A publication of

WACHOVIA CAPITAL MARKETS, LLC

Equity Research
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 / sharon.lui@wachovia.com

Eric Shiu, Associate Analyst
(212) 214-5038 / eric.shiu@wachovia.com

Praneeth Satish, Associate Analyst
(212) 214-8056 / praneeth.satish@wachovia.com

Ronald Londe, Senior Analyst
(314) 955-3829 / ron.londe@wachovia.com

Jeffrey Morgan, CFA, Associate Analyst
(314) 955-6558 / jeff.morgan@wachovia.com

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.

MLP071408-233712

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

III.

IV. V.

VI.

VII.

VIII.

3

..................................................................................... 60 General Partners Are Held In Different Entities ....... 66 C........................................................................................................................................................................... Cost Of Capital Is Becoming A More Prominent Issue................................................................................................................................................................................................................................................................................ Why? .................. 56 Hybrid Securities....................................... 46 What Is The Risk Of MLPs’’ Losing Their Tax Advantaged Status........................ 53 F...................................... 42 B............................................................ 57 Paid-In-Kind (PIK) Equity ...........Master Limited Partnerships WACHOVIA CAPITAL MARKETS........................................................................... 42 A.......................... LLC EQUITY RESEARCH DEPARTMENT IX................................................................................................... Foreign Investor Ownership ............................................................................ 45 E........................ 60 I................................................................................. State and Local Taxes and State Filing Requirements................................................................................................................................................................................................................................................. 56 PIPE Mania ............................................................................ Financial Products Facilitate Participation In MLPs ... Shift In Supply Resources Is Driving Energy Infrastructure Investment................................ MLPs Continue To Enjoy Good Access To The Capital ....................................... Tax And Legislative Issues..................................................................................................................... Who Pays Taxes?............................................................................................................ 47 Sector Trends ................................................................................................................... 66 D....................................................................................................................................................................... Current Tax and Legislative Issues................................................................................ 71 X.................................... 67 F.. 62 K................. XI.............................................................. MLP Investor Base Is Changing........................................................................................ What Are The Tax Advantages For The LP Unitholder (The Investor)? .................................................................................................................................................. 50 D............... Emergence Of MLP Indices ......................................... Dramatic Growth Of MLPs ................................................................. 57 GP Subsidies ................................... 66 E......................................... Publicly Traded General Partners -................................................................................. 61 What Should Be The Criteria To Invest Today? ...................................................................................................................................................................................................................................................... 66 A......... 58 The Multiplier .......................................................................................................................... Distribution Yield ..... 42 C...... 46 FERC Includes MLPs In Determining Pipeline ROEs............................................................................................................................................................................................................................. 66 B.......... MLPs Have Been Successful In Making Acquisitions And Investing Organically........................................... 4 ........................................................ 48 A............................................... MLPs As An Estate Planning Tool......... Emergence Of ““Dropdown”” MLPs.......... Can MLPs Be Held In An IRA? .......................................... Two-Stage Distribution (Dividend) Discount Model ................................. 48 C......................................................................... 58 Power Of The IDRs................................... 56 A Paradigm Shift In PIPE Dynamics .................................................................................................................................................................... 69 Appendix.......................................................................................................... Return Of Upstream MLPs.............................................. 64 L.................................................................................................. 58 Not All GPs Are Created Equal .... Spread Versus The Ten-Year Treasury ...... 61 Upstream MLPs Are Faced With Unique Challenges And Risks .............................................................................. 67 Risks ....................... MLPs Are Employing Creative Financing Solutions To Fund Growth....... 57 H......................... 46 H........ 44 D.................................................. 61 Upstream MLPs Failed In The 1980s.......... 46 Canadian Royalty Trusts Tax Status Expected To Change In 2011............ XII................... Price-To-Distributable Cash Flow ....................................................................................................................................... What Is Maximum Potential Distribution (MPD)?. 46 What Is The NAPTP?............................................... The Mechanics Of A Purchase And Sale Of MLP Units And The Tax Consequences ........................................................................................ 51 E.......................... 54 G.................................................................................... 48 B............................................ 45 F.................................................................................................................................................. 46 NAPTP Is Working To Ensure GPs Are Not Impacted By Carried Interest ...................................................................................................... 47 MLPs Income Tax Allowance In Pipeline Ratemaking .......................................Recognizing The Value Of The GP ............. Enterprise Value-To-Adjusted EBITDA ......................................................................... XIII............................. 46 G................................................... 61 J................................................................................................................................................................................................................... 65 Valuation Of MLPs.......

