expense – Interest Expense Maintenance Expense – Other Cash Expenses (Income) for the trailing-12-month period. set their distributions below MPD to maintain a coverage ratio of at least 1. MPD Is Different Than Distributable Cash Flow (DCF) MPD is different than distributable cash flow (DCF). Our MPD calculations are based on the following assumptions: • Sustainable cash flow = The partnership’s estimated minimum available cash flow for the period between the trailing 12 months in question and 2012..0x. We prefer to calculate the distribution coverage ratio as available cash flow (i. Coal MLPs typically maintain a distribution coverage ratio of 1. LLC EQUITY RESEARCH DEPARTMENT
MPD is a proxy for free cash flow to limited partners. although we suspect that it may sometimes be erroneously defined as such. A ratio above 1 indicates that the partnership is generating more than sufficient cash flow to pay its distribution.e. The former more precisely quantifies free cash flow to limited partners. in our view. before the subtraction of cash paid to the GP) divided by the cash distributions paid to both the LP unit holders and GP.3x because of the impact of weather on cash flow. in our view. This is to account for distributions associated with anticipated equity issuances.MPD Does Not Tell The Whole Story Partnerships typically set their distributions (at a sustainable run rate) below MPD to account for cash flow volatility and financial leverage.g.
Any number of regulatory hurdles could affect MLPs’ ability to grow. pipeline volume. In particular. as 2008 progresses. this could inhibit longterm distribution growth. particularly those involved in the transportation (pipeline) and distribution of propane. Conflicts of interest with the GP.Third Edition
WACHOVIA CAPITAL MARKETS. Thus.
Growth is dependent on access to external capital. on their ability to complete identified organic growth projects on time and on budget and/or to successfully identify and execute future acquisitions. which could negatively affect cash flow and earnings in the near term. Intrastate pipelines are typically regulated by the FERC.
. If the MLPs are unsuccessful in completing projects on time or within budget or if the partnerships cannot identify attractive acquisitions. Commodity price risk. in part. could be negatively affected. they must continually access the debt and equity markets to finance growth. some MLPs’ cash flows could be negatively affected. If MLPs were unable to access these markets or could not access these markets on favorable terms. Regulatory risk. Tax and legislative risk. Because MLPs pay out the majority all of their cash to unit holders. gathering and processing. A severe economic downturn could reduce the demand for energy and commodity products. Energy demand is closely linked to overall economic growth. gathering fees. being subject to regulation by federal. Weather risk. Coal is one of the most heavily regulated industries in the country. If commodity prices are weaker than expected. and ultimately. Headline risk exists related to potential legislative changes on the treatment of carried interest and challenges to FERC tariff regulations. the GP of the partnership and the parent company that owns the GP are controlled and run by the same management teams. Specific to the former. state. MLPs are regulated across a number of industries. Some MLPs. MLP valuations could also be negatively affected if Congress revoked MLPs’ special tax treatment. A terrorist attack or environmental incident could disrupt the operations of an MLP. Execution risk related to acquisitions and organic projects. Many MLPs have assets that have been designated by the Department of Homeland Security as potential terrorist targets. propane demand. and therefore. A decline in drilling activity. volume. Environmental incidents and terrorism. A slowdown in drilling activity could reduce oil and gas producer revenue. lower commodity prices are more likely to affect drilling in these regions before drilling is curtailed in more convention oil and gas fields. A severe economic downturn.MLP Primer -. If an MLP’s operating region experiences unseasonably warm weather. LLC EQUITY RESEARCH DEPARTMENT
XII. are dependent on cold weather for their earnings. Some MLPs have significant exposure to commodity price fluctuations including partnerships involved in oil and gas production. throughput volume into processing plants. Even though these issues may appear daunting. which could result in lower earnings and cash flow. Some potential areas of conflict include (1) the price at which the MLP is acquiring assets from the GP. and (4) underlying MLP equity issuances benefit the GP regardless of whether the acquisition or project is accretive. and local authorities. investor psychology could be influenced by election rhetoric concerning tax laws. MLPs’ ability to grow is dependent. future cash flow and distribution growth rates could be adversely affected. (2) the GP aggressively increasing the distribution to achieve the 50%/50% split level rather than managing distribution growth to maximize the long-term sustainability of the partnership. (3) the potential for management to place the interests of the parent corporation or the GP above the interests of the LP unit holders. many MLPs have assets tied to unconventional shale plays. and coal. which typically have a higher cost structure. For certain MLPs. such as pipelines and storage assets. MLP management teams have been successful in dealing with similar uncertainties related to the MLP landscape over recent years.
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.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS.
. LLC EQUITY RESEARCH DEPARTMENT
XIII.MLP Primer -.Third Edition
WACHOVIA CAPITAL MARKETS.
Base gas (or cushion gas). 2P reserves (proved + probable). Backwardation. Blendstocks. LLC
Contango. Amine. Figure 84.e. Amine is a type of chemical used to remove impurities from natural gas in order to make the natural gas suitable for pipeline transport.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. Available cash flow is the cash flow available to the common unit holders and the general partner. Possible reserves indicate there is at least a 10 % probability or “less likely than probable” chance that the reserves will be producing. A blendstock is a liquid compound that is mixed with petroleum products to improve the petroleum’s characteristics. The higher future price is often due to the cost associated with storing and insuring the underlying commodity. Available cash flow. A market condition in which future commodity prices are greater than spot prices. 3P reserves (proved + probable + possible). Backwardated Market
Backwardated Market Conditions Commodity price $150 $100 $50 $0 Spot price
Source: Wachovia Capital Markets. Proved reserves indicate there is at least a 90% probability or “reasonable certainty” that the reserves will be producing in the future. A market condition in which future commodity prices are lower than spot prices. Figure 85. Probable reserves indicate there is at least a 50% probability or “more likely than not” chance that the reserves will be producing in the future. blendstocks are mixed with motor gasoline to increase the gasoline’s octane or oxygen content. For example.
. Base gas refers to the volume of gas that is needed as permanent inventory in a storage reservoir (i. A backwardated market usually occurs when demand exceeds supply. and/or salt cavern) to maintain adequate pressure and deliverability rates throughout the withdrawal season. aquifer.. Contango Market
Contango Market Conditions Commodity price $150 $100 $50 $0 Spot price
Source: Wachovia Capital Markets. depleted natural gas or oil field. LLC EQUITY RESEARCH DEPARTMENT
MLP Glossary Of Terms
1P reserves (proved).
We define cash yield as an MLP’s current yield adjusted for its GP share of cash flow. withdrawal rate. or any other parties. For example. the injection rate is at its lowest when the reservoir is most full and increases as working gas is withdrawn. Dekatherm. Figure 86. the deliverability rate it is at its highest when the reservoir is most full and declines as working gas is withdrawn.e. In a typical partnership agreement. A dekatherm is a measurement of energy content. Cash or adjusted yield. A storage facility’s injection rate is the amount of gas that can be injected into a storage facility on a daily basis. Natural gas is compressed to a higher pressure to facilitate delivery of gas from one point to another. Coalbed methane (CBM).MLP Primer -. In contrast to the deliverability rate. Cycling. Deliverability refers to the amount of natural gas that can be delivered (withdrawn) from a storage facility on a daily basis (this also known as the deliverability rate.. It is defined as the risk-free rate (typically the 10-year treasury) plus (+) beta multiplied (×) by the expected market return (typically the historical return of a given market index). LLC OR EBITDA (-) interest expense (-) maintenance capex Available cash flow (-) Cash flow to general partner Distributable cash flow
Distribution. if the GP is receiving 10% of an MLP’s total distributions and the partnership’s units trade at a 7% yield. A storage process in which the same quantity of natural gas is injected into and withdrawn from storage within a certain period of time. minus the risk-free rate. Methane found in coal seams. limited liability). LLC EQUITY RESEARCH DEPARTMENT
British thermal unit (Btu): A unit of measurement for energy representing the amount of heat required to raise the temperature of one pound of water one degree Fahrenheit.) is a distinct legal entity. a corporation protects its owners from being personally liable in the event that the company is sued (i. Deliverability. Injection capacity (or rate). separate from its shareholders and employees. Deliverability is usually expressed in terms of millions of cubic feet per day (MMcf/day) or dekatherms per day.% of cash distributions paid to GP]).” MLPs typically distribute all available cash flow (i. As a separate legal standing entity. the cash yield would be 7.000 cubic feet of natural gas (or 1 Mcf). The injection capacity of a storage facility is also variable. or withdrawal capacity). The CAPM maps the relationship between risk and expected return. Compression. A corporation (C Corp. Corporation. The shareholders contribute capital. but have no liability to business creditors.8% (current yield / [1 . and provides an alternate definition of the required rate of return (or cost of equity) of a given asset. Available And Distributable Cash Flow Calculation
Net income (+) depreciation and amortization (-) maintenance capex Available cash flow (-) Cash flow to general partner Distributable cash flow Source: Wachovia Capital Markets.
. cash flow from operations less maintenance capex) to unit holders in the form of distributions (similar to dividends). and is dependent on factors comparable to those that determine deliverability. the MLP is required to distribute all of its “available cash. Capital asset pricing model (CAPM). One dekatherm is the approximate energy content of 1. which may have a claim on corporate earnings and assets. tax authorities. However.. As with deliverability. The current yield is calculated by taking the current declared quarterly distribution annualized and dividing it by current stock price. management typically has some discretion in how much cash flow it chooses to pay out.e. DCF is the cash flow available to be paid to common unit holders after payments to the general partner. Distributable cash flow (DCF). In general.Third Edition
WACHOVIA CAPITAL MARKETS. injection capacity is usually expressed in MMcf/day or dekatherms/day. Dirty hedge. A dirty hedge is the use of crude oil derivatives to hedge natural gas liquids (NGL) exposure. Current yield.
The coverage ratio indicates the cash available for distribution for every dollar to be distributed. (Definition source – www. Distribution tiers indicate the percentage allocations (and the associated thresholds) of available cash flow between common unitholders and the general partner based on specified target distribution levels. An MLPs’ EPU is synonymous with a C corp.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. Hypothetical Distribution Tiers
Percent of cash flow to: Distribution tiers Tier 1 LP 98% 85% 75% 50% GP 2% 15% 25% 50% LP distr. the processor receives a fee for processing. The ratio is calculated by dividing available cash flow by distributions paid. LLC
Distribution yield. Earnings per unit (EPU). would be expected to generate approximately $12.00 $2. The FERC is an independent agency that regulates the interstate transmission of electricity. Investors typically associate as the “cushion” a partnership has in paying its cash distribution. EBITDA is a useful tool when comparing companies that incur large amounts of depreciation expense because it excludes these non-cash items that could understate the company’s true performance.00 $3. EBITDA multiple. Federal Energy Regulatory Commission (FERC). therefore. It is also associated with the sale of products after they are refined or processed. Downstream relates to the refining and marketing sectors of the energy industry. An EBITDA multiple is the expected return an acquisition or organic growth project is estimated to generate. Distribution Coverage Ratio Calculation
Distributions paid (to GP and LP) Source: Wachovia Capital Markets. In this context.5 million on an annual basis (or a 12.00 $4.00
Tier 2 Tier 3 Tier 4 (high splits)
Source: Wachovia Capital Markets. depreciation and amortization (EBITDA). LLC EQUITY RESEARCH DEPARTMENT
Distribution coverage ratio.5% return). Fee-based.gov)
. For example. Excess cash flow. the higher the ratio is. Under the fee-based arrangement. The producer retains ownership of both the dry gas and the NGLs. up to: $1. LLC Distribution coverage ratio = Available cash flow (to GP and LP)
Distribution tiers. Figure 88. The FERC also reviews proposals to build liquefied natural gas terminals and interstate natural gas pipelines. as well as licensing hydropower projects. Figure 87. Earnings before interest. the greater the safety of the distribution. This measure excludes the potential distortion that accounting and financing rules may have on a company’s earnings. Dropdowns can also be defined as a transaction between two affiliated companies.’s earnings per share (EPS). Excess cash flow is the cash flow that remains after distributions have been paid to common and subordinated unit holders and general partner. Downstream. EBITDA is a non-GAAP measure used to provide an approximation of a company’s profitability. Dropdown. natural gas. See definition for Organic capex. A dropdown is the sale of an asset from the parent company (or sponsor company) to the underlying partnership. taxes. Expansion capital expenditures (CAPEX). and oil. a $100 million investment at an 8x EBITDA multiple.ferc. EPU is calculated by dividing net income allocated to the limited partners divided by the weighted average units outstanding at the end of the period. The distribution yield is synonymous to a dividend yield.
An organic compound made of carbon and hydrogen atoms used as sources of energy. Limited liability company. and (3) receives cash distributions.” The processor must then replace the BTUs that it extracts from the natural gas stream (via the extraction of NGLs) with equivalent BTUs of natural gas. General partner (GP). We define forward yield as an MLP’s next four quarterly distributions (i. ethane. The process that changes natural gas from a gaseous state to a liquid state. The LLC structure affords the additional benefit of better corporate governance relative to the typical MLP structure. This is known as the 50/50. Limited partner. MLPs establish agreements between the GP and LP that outline the percentage of total cash distributions that are to be allocated between the GP and LP unit holders.e. A K-1 is similar to Form 1099 received by shareholders of a corporation. LNG is natural gas that has been condensed into liquid form (via either pressure or refrigeration). and credits. total distributions received over the next 12 months) divided by an MLP’s current unit price. The LLC structure provides some additional benefits as compared to the LP structure.e. or local jurisdictions. Intrastate pipelines. whereas unit holders of a standard MLP structure (LP) do not have this right. Incentive distribution rights. The GP (1) manages the day-to-day operations of the partnership. LPGs are typically a mixed form of propane and butane. propane. The crack in the rock exposes an increased surface area that allows a greater amount of natural gas to be produced. This is referred to as “shrinkage.Third Edition
WACHOVIA CAPITAL MARKETS. deductions. except the payment of distributions is in stock instead of cash. LPGs are created (as a by-product) during the refining of crude oil or from natural gas production. LLC EQUITY RESEARCH DEPARTMENT
Forward yield. Interstate pipelines. This refers to the period of time (i. Incentive distribution agreement. and (3) is eligible to receive an incentive distribution (through the ownership of the MLPs’ incentive distribution rights). gain. IDRs allow the holder (typically the general partner) to receive an increasing percentage of quarterly distributions after the MQD and target distribution thresholds have been achieved. iso-butane. By extracting the NGLs. Investors in i-shares receive a 1099 statement (not K-1).. An interstate pipeline is a pipeline that transports product across state lines. The LP (1) provides capital. Liquefied natural gas.e. the processor retains title to the NGLs produced from the natural gas stream to sell at market prices. I-shares do not generate UBTI. Keep-whole. Fractionation. the volume and BTU content of the dry gas is reduced. Liquefaction. provincial. Hydrocarbon. and natural gasoline). and crude oil. K-1 statement. Interstate pipelines are regulated by the FERC. LLC unit holders have voting rights.
. In a keep-whole arrangement. At inception.MLP Primer -. Fracturing. Injection season. In most partnerships. April 1 to October 31) during which producers and pipelines inject natural gas into storage for use during the winter months. Liquid petroleum gases. normal butane. (2) has no role in the MLPs’ operations or management. Frac spread. loss. (2) generally has a 2% ownership stake in the partnership. A holder of a keepwhole contract would be long NGL prices and short natural gas prices. coal. See definition for processing margin. IDRs can reach a tier wherein the GP is receiving 50% of every incremental dollar paid to the LP unit holders. Fractionation is the process that involves the separation of the NGLs into discrete NGL purity products (i. or “high splits” tier. The K-1 form is the statement that an MLP investor receives each year from the partnership that shows his or her share of the partnership’s income. I-shares are equivalent to MLP units in most aspects. An intrastate pipeline is a pipeline that operates within one state. Fracturing is a process employed in the production of natural gas that typically involves the pumping of water (at very high pressures) to create an extensive crack in the rock formation. including natural gas... I-Shares. Intrastate pipelines are regulated by state.
Pricing differential. It is the most commonly found hydrocarbon gas. Looping. this is unlikely to happen to a PTP investor. Master limited partnership. Midstream relates to the gathering. Alternatively. but instead. or storage of a product after it is produced from the wellhead. Maintenance capex is the investment required to maintain the partnership’s existing asset. A play is a proven geological formation that contains petroleum and/or natural gas. but before it is distributed to the end use market for consumption. propane. butane. Processing. pay if it distributed all of its sustainable cash flow. The pricing differential is the difference between a pipeline’s contractual cost of natural gas supply and the market price. the processor gathers and processes the natural gas and then sells the residue gas and produced NGLs at market prices. it owns natural gas and benefit when the price increases. (Source: NAPTP) Percent of proceeds or liquids. and cash flow to the GP). The partnership does not guarantee its ability to pay out the MQD during any quarter. An LDC is a company that obtains the major portion of its revenues from the operations of a retail distribution system for the delivery of gas for consumption by residential customers. Natural gas processing involves the separation of raw natural gas into “pipeline quality” gas and natural gas liquids. they are not fully shielded in the way shareholders are.0x (no excess cash flow). MLPs are also commonly referred to as “partnerships. upon initial public offering (assuming the company is able to generate sufficient cash flow from its operations after the payment of fees. If a holder is “long” natural gas. This right survives the termination of a partner’s interest. Maintenance capital expenditure. although limited partners enjoy limits on their liability. Organic growth capital expenditure. however. This is natural gas that has impurities removed. Pipeline quality gas is typically 95% methane. in theory. transportation. MPD represents the maximum distribution a partnership could. it is the distribution that could be paid such that he distribution coverage ratio equals 1. Minimum quarterly distribution. The processor receives a percent of the resulting dry gas and/or NGLs. and natural gasoline). Partnership. Pipeline customers may park natural gas to avoid selling the gas at a low price. treating. Maximum potential distribution. Parking is the temporary storage of natural gas for a pipeline customer. The NGLs are then typically transported via pipelines to fractionation facilities. iso-butane. MQD is the minimum distribution the partnership plans to pay to its common and subordinated unit holders. As a practical matter. NGLs are extracted from the raw natural gas stream into a liquid mix (consisting of ethane. Parking. Natural gas liquids. the processor receives a percentage of the NGLs only. All partners are liable for the obligations of the partnership. Oil or gas play. processing. A partnership is not considered to be a separate entity. maintenance capex.
. LLC EQUITY RESEARCH DEPARTMENT
Local distribution company.” Methane. MLPs consist of a general partner and limited partners. Midstream. Pipeline quality gas. Long. MLPs are limited partnership investment vehicles consisting of units (rather than shares) that are traded on public exchanges. Creditors generally have the right to seek return of capital distributed to a limited partner if the liability for which payment is sought arose before the distribution.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. is an aggregate of all the partners. expenses. In a percentage of proceeds (POP) arrangement. Looping involves the installation of additional pipeline next to an existing pipeline to increase the system’s capacity. Methane is also known as natural gas. Holders of POP or POL contracts are effectively long on natural gas or NGL prices. Organic capex is investments used to expand a company’s operating capacity or operating income over the long term. Limited partners may also be liable for substantial tax liabilities that could be determined through the audit process long after they have sold their interest. Under percent of liquids (POL) contracts.
If a holder is “short” natural gas. Subordination period. The processing margin is the difference between the price of natural gas and a composite price for NGLs on a BTU-equivalent basis. The process that changes natural gas from a liquid state to a gaseous state. Throughput. For example. Refined petroleum products. 2006. Proved developed producing reserves. Upon expiration of the subordinated period. A percentage of the cash distribution to the unitholder that is tax deferred until the security is sold. Processing margin.
. Short.e. Companies are allowed to increase their rates on an annual basis on July 1. PDPs are reserves that can be recovered via existing wells and through the use of existing equipment and operations. Shale is a form of sedimentary rock that contains crude oil or natural gas. The index system is based on the Producer Price Index for finished goods plus 1. jet fuel. Proved undeveloped reserves. Regasification. Reside gas is the natural gas that remains after processing and treating. and heating oil). they benefit when the price of natural gas declines. PV-10 (standardized measure).. 2011. Subordinated units increase the likelihood that (during the subordinated period) there will be sufficient available cash to be distributed to the common units. the subordinated units will not be entitled to receive distributions until the common units have received the MQD plus any arrearages from prior quarters. diesel. Producer Price Index (PPI) adjustment. Crude oil refineries process and refine oil into refined petroleum products. kerosene. For a period of time. etc. Subordinated units are subordinate in the capital structure to common units. A royalty is a type of payment received based on either a percentage of sales revenue or a fixed price per unit sold. crude oil. The total gas in storage refers to the volume of storage in the underground facility at a particular time. The current index is valid for a five-year period that began on July 1.. The subordination period is the period of time that subordinated units will not be entitled to receive any distributions until the common units have received the MQD plus any arrearages from prior quarters. the units will convert to common units on a one-for-one basis. the buyer is obligated to pay for a product (i. subordinated units are not entitled to distribution arrearages. The FERC has allowed interstate natural gas and oil pipelines to increase the (maximum) rates charged to shippers based on the use of an index system. A recompletion is the completion of an existing wellbore (i. The tax deferral rate is an approximation provided by the partnership and is only effective for a certain period of time. Tax deferral rate. Take-or-pay contract. had been previously completed) for production. Under this type of agreement. the subordination period could be terminated at an earlier date if the partnership achieves certain criteria. and extends through July 1. However. Total gas in storage.e. Residue gas. Recompletion. In addition. a partnership may lease out its coal reserves to operators for the right to mine the partnership’s coal reserves in exchange for royalty payments. NGLs. The amount of natural gas or NGLs transported through a pipeline system.) regardless of whether the buyer takes delivery of the product. natural gas. Royalty payment. The tax deferral rate on distributions ranges from 40-90%. PUDs are reserves that are recovered through new wells (on undrilled acreage) or from existing wells that require significant capital expenditure (to be recompleted).MLP Primer -. PV-10 is the after tax present value of estimated future cash flow of proved reserves. The calculation is based on current commodity prices and is discounted at 10%.Third Edition
WACHOVIA CAPITAL MARKETS. The subordination period typically last for three years from the date of the partnership’s initial public offering. Subordinated units.3%. Shale. LLC EQUITY RESEARCH DEPARTMENT
Production decline rate. This is a measure of the decline in production from crude oil and natural gas reserves. These products are primarily used as fuels by consumers (gasoline.
Upstream relates to the production of oil and natural gas from the wellhead (also known as exploration and production). Wellhead. As it relates to MLPs.e.000 per year of UBTI may be held liable for the tax on the UBTI. Working gas is available to the marketplace. Working gas capacity. The equipment at the surface of a crude oil or natural gas well used to control the pressure of the well. MLPs do not realize a tax benefit on their debt (since they do not pay corporate taxes). Natural gas gathered with impurities higher than what is allowed by pipeline quality standards is treated with liquid chemicals (i. Workover. Treating. Well bore. A well bore is the hole created by a drill bit.. Weighted average cost of capital. Unlike C Corps. it is the proportional weight of equity and debt in a partnership’s capital structure.e. The period of time (i.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS.. amine) to remove the impurities. and operating procedures at the site. MLP units are synonymous with C Corp. Upstream.. A workover is the operations on a producing well to resume or increase production. LLC EQUITY RESEARCH DEPARTMENT
Total gas storage capacity. pension accounts.
. A tax-exempt entity that receives more than $1. 401-K. Units. Total gas storage capacity is the maximum volume of gas that can be stored in an underground storage facility based on the physical characteristics of the reservoir. The wellhead is also the point at which natural gas or crude oil emerges from the ground to the surface.’s shares. and endowment funds) is considered “income earned from business activities unrelated to the entity’s tax-exempt purpose” or UBTI. MLP income received by a tax-exempt entity (e. Working gas capacity refers to total gas storage capacity minus base gas. WACC represents the cost to the entity of financing and should be the hurdle rate for new investments. The natural gas is treated at a separate facility before being processed. Working gas.g. November 1 to March 1) in which natural gas supplies are withdrawn from storage for use during the heating season. Withdrawal season. Working gas is the volume of gas in the reservoir above the level of base gas. Unrelated taxable business income. installed equipment.
Tcf: One trillion cubic feet of gas.
WACHOVIA CAPITAL MARKETS.MLP Primer -. MMBbls/d: One million barrels per day. MMcf/d: One million cubic feet of natural gas per day. MMBtu/d: One million Btus per day. MMBtu: One million Btus. MMcf: One million cubic feet of natural gas. MBbls: One thousand barrels. MM: In millions. MBbls/d: One thousand barrels per day. Mcf: One thousand cubic feet of natural gas. LLC EQUITY RESEARCH DEPARTMENT
Energy Industry Abbreviations
Bbls: Barrels Bcf/d: One billion cubic feet per day MBtu: One thousand Btus. MMBbls: One million barrels.
000.1667 barrels of oil 1 MBtu of natural gas = 0.000.000.8 MBtu of natural gas 1 Mcf of natural gas = 0.000.000 cf 1. LLC EQUITY RESEARCH DEPARTMENT
Basic Energy Conversion Factors
1 barrel = 42 gallons 1 Mcf = 1.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS.1724 barrels of oil
.000 Btu (nominal) = 1.000.026.000 cf 1 Tcf = 1.000 cf 1 MMcf = 1.000.000 cf 1 Bcf = 1.9 Btu (actual) 1 barrel of oil = 6 Mcf of natural gas 1 barrel of oil = 5.
35 $0.46 $0.31 $0.40 $0.43 $0.59 $0.53 $0.53 $0.43 $0.40 $0.40 $0.47 $0.53 $0.43 $0.48 $0.54 $0.33 $0.40 $0.49 $0.66 $0.15 $0.25 $0.33 $0.31 $0.42 $0.28 $0.44 $0.45 $0.44 $0.41 $0.56 $0.64 $0.49 $0.63 $0.29 $0.53 $0.59 $0.85 $0.49 $0.45 $0.23 $0.65 $0.51 $0.58 $0.50 $0.72 $0.04 $0.56 $0.53 $0.60 $0.55 $0.55 $0.28 25% Tier $0.50 $0.39 $0.68 $0.43 $0.32 $0.69 $0.95 $0.50 $0.64 $0.71 $0.78 $0.53 $0.60 $0.32 $0.87 $0.49 $0.46 $0.55 $0.38 $0.60 $0.63 $0.50 $0.44 $0.42 $0.42 $0.28 $0.30 $0.25 $0.40 $0.68 $0.38 $0.45 $0.28 $0.53 $0.54 $0.87 $0.94 $0.38 $0.38 Current Quarterly Distribution $0.39 $0. LLC EQUITY RESEARCH DEPARTMENT
Figure 89.62 $0.28 $0.99 $0.35 $0.44 $0.60 $0.40 $0.47 $0.53 $0.29 $0.38 $0.51 $0.50 $0.45 Current IDR Split 50% 50% 25% 2% 0% 2% 2% 25% 25% 25% 2% 50% 25% 25% 50% 2% 50% 50% 25% 50% 50% 25% 50% 50% 2% 50% 50% 25% 50% 50% 25% 50% 2% 15% 15% 15% 2% 25% 2% 2% 50% 15% 15% 0% 15% 2% 25% 0% 0% 0% 0% 0% 0% 15% 2% 15% 50% 15% 15% 2% 50% 2% 2% 15% 2% 2% 2% 50% 50% 50% 50%
Source: Partnership reports
Drop Down MLPs
.31 $0.58 $0.50 $0.33 $0.61 $0.40 $0.59 $0.36 $0.75 $0.75 $0.70 $0.38 $0.33 $0.38 $0.82 $0.45 $0.56 $0.30 $0.63 $0.52 $0.33 $0.63 $0.53 $0.36 $0.99 $0.47 $0.42 $0.99 $1.50 $0.25 $0.35 $0.72 $0.44 $0.28 $0.29 $0.29 $0.38 $0.50 $0.31 $0.45 $0.33 $0.75 $0.45 $0.61 $0.18 $0.90 $0.62 $0.53 $0.45 $0.47 $0.70 $0.55 $0.70 $0.57 $0.95 $0.38 $0.62 $0.59 $0.59 $0.40 $0.53 $0.46 $0.74 $0.68 $0. MLP IDR Tiers
MLP IDR Tiers
Ticker ATLAS PIPELINE PARTNER LP BUCKEYE PARTNERS LP BOARDWALK PIPELINE PARTNERS CALUMET SPECIALTY PRODUCTS COPANO ENERGY LLC CHENIERE ENERGY PARTNERS LP DUNCAN ENERGY PARTNERS LP ENBRIDGE ENERGY PRTNRS -LP ENBRIDGE ENERGY MGMT LLC ENTERPRISE PRODS PRTNER -LP EAGLE ROCK ENERGY PARTNRS LP ENERGY TRANSFER PARTNERS -LP GENESIS ENERGY -LP HOLLY ENERGY PARTNERS LP HILAND PARTNERS LP QUICKSILVER GAS SERVICES LP KINDER MORGAN ENERGY -LP KINDER MORGAN MANAGEMENT LLC MARTIN MIDSTREAM PARTNERS LP MAGELLAN MIDSTREAM PRTNRS LP MARKWEST ENERGY PARTNERS LP NUSTAR ENERGY LP ONEOK PARTNERS -LP PLAINS ALL AMER PIPELNE -LP RIO VISTA ENERGY PARTNERS LP SUNOCO LOGISTICS PRTNRS L P TC PIPELINES LP TRANSMONTAIGNE PARTNERS LP TEPPCO PARTNERS -LP CROSSTEX ENERGY LP Midstream MLP Median DCP MIDSTREAM PARTNERS LP EL PASO PIPELINE PARTNERS LP EXTERRAN PARTNERS LP TARGA RESOURCES PARTNERS LP REGENCY ENERGY PARTNERS LP SPECTRA ENERGY PARTNERS LP SEMGROUP ENERGY PARTNERS LP WESTERN GAS PARTNERS LP WILLIAMS PIPELINE PARTNERS WILLIAMS PARTNERS LP Drop Down MLP Median ATLAS ENERGY RESOURCES LLC BREITBURN ENERGY PARTNERS LP CONSTELLATION ENERGY PRTNRS ENCORE ENERGY PARTNERS LP EV ENERGY PARTNERS LP LEGACY RESERVES LP LINN ENERGY LLC QUEST ENERGY PARTNERS LP PIONEER SOUTHWEST ENRG PRTNR VANGUARD NATURAL RESOURCES Upstream MLP Median AMERIGAS PARTNERS -LP FERRELLGAS PARTNERS -LP GLOBAL PARTNERS LP INERGY LP SUBURBAN PROPANE PRTNRS -LP Propane MLP Median CAPITAL PRODUCT PARTNERS LP K-SEA TRANSPORTATION -LP NAVIOS MARITIME PARTNRS-REDH OSG AMERICA LP TEEKAY LNG PARTNERS LP TEEKAY OFFSHORE PARTNERS LP US SHIPPING PARTNERS LP Shipping MLP Median ALLIANCE RESOURCE PTNRS -LP NATURAL RESOURCE PARTNERS LP PENN VIRGINIA RES PRTNR LP Coal MLP Median APL BPL BWP CLMT CPNO CQP DEP EEP EEQ EPD EROC ETP GEL HEP HLND KGS KMP KMR MMLP MMP MWE NS OKS PAA RVEP SXL TCLP TLP TPP XTEX DPM EPB EXLP NGLS RGNC SEP SGLP WES WMZ WPZ ATN BBEP CEP ENP EVEP LGCY LINE QELP PSE VNR APU FGP GLP NRGY SPH CPLP KSP NMM OSP TGP TOO USS ARLP NRP PVR Quarterly Distribution Thresholds 15% Tier $0.41 $0.Third Edition
WACHOVIA CAPITAL MARKETS.63 $0.35 $0.45 $0.44 $0.MLP Primer -.40 $0.40 $0.50 $0.70 $0.42 $0.59 $0.25 $0.70 $0.15 $0.33 $0.56 $0.50 $0.39 $0.28 $0.40 $0.45 $0.94 $0.46 $0.96 $0.23 $0.90 $0.50 $0.36 $0.45 $0.96 $0.43 $0.53 $0.56 $0.44 $0.46 $0.33 $0.38 $0.18 $0.83 $0.70 $0.67 $0.36 $0.43 $0.66 $0.45 $0.43 $0.35 $0.76 $0.33 $0.41 $0.60 $0.33 50% Tier $0.55 $0.50 $0.54 $0.44 $0.
ConocoPhillips. LP Southern Natural Gas Company Spectra Energy Corporation Spectra Energy Corporation Spectra Energy Corporation Spectra Energy Corporation TransCanada Pipeline USA TransCanada Pipeline USA TransCanada Pipeline USA Transcontinental Gas Pipe Line Corporation Transcontinental Gas Pipe Line Corporation Projects Involving MLPs: 15
Source: FERC and Partnership reports
Project Name Gulf Crossing Pipeline Fayetteville & Greenville Laterals E. Major U. & ExxonMobil CenterPoint Energy CenterPoint Energy & Spectra Energy El Paso El Paso Eastern Shore Natural Gas Company El Paso/ Bear Energy Enbridge Energy Partners Enbridge Energy Partners Enbridge Energy Partners Energy Transfer Partners Enterprise Products Partners & Questar Florida Gas Transmission Kinder Morgan Energy Partners Kinder Morgan Energy Partners Kinder Morgan & Energy Transfer Partners Kinder Morgan Energy Partners Oneok Partners Oneok Partners.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS.The Alaska Gas Pipeline Project Tontitown Project Southeast Supply Header Project High Plains Expansion Project Raton 2010 Expansion Project EasternShore EnergyLink Project Ruby Pipeline Project Southern Access Alberta Clipper E. LP & TC Pipelines.Texas To Mississippi Expansion Southeast Expansion Denali . Pipeline Projects
Sponsor Boardwalk Pipeline Partners Boardwalk Pipeline Partners Boardwalk Pipeline Partners Boardwalk Pipeline Partners BP.S.Texas Extension (Clarity) Phoenix Expansion White River Hub Project Phase VIII Expansion Project Rockies Express Louisiana Pipeline Mid-Continent Express Colorado Lateral Expansion Project Overland Pass w/ Expansion Bison Pipeline Project South System Expansion III Project Phase V Project East to West Hubline Expansion M&NE Phase IV (Canaport) Expansion Ramapo Pathfinder Pipeline Project Yuma Lateral Project Palomar Pipeline 85 North Expansion Project Sentinel Expansion Project
. LLC EQUITY RESEARCH DEPARTMENT
States With MLP Pipeline And Storage Assets
BWP Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming X BPL DEP EEP X X X X X X X X X X X EPB X EPD X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X ETP GEL X X Pipelines And Storage MLPs HEP KMP OKS MMP NS X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X PAA X SEP SGLP SXL X TCLP TLP TPP X WMZ
X X X
X X X X X X X X X X X X X X X X
X X X X
X X X X
X X X X X X
X X X
X X X X
X X X X X
X X X X X
X X X
X X X X X X X X X X X X X X X X X X X X X X X X X X
X X X X X X X X X X X X X
X X X X X X
X X X X X
X X X X X
X X X X X
X X X X X X X X X X X X X X X X X X X X X
X X X
X X X X X
X X X X X X X X X X X X X X
X X X X
X X X
Source: National Association of Publicly Traded Partnerships
.MLP Primer -. LLC EQUITY RESEARCH DEPARTMENT
Figure 91.Third Edition
WACHOVIA CAPITAL MARKETS.
Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. States With MLP Gathering And Processing Assets
APL Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming CPNO DPM EROC HLND Gathering And Processing MLPs KGS MMLP MWE X X X X NGLS RGNC WES WPZ XTEX X
X X X X X X X X X X X X X X
X X X
X X X X X X X X X X X X X X X X X X
X X X X
Source: National Association of Publicly Traded Partnerships
. LLC EQUITY RESEARCH DEPARTMENT
WACHOVIA CAPITAL MARKETS. States With MLP Coal And Upstream Assets
ARLP Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Coal MLPs NRP X PVR ATN BBEP CEP X ENP Upstream MLPs EVEP LGCY LINE PSE QELP VNR
X X X X X X
X X X
X X X X X X X X X
X X X X X X
X X X X
Source: National Association of Publicly Traded Partnerships
.MLP Primer -. LLC EQUITY RESEARCH DEPARTMENT
Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. States With MLP Propane And Shipping Assets
APU Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X Propane And Heating Oil MLPs FGP GLP NRGY SGU X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X SPH CPLP KSP Shipping MLPs NMM OSP TGP TOO USS
X X X
X X X X X X X X X X X X X X X
X X X X X X X X X X X X X X X X X X X X X
Source: National Association of Publicly Traded Partnerships
. LLC EQUITY RESEARCH DEPARTMENT
Constellation Energy Partners. L. K-Sea Transportation Partners. L. Kinder Morgan Energy Partners.P. L. L. Ticker ARLP WES ATN APL BPL CPLP CQP CEP NRP XTEX DPM GEL DMLP EPB EEP ENP ETP EVEP EPD DEP TPP EXLP FGP RGNC GLP HLND HEP NRGY KMP KSP BWP MMP MMLP EROC NMM NS OKS OSP RVEP PVR SGU PSE PAA QELP KGS SGLP SEP SXL NGLS TGP TOO CLMT TCLP TLP APU USS WPZ WMZ
Source: Company reports
. L. L. Duncan Energy Partners.P. Atlas GP Holdings. Regency Energy Partners. L. Teekay Shipping Corporation Teekay Shipping Corporation The Heritage Group (and others) TransCanada Transmontaigne.P.P.P.P.P. NuStar GP Holdings. Buckeye GP Holdings. NuStar Energy L. L. L. L. Inc. L. Dorchester Minerals Management L.P. Holly Corporation Inergy Holdings. Inc. Constellation Energy Group Corbin J. El Paso Pipeline Partners. Cheniere Energy Partners. L. L. L. GPs And Their Underlying MLPs
Publicly Traded GP Interest (except where noted) Alliance Holdings GP.P. L. LLC Williams Companies Williams Companies Note: High-lighted cells indicate publicly traded GP MLP Ticker AHGP APC ATLS AHD BGH Private LNG CEG Private XTXI Private DNR Private EP ENB EAC ETE Private EPE EPD EPE EXH Private GE Private HPGP HOC NRGP Private Private LTR MGG Private Private NM NSH OKE OSG POCC PVG Private PXD Private QRCP KWK Private SE SUN Private TK TK Private TSX Private UGI Private WMB WMB Master Limited Partnership Alliance Resource Partners.P.P. Holly Energy Partners.P. L. L. Inc. L. L.P.P. L. Atlas America.P. L. L. L. Global Partners. Encore Acquisition Company Energy Transfer Equity.P.P.P.P. L. Dorchester Minerals. Martin Midstream Partners.P. L. Spectra Energy Partners. U.P. L.) UGI Corp.P.P.P.P. Quicksilver Resources.P.P.P. Inc.P. L. Inc. Inc. United States Shipping Master. L.P.P. L. Eagle Rock Energy Partners. Amerigas Partners. SemGroup Energy Partners.P. L. Sunoco Logistics Partners. L.P. L. DCP Midstream. Transmontaigne Partners. L. Buckeye Partners. LLC (which is a 50/50 joint venture between Spectra Energy / ConocoPhillips) Denbury Resources. Penn Virginia Resource Partners. Teekay LNG Partners. SemGroup. Quicksilver Gas Service.P.P.P.P. L. Genesis Energy. L. Pioneer Southwest Energy Partners.P. Martin Resource Management Corp. K-Sea General Partner.P. StarGas Partners. Jr. Cheniere Energy Inc. L. Capital Products Partners.P.P.P. Navios Maritime Partners L. Plains All American Pipeline. Williams Pipeline Partners. Targa Resources Partners.P. L. Penn Octane Corp. Inc. L.P. L. LLC Atlas Pipeline Partners. L. Hiland Holdings GP. GE Energy Financial Services Global Companies LLC and Global Montello Group Corp. Magellan Midstream Partners. Shipping Partners. LLC ONEOK. Ferrellgas. Inergy. Natural Resource Partners. L. L.P. L.P. L. L. (Morgan Stanley Capital Group Inc. Energy Transfer Partners. DCP Midstream Partners. L. L. L. Encore Energy Partners.P. L.MLP Primer -. TC Pipelines.S. Inc.P. L. Inc.P. Crosstex Energy.P. Crosstex Energy.P. Williams Partners. L. LLC Pioneer Natural Resources Plains GP Holdings. L. Exterran Energy Partners. Anadarko Petroleum Corp. Calumet Specialty Products Partners. Enterprise Product Partners. Kinder Morgan. Natural Gas Partners Navios Maritime Holdings Inc. L. Kestrel Heat. L. LLC Capital Maritime & Trading Corp. EV Energy Partners.P. L. Targa Resources.P.P.P.P. Teekay Offshore Partners. Inc. L.P. Spectra Energy Sunoco. L. Quest Energy Partners.P.P.P.P. LLC EQUITY RESEARCH DEPARTMENT
Figure 95. L. L. Inc. L. Quest Resource Corp.P. Enervest and EnCap Enterprise GP Holdings. Western Gas Partners. TEPPCO Partners. L. Enterprise GP Holdings. L. Robertson.P. L. Atlas Energy Resources.P.P. Rio Vista Energy Partners. OSG America.P. L. Exterran Holdings Inc. L. L. Penn Virginia GP Holdings. Ferrelgas Partners. L.P. ONEOK Partners.P. Overseas Shipholding Group Inc. Enbridge Energy Partners.Third Edition
WACHOVIA CAPITAL MARKETS. Boardwalk Pipeline Partners.P. El Paso Corporation Enbridge. Loews Corporation Magellan Midstream Holdings. L.P. Hiland Partners. Enterprise Products Partners.P.
897 34.61 $21.264 71.822 82.00 $43.147 $55 $1.115 3-Month Avg.60 $48.48 $10.26 $16.53 $27.31 $13.462 138.74 $40.17 $22.021 $1.5% 7.29 $38.89 $19.49 $20.696 35.513 $1.410 $676 $843 $1.00 $62.541 198.1% 8.9% 6.07 $28.10 $46.59 $41.17 $36.81 $11.45 $24.209 $541 $7.53 $18.892 $1.1% 8.57 $29.373 $2.018 $1.50 $57.65 $22.9% 52-Week Low High $37.113 410.726 $1.71 $19.80 $52.375 $1.1% 6.394 82.384 $1.99 $49.86 $11.200 $1.19 $31.094 $352 $1.226 156.55 $26.15 $1.89 $23. except per unit data) ATLAS PIPELINE PARTNER LP BUCKEYE PARTNERS LP BOARDWALK PIPELINE PARTNERS CALUMET SPECIALTY PRODUCTS COPANO ENERGY LLC CHENIERE ENERGY PARTNERS LP DUNCAN ENERGY PARTNERS LP ENBRIDGE ENERGY PRTNRS -LP ENBRIDGE ENERGY MGMT LLC ENTERPRISE PRODS PRTNER -LP EAGLE ROCK ENERGY PARTNRS LP ENERGY TRANSFER PARTNERS -LP GENESIS ENERGY -LP HOLLY ENERGY PARTNERS LP HILAND PARTNERS LP QUICKSILVER GAS SERVICES LP KINDER MORGAN ENERGY -LP KINDER MORGAN MANAGEMENT LLC MARTIN MIDSTREAM PARTNERS LP MAGELLAN MIDSTREAM PRTNRS LP MARKWEST ENERGY PARTNERS LP NUSTAR ENERGY LP ONEOK PARTNERS -LP PLAINS ALL AMER PIPELNE -LP RIO VISTA ENERGY PARTNERS LP SUNOCO LOGISTICS PRTNRS L P TC PIPELINES LP TRANSMONTAIGNE PARTNERS LP TEPPCO PARTNERS -LP CROSSTEX ENERGY LP Midstream MLP Median DCP MIDSTREAM PARTNERS LP EL PASO PIPELINE PARTNERS LP EXTERRAN PARTNERS LP TARGA RESOURCES PARTNERS LP REGENCY ENERGY PARTNERS LP SPECTRA ENERGY PARTNERS LP SEMGROUP ENERGY PARTNERS LP WESTERN GAS PARTNERS LP WILLIAMS PIPELINE PARTNERS WILLIAMS PARTNERS LP Drop Down MLP Median ATLAS ENERGY RESOURCES LLC BREITBURN ENERGY PARTNERS LP CONSTELLATION ENERGY PRTNRS ENCORE ENERGY PARTNERS LP EV ENERGY PARTNERS LP LEGACY RESERVES LP LINN ENERGY LLC PIONEER SOUTHWEST ENRG PRTNR QUEST ENERGY PARTNERS LP VANGUARD NATURAL RESOURCES Upstream MLP Median AMERIGAS PARTNERS -LP FERRELLGAS PARTNERS -LP GLOBAL PARTNERS LP INERGY LP STAR GAS PARTNERS -LP SUBURBAN PROPANE PRTNRS -LP Propane MLP Median CAPITAL PRODUCT PARTNERS LP K-SEA TRANSPORTATION -LP NAVIOS MARITIME PARTNRS LP OSG AMERICA LP TEEKAY LNG PARTNERS LP TEEKAY OFFSHORE PARTNERS LP US SHIPPING PARTNERS LP Shipping MLP Median ALLIANCE RESOURCE PTNRS -LP NATURAL RESOURCE PARTNERS LP PENN VIRGINIA RES PRTNR LP Coal MLP Median ATLAS PIPELINE HOLDINGS LP ALLIANCE HOLDINGS GP LP BUCKEYE GP HOLDINGS LP ENTERPRISE GP HOLDINGS LP ENERGY TRANSFER EQUITY LP HILAND HOLDINGS GP LP MAGELLAN MIDSTREAM HLDGS LP INERGY HOLDINGS LP NUSTAR GP HOLDINGS LLC PENN VIRGINIA GP HOLDINGS CROSSTEX ENERGY INC General Partnership MLP Median All MLPs Average All MLPs Median All MLPs Sum Source: Partnership reports and FactSet Ticker APL BPL BWP CLMT CPNO CQP DEP EEP EEQ EPD EROC ETP GEL HEP HLND KGS KMP KMR MMLP MMP MWE NS OKS PAA RVEP SXL TCLP TLP TPP XTEX DPM EPB EXLP NGLS RGNC SEP SGLP WES WMZ WPZ ATN BBEP CEP ENP EVEP LGCY LINE PSE QELP VNR APU FGP GLP NRGY SGU SPH CPLP KSP NMM OSP TGP TOO USS ARLP NRP PVR AHD AHGP BGH EPE ETE HPGP MGG NRGP NSH PVG XTXI Price 7/14/2008 $38.853 $2.187 $1.822 119.8% 8.262 $2.53 $21.015 203.4% 9.5% 10.324 $411 $639 $399 $731 $2.954 $462 $640 $2.40 $38.87 $24.953 $382 $1.10 $37.187 71.8% 7.90 $19.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS.178 $1.6% 7.00 $19.246 27.554 $456 $2.1% 8.08 $30.1% 7.8% 6.308 127.552 $725 $818 $556 $1.25 $15.5% 8.273 $9.5% 5.39 Market Cap $1.54 $37. MLP Market Data
MLP Market Data
($MM.1% 7.51 $33.31 $43.89 $60.82 $30. 285.07 $31.7% 6.4% 5.2% 5.799 67.718 179.90 $41.660 $223. Tax Deferred 80% 75% 80% 80% 80% 80% 80% 90% NA 90% 80% 80% 90% 80% 80% 80% 95% NA 80% 51% 90% 80% 90% 80% NA 80% 80% 80% 90% 80% 80% 70% 80% 80% 80% 80% 80% 80% 70% 80% 80% 80% 60% 50% 70% 80% 40% 90% 100% 15% 80% 70% 70% 70-80% 90% 70% 80% 80% 80% 80% 60% 80% 44% 80% 80% 30% 90% 80% 70% 70% 80% 70% 75% 50% 90% 90% 60% 90% 90% 50% 80% 70% 0% 75% 75% 80% Date: 7/14/2008
Drop Down MLPs
.614 $2.10 $30.51 $18.837 16.4% 4.50 $17.706 121.53 Current Yield 9.683 $567 $3.212 $1.764 $457 $5.3% 8.437 $28 $1.50 $46.10 $26.00 $45.50 $69.95 $41.1% 9.60 $55.50 $23.8% 5.22 $31.212 $1.32 $30.230 462.570 133.11 $19.00 $24.696 $608 $483 $283 $732 $2.38 $40.07 $17.92 $12.5% 7.89 $46.12 $33.86 $23.73 $44.306 $1.50 $33.86 $2.86 $33.24 $23.66 $29.290 157.229 $687 $1.2% 6.40 $39.663 15.9% 0.95 $45.918 $1.169 197.4% 13.1% 9.67 $48.47 $65.475 $1.68 $17.452 111.725 $2.7% 8.217 576.03 $32.04 $37.38 $35.74 $28.96 $41.410 $676 $846 $1.08 $21.803 67.706 42.3% 8.258 15.00 $53.558 238.726 $470 $1.8% 6.114 113.01 $23.516 $1.958 78.05 $30.216 244.905 37.11 $20.57 $35.32 $46.9% 5.365 184. Vol.099 197.15 $26.2% 9.00 $31.660 $2.39 $49.844 $2.2% 8.47 $54.93 $9.544 $12.151 $966 $1.50 $48.033 $4.0% 5.328 $2.12 $24.2% 6.56 $21.358 33.00 $35.02 $20.00 $38.30 $13.6% 6.50 $58.683 $567 $4.2% 6.41 $47.55 $25.253 $4.00 $16.237 $164 $1.680 $7.75 $19.00 $21.00 $50.689 Enterprise Value $2.14 $8.2% 5.041 104.57 $18.131 $5.881 $670 $544 $460 $550 $14.8% 8.13 $27.7% 6.30 $17.1% 12.8% 8.00 $38.45 $15.22 $14.36 $42.41 $2.22 $18.516 $1.66 $16.392 25.14 $12.1% 9.994 28.51 $12.20 $13.061 353.212 $2.005 55.88 $32.84 $31.35 $34.03 $34.17 $4.9% 5.624 73.0% 11.8% 15.022 $818 $799 $2.367 $353 $4.70 $27.95 $18.9% 7.14 $26.33 $25.65 $40.13 $15.988 $1.206 92.455 $547 $795 $669 $867 $4.7% 6.53 $44.24 $11.604 $1.497 90.517 $3.13 $56.087 200.079 103.25 $26.93 $43.50 $15.201 $322 $2.00 $25.295 $19.37 $52.0% 7.696 138.736 $1.133 4.1% 9.8% 9.575 $1.4% 6.17 $15.781 243.01 $31.00 $17.90 $40.32 $42.33 $28.16 $45.9% 7.9% 8.911 $941 $1.382 55.388 $4.68 $24.35 $28.628 $20.98 $37.04 $29.52 $45.9% 9.43 $26.529 183.193 93.237 $558 $1.64 $1.3% 10.210 $194 $1.84 $22.82 $54.99 $42.4% NM 10.140 $7.224 $2.360 $584 $2.048 $753 $2.188 338.79 $21.237 $2.90 $44.232 113.632 $608 $359 $181 $624 $1.75 $38.89 $57.5% 11.914 66.65 $17.25 $16.781 $1.2% 7.3% 4.0% 7.9% 10.920 $711 $3.809 $558 $1.21 $55.0% 4.38 $26.12 $35.29 $7.929 43.78 $19.70 $47.212 $1.898 $1.50 $55.350 157.1% 10.45 $17.194 132.73 $39.24 $61.81 $19.45 $37.40 $36.39 $58.780 27.7% 11.279 55.7% 6.00 $17.00 $32.8% 5.439 151.97 $16.50 $39.189 39.85 $20.654 257.3% 5.203 300.20 $14.41 $16.1% 10.48 $20.808 358.9% 8.672 $5.61 $41.541 29.272 $1.3% 4.43 $23.000 114.98 $20.40 $25. LLC EQUITY RESEARCH DEPARTMENT
Figure 96.53 $33.911 $2.79 $52.75 $23.915 $748 $640 $294 $481 $2.994 7.803 $3.64 $63.60 $19.55 $13.15 $23.440 $718 $1.378 226.996 206.111 878.570 Est.92 $71.70 $51.99 $29.934 87.5% 9.39 $28.704 126.686 $1.60 $28.046 10.75 $18.7% 7.82 $28.604 $919 $2.569 $3.5% 9.33 $24.013 182.950 10.28 $19.50 $32.465 69.60 $20.392 148.443 $1.552 37.99 $25.61 $18.57 $30.171 28.762 $1.521 $752 $900 $695 $633 $21.02 $25.3% 4.223 98.332 66.151 $2.025 457.08 $36.6% 7.592 $6.88 $22.00 $31.117 $5.48 $24.47 $26.08 $40.11 $32.01 $39.4% 8.5% 6.274 $7.11 $21.00 $28.199 $396 $306 $140 $404 $928 $375 $25 $375 $1.65 $41.0% 9.407 231.16 $27.262 $13.88 $31.4% 20.99 $31.990 $930 $1.9% 8.674 $10.62 $24.0% 8.6% 6.187 $145.50 $51.00 $34.410 114.
2 $46.856 $41 $0 $708 $0 $0 $36 $683 $1.2 $60.2 $11.0 $3.5 $62.607 $30 $2.0 $110.5 $220.4 $8.189 $11.1 $54.268 $21 $0 $25 $12 $78 $55 $0 $11 NA $41 $243 $143 $22 $19 $0 $0 $0 $92 ($0) $275 $47 $30 $84 $17 $177 $10 $351 $21 $382 $106 $0 $38 $145 NA NA NA NA NA NA NA NA NA NA NA NA $264 $50 $13.7 $77.2 $13.9 $1.8 $360 $29.5 $23.498 $571 $0 $0 $0 $713 $41 $0 ($0) $0 $300 $127 $13 $7 $13 $0 $6.1 $18.8 $66.3 $27.1 $30.4 AHD AHGP BGH EPE ETE HPGP MGG NRGP NSH PVG XTXI NA NA NA NA NA NA NA NA NA NA NA NA $36.1 $72.966 $50 $998 $10 $10 $88 $18 $3.2 $208.9 $14.2 $25.4 $25.1 $4.0 $7.725 $0 $0 $53 $200 $150 $160 $80 $73 $716 $2 $1 $44 $0 $46 $230 $0 $0 $230 $0 $3 $210 $213 NA NA NA NA NA NA NA NA NA NA NA NA $213 $76 $11.198 2009E $270 $50 $562 $70 $0 $1.4 $137.540 $0 $200 $150 $200 $150 $200 $0 $73 $973 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $150 $50 $200 NA NA NA NA NA NA NA NA NA NA NA NA $123 $0 $6.1 $21.4 $27.2 ARLP NRP PVR $76.5 KSP TGP TOO $22.0 $28.0 $11.6 $43. except per unit data) ATLAS PIPELINE PARTNER LP BUCKEYE PARTNERS LP BOARDWALK PIPELINE PARTNERS COPANO ENERGY LLC DUNCAN ENERGY PARTNERS LP ENBRIDGE ENERGY PRTNRS -LP ENTERPRISE PRODS PRTNER -LP EAGLE ROCK ENERGY PARTNRS LP ENERGY TRANSFER PARTNERS -LP Ticker APL BPL BWP CPNO DEP EEP EPD EROC ETP GEL HEP HLND KGS KMP MMLP MMP MWE NS OKS PAA SXL TLP TPP XTEX 2008E $16.9 NA NA NA NA NA NA NA NA NA NA NA NA $40.671 $483 $485 $194 $0 $0 $0 $4.0 $71.900 $0 $200 $150 $200 $150 $250 $0 $50 $1.8 $17.3 $23.5 $27.2 $19.6 $24.027 $140 $7 $1.4 $60.2 $28.000 $5.8 $2.6 $21.111 2010E $18.7 $21.400 $1.4 $54.5 $28.152 $300 $500 $246 $700 $1.3 $81.489 2008E $217 $100 $3.313 % EBITDA 5% 11% 13% 6% 16% 9% 11% 8% 8% 4% 4% 7% 4% 8% 16% 9% 3% 13% 12% 7% 12% 11% 10% 7% 8% 4% 3% 13% 13% 7% 5% 6% 23% 37% 16% 10% 17% 22% 32% 32% 18% 24% 28% 39% 26% 9% 9% 3% 7% 8% 24% 12% 29% 24% 29% 9% 7% 9% NA NA NA NA NA NA NA NA NA NA NA NA 13% 10% Organic Growth Spending 2007A $144 $34 $1.3 $20.0 $321 $28.8 $37.104 $63 $151 $309 $192 $647 $548 $81 $25 $176 $392 $12.0 $207.2 $82.2 $21.1 $111.9 $74.3 $1.4 $21.0 $20.0 $16.920 $1.0 $1.736 Acquisition Spending 2008E $9 $900 $0 $0 $300 $0 $0 $154 $0 $311 $194 $0 $0 $0 $6 $12 $241 $675 $0 $676 $200 $136 $338 $0 $4.365 $109 $300 $450 $175 $854 $420 $105 $50 $475 $300 $14.2 $15.4 $134.0 $14.5 $11.2 $62.4 $11.7 $3.2 $16.2 $121.3 $20.4 $8.5 $23.479 $407 $514 $0 $580 $1.0 $28.253 $13.4 $39.9 $13.1 $5.0 $5.608 $615 $0 $0 $705 $55 $0 $0 $0 NA $828 $2.9 $34.0 $1.4 $35.870 $0 $105 $62 $25 $183 $90 $0 $25 $43 $15 $548 $78 $44 $10 $0 $0 $0 $57 $0 $188 $30 $9 $39 $5 $83 $4 $0 $0 $4 $234 $0 $12 $246 NA NA NA NA NA NA NA NA NA NA NA NA $95 $41 $4.7 $83.5 $25.7 $63.0 $4.2 $6.Third Edition
WACHOVIA CAPITAL MARKETS.4 $41.5 $64.450 $500 $30 $645 $24 $40 $56 $40 $808 $20 $150 $225 $150 $150 $320 $105 $60 $192 $83 $6.1 $65.4 $18.5 $6.5 $2.1 $72.0 $13.0 $35.2 $141.8 $114.2 $77.2 $32.3 $8.940 2007A $1.5 NA NA NA NA NA NA NA NA NA NA NA NA $44.7 $34.0 $35.8 $3.752
Midstream MLPs Drop Down MLPs Upstream MLPs Propane Ship Coal General Partnerships
GENESIS ENERGY -LP HOLLY ENERGY PARTNERS LP HILAND PARTNERS LP QUICKSILVER GAS SERVICES LP KINDER MORGAN ENERGY -LP MARTIN MIDSTREAM PARTNERS LP MAGELLAN MIDSTREAM PRTNRS LP MARKWEST ENERGY PARTNERS LP NUSTAR ENERGY LP ONEOK PARTNERS -LP PLAINS ALL AMER PIPELNE -LP SUNOCO LOGISTICS PRTNRS L P TRANSMONTAIGNE PARTNERS LP TEPPCO PARTNERS -LP CROSSTEX ENERGY LP Midstream MLP Total DCP MIDSTREAM PARTNERS LP EL PASO PIPELINE PARTNERS LP EXTERRAN PARTNERS LP TARGA RESOURCES PARTNERS LP REGENCY ENERGY PARTNERS LP SPECTRA ENERGY PARTNERS LP SEMGROUP ENERGY PARTNERS LP WESTERN GAS PARTNERS LP WILLIAMS PIPELINE PARTNERS WILLIAMS PARTNERS LP Drop Down MLP Total ATLAS ENERGY RESOURCES LLC BREITBURN ENERGY PARTNERS LP CONSTELLATION ENERGY PRTNRS EV ENERGY PARTNERS LP LEGACY RESERVES LP PIONEER SOUTHWEST ENRG PRTNR QUEST ENERGY PARTNERS LP VANGUARD NATURAL RESOURCES Upstream MLP Total AMERIGAS PARTNERS -LP FERRELLGAS PARTNERS -LP INERGY LP SUBURBAN PROPANE PRTNRS -LP Propane MLP Total K-SEA TRANSPORTATION -LP TEEKAY LNG PARTNERS LP TEEKAY OFFSHORE PARTNERS LP Shipping MLP Total ALLIANCE RESOURCE PTNRS -LP NATURAL RESOURCE PARTNERS LP PENN VIRGINIA RES PRTNR LP Coal MLP Total ATLAS PIPELINE HOLDINGS LP ALLIANCE HOLDINGS GP LP BUCKEYE GP HOLDINGS LP ENTERPRISE GP HOLDINGS LP ENERGY TRANSFER EQUITY LP HILAND HOLDINGS GP LP MAGELLAN MIDSTREAM HLDGS LP INERGY HOLDINGS LP NUSTAR GP HOLDINGS LLC PENN VIRGINIA GP HOLDINGS CROSSTEX ENERGY INC General Partnership MLP Total All MLPs Average All MLPs Median All MLPs Sum
Source: Partnership reports and Wachovia Capital Markets.1 $61.7 $14.6 $24.6 $33.9 $30.000 $4.7 $8.9 $42.6 $241.418 $30 $78 $25 $50 $208 $124 $4 $19 $18 $43 $598 $171 $66 $16 $0 $0 $0 $58 $0 $310 $38 $19 $157 $11 $225 $10 $438 $27 $475 $135 $0 $37 $172 NA NA NA NA NA NA NA NA NA NA NA NA $312 $62 $16.5 $29.7 $22.5 $70.7 $15.0 $67.5 $2.2 $70.2 $37.1 $69.7 $66.111 $79 $32 $100 $0 $210 $16 $94 $189 $299 $53 $75 $177 $305 NA NA NA NA NA NA NA NA NA NA NA NA $269 $41 $13.2 $348 $60.0 $23.5 $93.6 $6.8 $268 APU FGP NRGY SPH $27.0 $12.4 $10.4 $61.2 $15.279 $1.3 $32.0 $196.0 $23.6 $77.9 $24.1 $38. LLC EQUITY RESEARCH DEPARTMENT
Figure 97.3 $20.2 $18.159 $72 $112 $1.3 $13.2 $16.415 2010E $0 $200 $0 $0 $0 $0 $0 $150 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $350 $150 $500 $575 $0 $350 $300 $350 $350 $575 $750 $3.5 $20.1 $12.6 $42.100 $24 $48 $35 $82 $2.1 $12.120 DPM EPB EXLP NGLS RGNC SEP SGLP WES WMZ WPZ $6.2 $101.2 $55.5 $5.1 $10.5 $71.203 $1.1 $54.2 $3.6 $24.000 $0 $113 $42 $50 $179 $90 $0 $22 $44 $15 $555 $123 $44 $13 $0 $0 $0 $56 $0 $235 $40 $8 $85 $8 $141 $4 $315 $0 $319 $243 $0 $12 $255 NA NA NA NA NA NA NA NA NA NA NA NA $144 $50 $7. MLP Capex Forecast
Maintenance Capex Spending ($MM.9 $7.3 $5.5 $91.6 $14.000 $0 $0 $0 $0 $0 $0 $94 $208 $302 $0 $150 $50 $200 NA NA NA NA NA NA NA NA NA NA NA NA $111 $0 $5.4 $18.505 2010E $255 $50 $135 $70 $0 $500 $500 $25 $284 $25 $20 $56 $0 $738 $10 $150 $100 $150 $150 $410 $75 $5 $113 $50 $3.7 $20.9 $209.083 2009E $0 $200 $0 $0 $100 $0 $0 $150 $0 $125 $0 $0 $0 $0 $0 $0 $128 $0 $0 $0 $0 $0 $0 $0 $703 $150 $500 $575 $700 $170 $300 $350 $200 $595 $1.0 $128.8 $29.4 $275 $58.0 $60.4 $199 ATN BBEP CEP EVEP LGCY PSE QELP VNR $54.3 $24.893 2009E $17.9 $67.2 $6.MLP Primer -. LLC estimates
.2 $79.5 $65.
MLP Credit Metrics
Total ($MM.289 $1.601 $3.020 $2.271 $1.579 ARLP NRP PVR $240 $513 $414 $414 AHD AHGP BGH EPE ETE HPGP MGG NRGP NSH PVG XTXI $25 $1 None $1. except per unit data) ATLAS PIPELINE PARTNER LP BUCKEYE PARTNERS LP BOARDWALK PIPELINE PARTNERS COPANO ENERGY LLC DUNCAN ENERGY PARTNERS LP ENBRIDGE ENERGY PRTNRS -LP ENTERPRISE PRODS PRTNER -LP EAGLE ROCK ENERGY PARTNRS LP ENERGY TRANSFER PARTNERS -LP Ticker APL BPL BWP CPNO DEP EEP EPD EROC ETP GEL HEP HLND KGS KMP MMLP MMP MWE NS OKS PAA SXL TLP TPP XTEX Debt $1.366 $255 $953 $796 $2.120 DPM EPB EXLP NGLS RGNC SEP SGLP WES WMZ WPZ $655 $503 $217 $639 $1.647 $1. Standard & Poor's.572 $0 None None $3 None None $14 $1. LLC estimate
.579 $1.150 $857 $549 $928 KSP TGP TOO $333 $1. and Wachovia Capital Markets.287 $2.000 $1.000 $503 ATN BBEP CEP EVEP LGCY PSE QELP VNR $829 $131 $136 $270 $136 None $123 $103 $136 APU FGP NRGY SPH $1.793 $557 $4.710 $474 $135 $2.088 $1.751 $6.084 $553 Date: 7/14/2008 None None None BBNone None None None None None None No No No No No No No No No No No None None None No No No BBNone None No No No None B+ B+ B+ No No No No None None None None None None None None No No No No No No No No None None None None None None None None None BBBNo No No No No No No No No Yes S&P Debt Rating B+ BBB BBB+ BBNone BBB BBBNone BBBNone BBNone None BBB None BBB B+ BBBBBB BBBBBB None BBBNone Investment Grade No Yes Yes No No Yes Yes No Yes No No No No Yes No Yes No Yes Yes Yes Yes No Yes No
Midstream MLPs Drop Down MLPs Upstream MLPs Propane Ship Coal General Partnerships
GENESIS ENERGY -LP HOLLY ENERGY PARTNERS LP HILAND PARTNERS LP QUICKSILVER GAS SERVICES LP KINDER MORGAN ENERGY -LP MARTIN MIDSTREAM PARTNERS LP MAGELLAN MIDSTREAM PRTNRS LP MARKWEST ENERGY PARTNERS LP NUSTAR ENERGY LP ONEOK PARTNERS -LP PLAINS ALL AMER PIPELNE -LP SUNOCO LOGISTICS PRTNRS L P TRANSMONTAIGNE PARTNERS LP TEPPCO PARTNERS -LP CROSSTEX ENERGY LP Midstream MLP Median DCP MIDSTREAM PARTNERS LP EL PASO PIPELINE PARTNERS LP EXTERRAN PARTNERS LP TARGA RESOURCES PARTNERS LP REGENCY ENERGY PARTNERS LP SPECTRA ENERGY PARTNERS LP SEMGROUP ENERGY PARTNERS LP WESTERN GAS PARTNERS LP WILLIAMS PIPELINE PARTNERS WILLIAMS PARTNERS LP Drop Down MLP Median ATLAS ENERGY RESOURCES LLC BREITBURN ENERGY PARTNERS LP CONSTELLATION ENERGY PRTNRS EV ENERGY PARTNERS LP LEGACY RESERVES LP PIONEER SOUTHWEST ENRG PRTNR QUEST ENERGY PARTNERS LP VANGUARD NATURAL RESOURCES Upstream MLP Median AMERIGAS PARTNERS -LP FERRELLGAS PARTNERS -LP INERGY LP SUBURBAN PROPANE PRTNRS -LP Propane MLP Median K-SEA TRANSPORTATION -LP TEEKAY LNG PARTNERS LP TEEKAY OFFSHORE PARTNERS LP Shipping MLP Median ALLIANCE RESOURCE PTNRS -LP NATURAL RESOURCE PARTNERS LP PENN VIRGINIA RES PRTNR LP Coal MLP Median ATLAS PIPELINE HOLDINGS LP ALLIANCE HOLDINGS GP LP BUCKEYE GP HOLDINGS LP ENTERPRISE GP HOLDINGS LP ENERGY TRANSFER EQUITY LP HILAND HOLDINGS GP LP MAGELLAN MIDSTREAM HLDGS LP INERGY HOLDINGS LP NUSTAR GP HOLDINGS LLC PENN VIRGINIA GP HOLDINGS CROSSTEX ENERGY INC General Partnership MLP Median All MLPs Average All MLPs Median
Source: FactSet.293 $1.091 $465 $296 None $243 $1. LLC EQUITY RESEARCH DEPARTMENT
Figure 98.640 $82 $356 $235 $83 $7.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS.096 $651 $188 $2.
1% 1.5% 6.0% 12.4% 1999A 3.7%) 3.6% 11.2%
8.2% 15. LLC estimates
0.9% 6.8% 7.6% 13.1% 4.6% 12/30/08 12/30/09 12/30/10 2008E 2009E 2010E 9.2% 2.0% 25.7% 1995A 0.1% 4.2% 22.2% 21.1% 7.6% 16.0% 5.5% 7.0% 13.7% 6.5% 0.0% 5.8% 7.8%
21.3% 0.4% 0.5% 6.6% 4.3% 0.1% 30.9% 9.1% 22.8%
11.1% 8.3% 16.1% 5.0% 26.1% 12.0% 0.4% 6.4% 7.4% 3.6% 13.7% 2.6% 9.9% 6.6% 12.7% 4.7% 0.2% 18.0%
32.6% 49.2% 16.3% 1.3% 25.0%) 0.1% 9.0% 0.4% 0.8% 9.1% 4.5% 9.5% 11.9% 5.2%
5.5% 6.7% 0.9% 5.3% 10.0% 10.2% 18.0% 1.7%
8.5% 8.6% 6.0% 0.2% 33.8% 5.7% 12% 10% 8.0% 6.0% 18.4% (64.9% 16.5% 37.5% 12.3% 5.0% 6.1% 22.9% 7.0% Not Under Coverage 8.9% 11.3% 12.1% 7.7% 1.0% 1.4% 14.9% 7. MLP Historical And Forecast Distribution Growth Rates
Annual Distribution Growth (Four Quarters Declared12/29/00 12/31/01 12/31/02 12/31/03 12/31/04 Declared) Versus Previous Four Quarters 12/31/05 12/30/06 12/31/93 12/30/94 12/29/95 12/31/96 12/31/97 12/31/98 12/31/99
1994A APL BPL BWP CLMT CPNO DEP EEP EPD EROC ETP GEL HEP HLND KMP MMLP MMP MWE NS OKS PAA SXL TCLP TLP TPP XTEX Median DPM EPB EXLP NGLS RGNC SEP SGLP WES WPZ WMZ Median ATN BBEP CEP DMLP EVEP LGCY LINE PSE QELP VNR Median ARLP NRP PVR Median KSP TGP TOO USS Median APU FGP GLP NRGY SGU SPH Median AHD AHGP BGH EPE ETE HPGP MGG NRGP NSH PVG XTXI Median Median Distribution Growth For All MLPs Median Distribution Growth For All MLPs (Excl.9% 32.3% 1998A 22.8% 6.0% 18.0%
9.6% 30.1% 6.2% 13.9% 3.5% 14.1%
9.0% 3.5% 9.5% 13.2% 0.0% 0.7% 30.4% 13.5% 2.9% 14.4% 18.5% 23.3% 2001A 27.3% 0.0%) 4.3% 100.8% 4.2% 6.1% 1997A 14.2% 24.4% 16.5% 21.7% 12.8% 0.0% 7.1% 25.3% 25.0% 27.0% 4.7% 10.0%
0.0% 15.7% 3.9%
6.0% 1.5% 2006A 7.7% 9.1% 19.4% 15.4% 9.0% 19.2%
13.4% 25.5% 11.3% 1.2% 11.8% 10.0% 10% 9% 4.2% 11.2% 8.1%
4.0% 6.8% 5.0% 5.9% 6.2% 7.0% 0.3% 5.9% 7.8% 8.0% 0.7% 11.9% 14.2% Not Under Coverage 20.8% 5.5% 6.5% 12.0% 9.5% 8.0% 4.1% 0.4% 8.4% 10.0% 15.5% 15.6% 6.1% 8.2% 6.5% 0.1% 17.6% 5.7% 23.7% 9.5% 6.4% 7.1% 3.1% 6.3%
Drop Down MLPs
24.4% 11.3% 16.0%
13.1% 4.7% 5.6% 6.9% 5.4% 13.0% 0.7% 6.2% 14.8% 22.5% 23.0% 16.4%
0.5% 14.4% 1.0% 5.4% 5.0% 5.2% 8.0% 8.0% 0.3% 33.2% 10.1% 6.0% 0.9% 5.5% 7.3% 15.5% 0.8% 12.5% 0.0% 0.6% 3.8% 25.2% 7.0% 10.1% 8.7% 2.0%
Not Under Coverage 10.6% 0.1% 6.3% 22.1% 8.4% 6.7% 8.1% 7.1% 4.1% 14.0% 0.1% 5.5% 35.6% 17.3%
4.3% 12.1% 18.6% 7.0% 0.5%
10.0% 2004A 11.0%
19.0% 5.2% 17.8% 16.5% 9.9% 15.9% 10.0% 2.0% 3.0% 2003A 11.5% 31.0% 0.5% 6.8%
5.0% 4.8% 0.1% 9.5% 11.0% 1996A 7.7% 5.1% 35.9% 6.6% 1.1% 6.0% 0.5% 4.5% 7.5% 6.Third Edition
WACHOVIA CAPITAL MARKETS.1% 8.0% 0.9% 4.5% 0.2% 2.3% 12.4% 14.6% 9.5% (15.7% 6.3% 14.7% 11.0%
0.0% 7.2% 21.1% 3.2% 3.6% 9.7% 5.6% 7.0% 15.9% 6.6% 4.2% 6.2% (50.1% 9.0%
1.4% 18.0% 9.7% 12.3% 15.6%) 2.3% 6.4%
35.2% 20.0% 0.0% 12.8% 1.8% 15.3% 16.5% 12.1% 11.5%
47.7% 8.2% 27.1% 8.0% 0.1% 11.6% 14.0% 12.4% 7.5% 7.6% 3.5% 17.7% 18.8% 6.2% 0.6% 8.1% 2.2%
-19.1% 2002A (14.3%
35.2% (66.3% 4.4% 2.1% Not Under Coverage 22.2% Not Under Coverage 12.0%
0.2% 9.9% 40.3% 12.0% 0.5% 11.4% 9.2% 3.0%
9.7% 16.0% 4.3%
9.1% 14.8% 10.0% 42.3% 8.9%
4.6% 2000A 10.1% 1.9% 5.4% 11.9% 5.6% 26.6%
1.0% 0.8% 3.0% 0.1% 5.8% 4.6% 1.5% 61.0%
0.1% 0.4% 25.2% 4.7% 2.9% 18.1% 44.0% 0.2%
5.2% 0.0% 0.4%
Source: Partnership reports and Wachovia Capital Markets.4% 12.1%
37.0% 7.8% 9.7%) 2.3% 29.3%
0.6% 26.9% 7.8% 6.3% 7.3% 0.8% 10.8% 7.1% 0.3%
10.0% 10.8% 7.MLP Primer -.2% 16.4% 2.9% Not Under Coverage 1.6% 8.0% 12/30/07 2007A 5.0% 4.9% 28.8% 0.8%
4.3% 13.8% 2.7% 10.9% 18.8% 14.0% 12. LLC EQUITY RESEARCH DEPARTMENT
Figure 99.1% 20.3% 20.0% 8.6% 3.9% 2005A 18.7% 19.4% 21.0% 13.5% 13.3% 0.0%
0.0% 0.0% 12.9% Not Under Coverage 31.8% 17.8% 7% 6%
0.5% 19.3% 8.5% 0. GPs) 3.1% 10.3% 17.8% 12.1% 28.0% 50.9% 5.0% 3.7% 7.2% 23.4% 19.6% 27.5% 21.0%
0.7% 43.8% 19.8% 35.2% 12.6% 13.3%)
13.5% 0.0% 3.1% 11.1% 22.6% 12.4% 22.9%
37.2% 21.7% 8.0% 0.9% Not Under Coverage 9.6% 2.0% 7.2% 8.8% 13.9% 0.4% 9.6% 9.9% (0.9%
7.0% 0.1% 0.
LLC EQUITY RESEARCH DEPARTMENT
Figure 100.e. MLP Distribution Growth CAGRs Since IPO
ETE AHD NRGP XTXI EVEP ENP CPNO PVG LINE ATN DPM SGLP WPZ MGG CLMT HLND HPGP BGH XTEX EPE NGLS GEL AHGP NRP MWE CEP MMP EXLP BBEP KMP LGCY BWP SXL ETP HEP APL NRGY ARLP CPLP PVR KSP VNR RGNC TOO EPD TGP SEP NS PAA GLP TLP NSH MMLP EROC KGS BPL TPP TCLP QELP OKS SPH EEP DEP APU USS FGP 35% 34% 32% 30% 29% 28% 28% 23% 23% 23% 21% 20% 20% 20% 19% 19% 19% 19% 17% 17% 17% 15% 15% 14% 13% 13% 13% 13% 13% 13% 12% 12% 11% 10% 10% 10% 10% 10% 10% 9% 9% 9% 9% 9% 8% 8% 8% 7% 7% 7% 7% 7% 7% 7% 7% 5% 5% 5% 5% 4% 4% 3% 2% 1% 0% 0% 0% 5% 10% 15% 20% 25% 30% 35% 40%
.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS. 1.0x^4) Note: GEL distribution CAGR is post restructuring brought about after DNR purchased GEL's GP Note: ENP distribution CAGR reflects growth in the MLP's sustainable MQD distribution Source: Partnership reports
.General Partnership .MLP
Note: Distribution CAGRs based on annualized quarterly distribution growth rate since IPO (i.
L.wachoviaresearch. L. in the past 12 months.P. Boardwalk Pipeline Partners.P.. L. L.P.P.. Inergy Holdings.P. L. Quest Energy Partners. Crosstex Energy. Magellan Midstream Partners. Alliance Resource Partners.P.P. DCP Midstream Partners. Crosstex Energy... Eagle Rock Energy Partners.P.P... Plains All American Pipeline. NuStar Energy. Genesis Energy.P. Boardwalk Pipeline Partners. L. Constellation Energy Partners LLC.P. L. L.P.P. L.P. Teekay LNG Partners. Energy Transfer Equity.P.MLP Primer -. Regency Energy Partners. Copano Energy L.P.P. Buckeye Partners... Inergy. L. Energy Transfer Equity.. L.P. Inergy.. MarkWest Energy Partners. L. L..P.P. Legacy Reserves.P. Energy Transfer Equity.. L. Williams Partners L. L. L. L.. Penn Virginia Resource Partners... MarkWest Energy Partners. Genesis Energy.. L. LLC or its affiliates managed or comanaged a public offering of securities for Atlas Energy Resources.P.. Targa Resources Partners. BreitBurn Energy Partners L. L. L. Hiland Partners. L. AmeriGas Partners.. Wachovia Capital Markets.P... L. Crosstex Energy. L. L. L..P..P.P.P. is..... L..P. L.P. Genesis Energy....P..P. Duncan Energy Partners. L. L. Legacy Reserves.P.. L..P...P.P.P. Enterprise Products Partners L. L. Teekay LNG Partners. Targa Resources Partners. L. Martin Midstream Partners. LLC.P. L...P..P. related to the specific recommendations or views expressed by me in this research report. Natural Resource Partners L. L.P.. L. L. Pioneer Southwest Energy Partners... Baltimore... L. L. MD 21202 ATTN: Research Publications
Additional Information Available Upon Request
I certify that: 1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed. L. L. Buckeye GP Holdings L.. Copano Energy L. NuStar Energy. L...P. Western Gas Partners... LLC or its affiliates intends to seek or expects to receive compensation for investment banking services in the next three months from Alliance Holdings GP.P.. L. MarkWest Energy Partners. L..P. Quest Energy Partners. L..P.P.P. SemGroup Energy Partners.P. L.P. L. ONEOK Partners... L.. Penn Virginia Resource Partners.P.P.P.P. Boardwalk Pipeline Partners. Legacy Reserves.P..P..P. L.P.. LLC... Magellan Midstream Partners..L. Copano Energy L. L. Sunoco Logistics Partners L..P. L.P.. Magellan Midstream Holdings.P.P. Copano Energy L.. Genesis Energy.P. L. L. L. Enterprise Products Partners L. L.C. please go to www.P.P. LLC. Wachovia Capital Markets. L. Teekay Offshore Partners. L. Buckeye Partners. Genesis
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To view price charts for all companies rated in this document. Atlas Energy Resources. L. Kinder Morgan Energy Partners.. Plains All American Pipeline. L. L.P. L. L. Sunoco Logistics Partners L..P. L. Kinder Morgan Energy Partners. Plains All American Pipeline.P. Kinder Morgan Energy Partners.. LLC.P.. El Paso Pipeline Partners.P.. L. Penn Virginia GP Holdings. L.P. Energy Transfer Partners.P. Quest Energy Partners.P..P. EV Energy Partners. L..P. LLC.P.P.P. L. L.L. Boardwalk Pipeline Partners.P. L.. Magellan Midstream Partners.P..P. K-Sea Transportation Partners. L.P.C.P. 1st Floor.. L. Enbridge Energy Partners. Inergy. Duncan Energy Partners. L. Duncan Energy Partners. Kinder Morgan Management. Energy Transfer Partners..P... NuStar GP Holdings... DCP Midstream Partners.P. MD5202.P.P. TransMontaigne Partners L... L.. L.. L...P.P.P. Targa Resources Partners. LLC. Inc.P.P..P. L. Crosstex Energy.P. L.P.P. L.. Spectra Energy Partners.com or write to 7 Saint Paul Street.P. LLC. Regency Energy Partners.. Atlas Pipeline Holdings. Inc..P. L.P.P.P. Exterran Partners. directly or indirectly. Legacy Reserves.... Atlas Pipeline Partners. Martin Midstream Partners.Third Edition
WACHOVIA CAPITAL MARKETS. Hiland Partners.P. L. Teekay LNG Partners. K-Sea Transportation Partners. Atlas Energy Resources. L. L.P. L.. L.. Williams Pipeline Partners.C..P.P. SemGroup Energy Partners. TEPPCO Partners... NuStar GP Holdings. L. within the past 12 months..P. TEPPCO Partners. Hiland Partners.P.P.. Hiland Holdings GP.. Suburban Propane Partners.P. Spectra Energy Partners. Penn Virginia GP Holdings. Eagle Rock Energy Partners. Williams Partners L. Ferrellgas Partners. L. Regency Energy Partners.P. L... LLC.P.P... Atlas Pipeline Partners... L.C.. L. L.. Atlas Pipeline Partners.. L.P. TEPPCO Partners. L..P.P..P.. L. L.. L. El Paso Pipeline Partners.P. L. L. Enbridge Energy Partners. L. L.P..P.. Enterprise GP Holdings L. Enterprise Products Partners L. L.P..P.P. L.P. Vanguard Natural Resources.P. L.. Targa Resources Partners. Enterprise GP Holdings L. L.. Buckeye GP Holdings L.. L. Enterprise GP Holdings L. LLC and/or its affiliates. L. Wachovia Capital Markets. Atlas Pipeline Partners. Enbridge Energy Partners. Energy Transfer Partners. Enbridge Energy Partners. L. L.P.P.. Exterran Partners.. L. L. L. SemGroup Energy Partners.P. L. L. L..P. Hiland Holdings GP. LLC. Crosstex Energy...L.P.. or will be. L. Williams Partners L.P. L. L. El Paso Pipeline Partners.P. El Paso Pipeline Partners..P. L. LLC maintains a market in the common stock of Alliance Holdings GP.P... Regency Energy Partners.. L.. L. L. have beneficial ownership of 1% or more of any class of the common stock of BreitBurn Energy Partners L.P. Western Gas Partners.P.... L.P.P. L. Copano Energy L. L. Hiland Holdings GP. ONEOK Partners. L.L. SemGroup Energy Partners. Exterran Partners. Penn Virginia Resource Partners.P..P. Buckeye Partners.P.P. Inc. Williams Pipeline Partners. L. DCP Midstream Partners.P.. Crosstex Energy...P.P.. ONEOK Partners.P..P. L.... Inergy.P.P..C. TransMontaigne Partners L. NuStar Energy. DCP Midstream Partners. Wachovia Capital Markets.. Exterran Partners. Buckeye Partners.P. Enterprise Products Partners L. Atlas Energy Resources. L...P.. Crosstex Energy. Williams Pipeline Partners. L.P.L. LLC or its affiliates received compensation for investment banking services from AmeriGas Partners.P.. L. EV Energy Partners. Quest Energy Partners. Holly Energy Partners.. Pioneer Southwest Energy Partners.. and 2) No part of my compensation was.. L.P.. Inergy Holdings. L..P.P. L.P.. L.... L. Magellan Midstream Holdings. L. LLC.P. Vanguard Natural Resources. Atlas Pipeline Holdings.. L.P. L..P. L.... AmeriGas Partners. TransMontaigne Partners L. L. Crosstex Energy. Atlas Pipeline Holdings.P.. L.P.P. BreitBurn Energy Partners L.P. Quicksilver Gas Services. L..P.. Wachovia Capital Markets. Energy Transfer Partners. Vanguard Natural Resources.
Vanguard Natural Resources. LLC. Natural Resource Partners L. TEPPCO Partners. currently is.P. K-Sea Transportation Partners. L. L. L. TransMontaigne Partners L. Teekay Offshore Partners.P.P. TEPPCO Partners. Enterprise Products Partners L.P. MarkWest Energy Partners. Crosstex Energy... L. L.P. L. LLC.P.. SemGroup Energy Partners. Energy Transfer Equity. ONEOK Partners.. Pioneer Southwest Energy Partners. or during the 12-month period preceding the date of distribution of the research report was..P.P..P.P. Williams Pipeline Partners. Atlas Energy Resources. L.. L. LLC provided investment banking services to AmeriGas Partners. Pioneer Southwest Energy Partners.P.P. L..L.P. Legacy Reserves. Inergy. Sunoco Logistics Partners L. Inc.P. L. Penn Virginia GP Holdings. Atlas Pipeline Partners. Inc. L..P. LLC.P..P.. L. Penn Virginia Resource Partners.. L.P. L. Crosstex Energy... Exterran Partners. L. L..P. Teekay LNG Partners. Atlas Pipeline Holdings.P. L.P. L. L. L.. Inergy Holdings. L.. L.P. Atlas Pipeline Partners. L.P. L.P. Enterprise Products Partners L.. LLC provided nonsecurities services to Atlas Energy Resources. L. but is not limited to investment banking revenue. L.. Duncan Energy Partners..P. L.P. L. Penn Virginia Resource Partners. NuStar Energy. El Paso Pipeline Partners. L. L... Pioneer Southwest Energy Partners...P.. Regency Energy Partners. L.P. L.P.. Kinder Morgan Management.. L. L. Kinder Morgan Energy Partners..P.. LLC.. Kinder Morgan Management. Wachovia Capital Markets. L. DCP Midstream Partners..P. Boardwalk Pipeline Partners.P. Regency Energy Partners.. Enterprise GP Holdings L.P. LLC does not compensate its research analysts based on specific investment banking transactions. L.
. a client of Wachovia Capital Markets. Wachovia Capital Markets..P...P.. Regency Energy Partners. Vanguard Natural Resources. L. Exterran Partners. MarkWest Energy Partners. Spectra Energy Partners. L. Magellan Midstream Partners...P.P.P.P.. ONEOK Partners..P. L. L. LLC. Inc.. Genesis Energy.P.P.P.P. or during the 12-month period preceding the date of distribution of the research report was. L. Energy Transfer Partners.P. Western Gas Partners.P. Spectra Energy Partners.P.P.. NuStar GP Holdings.P.P..P. L. ONEOK Partners. Enbridge Energy Partners.. Magellan Midstream Holdings... L. Crosstex Energy. Regency Energy Partners.Master Limited Partnerships
WACHOVIA CAPITAL MARKETS... L.. Enterprise GP Holdings L. Eagle Rock Energy Partners.. L. L. Duncan Energy Partners.P. L.... L. LLC. L.P.. L. Eagle Rock Energy Partners.. L.P. L. L.... L. L. L.P. or during the 12-month period preceding the date of distribution of the research report was.. Energy Transfer Partners. LLC..P..P.P.P.P. Plains All American Pipeline.P..P.P.P.P. Kinder Morgan Energy Partners. L.P. currently is. L.P..P. L. LLC... NuStar GP Holdings.P.P. Quest Energy Partners.. L. Kinder Morgan Management.. Wachovia Capital Markets. L..P. SemGroup Energy Partners. Enterprise Products Partners L..P. L. Pioneer Southwest Energy Partners.P.P. LLC. L... Energy Transfer Partners. L. Crosstex Energy. MarkWest Energy Partners. Wachovia Capital Markets. L.P. Kinder Morgan Energy Partners.P. LLC. Quest Energy Partners.. L.. Boardwalk Pipeline Partners.P.P. Sunoco Logistics Partners L. L..P. Spectra Energy Partners.P. Natural Resource Partners L. Spectra Energy Partners. Kinder Morgan Management.P..P. L.P.P..P. Targa Resources Partners.. Targa Resources Partners.P.. L. MarkWest Energy Partners.P. Enbridge Energy Partners..P. Hiland Partners. Spectra Energy Partners. L. Energy Transfer Equity. L. DCP Midstream Partners.P. L. L. Inc.P. L.. LLC.. Pioneer Southwest Energy Partners. Enbridge Energy Partners. L. Buckeye GP Holdings L. Regency Energy Partners. L. L.. L. L.. L. Hiland Partners. L...P. L. Western Gas Partners. L.P.P. L. Kinder Morgan Energy Partners.P.. LLC provided noninvestment banking securities-related services to BreitBurn Energy Partners L. Exterran Partners.P. Kinder Morgan Energy Partners. Kinder Morgan Energy Partners. Penn Virginia GP Holdings.P.. Hiland Holdings GP. Enterprise GP Holdings L.. L. L.P.P.P.. L. Williams Partners L. LLC. Buckeye Partners.P.. L.. TEPPCO Partners. Crosstex Energy.P..P. TEPPCO Partners. Atlas Pipeline Holdings. Eagle Rock Energy Partners.P.P.P. L. L. L. L..P. Targa Resources Partners.P. Pioneer Southwest Energy Partners.P.. L.P.P. Inergy..P. L..P.. L.. L. L.. L. Boardwalk Pipeline Partners... L. Targa Resources Partners. Crosstex Energy.P. Pioneer Southwest Energy Partners.P. Wachovia Capital Markets. BreitBurn Energy Partners L.. ONEOK Partners. L.P. L. L.P. L. Energy Transfer Partners.. L. Crosstex Energy. BreitBurn Energy Partners L. which includes.P. L. L. L.. L.P.P... a client of Wachovia Capital Markets.P.. ONEOK Partners.P. NuStar Energy..P.P.. LLC.P. Plains All American Pipeline.. L. L... DCP Midstream Partners. LLC.P. L.P... Boardwalk Pipeline Partners. Energy Transfer Equity..P. TEPPCO Partners. SemGroup Energy Partners.P. Enterprise Products Partners L. LLC received compensation for products or services other than investment banking services from Atlas Energy Resources.P. L.P. Kinder Morgan Management.P. Kinder Morgan Management. SemGroup Energy Partners.P. L..P.. L.. L. L..P. Atlas Pipeline Holdings. Magellan Midstream Holdings. L.. Enbridge Energy Partners. Crosstex Energy. Constellation Energy Partners LLC....P.P. Hiland Holdings GP. L. MarkWest Energy Partners.. Atlas Pipeline Partners. Teekay LNG Partners. L.C. Magellan Midstream Partners. L... Constellation Energy Partners LLC.P. Kinder Morgan Management. in the past 12 months. L. Atlas Energy Resources. Constellation Energy Partners LLC. L. DCP Midstream Partners. L.P... LLC. Atlas Pipeline Holdings. Western Gas Partners...P. Enterprise GP Holdings L. Williams Partners L. LLC..P. Natural Resource Partners L.P. L.P.P. currently is.. LLC EQUITY RESEARCH DEPARTMENT
Energy. L.P.P. Teekay Offshore Partners. Legacy Reserves. Kinder Morgan Energy Partners..P..P. Inergy Holdings. WCM’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm.P.. Duncan Energy Partners. Energy Transfer Equity.. Copano Energy L.... SemGroup Energy Partners. Exterran Partners. LLC. Williams Pipeline Partners.P. L. L... L.. L. TransMontaigne Partners L... L..P.. LLC.. L.P.P.P. Atlas Pipeline Partners. Targa Resources Partners. Duncan Energy Partners... K-Sea Transportation Partners. a client of Wachovia Capital Markets... L.
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