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. versus 12% for the S&P 500 REIT Index and 6% for the S&P 500 Index. financing. Above-Average Performance And Good Portfolio Diversification From 1998 to 2007.MLP Primer -. In this third edition. II.A Framework For Investment This report provides an update to our previous MLP primer published in August 2005. MLPs are still relatively under-owned. A. we suspect that relative to other asset classes.2%. (2) Attractive value proposition of tax-efficient current income plus growth = a sustainable low-double-digit total return. (5) Demographics trends. Figure 1. In addition. Therefore.9% for the S&P 500) with lower risk (beta of 0. the Wachovia MLP Index has generated an average total return of 6. and developments within the MLP sector related to legislation. We provide a reference guide to familiarize investors with the MLP investment. versus 5. Introduction -. (4) An effective way to hedge inflation.Third Edition WACHOVIA CAPITAL MARKETS. 5 . 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% 22% WCM MLP Index (TR) S&P 500 Index (TR) 1992 1994 1996 1998 2000 2002 2004 2006 2008YTD Wachovia MLP TR Index +15. before delving into the details. versus 3% and 3%. During the past three years. MLPs have also outpaced the broader market and most income-oriented investments with an average total return of 13%. 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. respectively. etc. MLPs outperformed the S&P 500 in seven out of ten years. pure-play publicly traded general partners. Wachovia MLP Index generated an average total return of 6%. we have added new sections detailing upstream MLPs. feel free to call us with any questions or feedback. (3) A defensive investment. As always. we have added new information to our ““basics”” section based on questions and feedback we have received from investors over the past few years. fund flow. and (6) An emerging asset class.5% for the S&P 500. Why Own MLPs? While interest and ownership of MLPs has certainly increased since the publication of our last primer.8% WCM MLP Index (TR) S&P 500 Index (TR) Source: FactSet Over the past five years. dropdown stories. versus 2. During this time frame.31). MLPs have delivered above-average total returns (an average of 17.3%. LLC EQUITY RESEARCH DEPARTMENT I.

The Index composition is determined by Wachovia Capital Markets. Following a review. and November). which was introduced in December 2006. and the Index is independently calculated by Standard and Poor’’s using a float-adjusted market capitalization methodology. including 11 general partnerships (GP). To be eligible for the index. and that meet market capitalization and other requirements. the American Stock Exchange (AMEX) or NASDAQ. LLC. and December. please visit www.com. For each review date. August. The Index comprises energy master limited partnerships that are listed on the New York Stock Exchange (NYSE). The Wachovia MLP Composite Index currently consists of 73 energy MLPs. 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% (16%) (16%) (17%) (30%) YTD 1-year 3-year 5-year Source: Bloomberg Performance As Measured By The Wachovia MLP Index We gauge energy master limited partnerships’’ (MLP) performance using our Wachovia MLP Composite Index. 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. with changes effective after the close of trading on the third Friday of March. June. The Index is reviewed quarterly. securities are evaluated based on the close of trading on the last trading day (the evaluation date) of the month preceding the review (February. September. May. For further information and historical performance data from 1990 (downloadable). and is also subdivided into 13 subsectors.Master Limited Partnerships WACHOVIA CAPITAL MARKETS. 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. 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.wachoviaresearch. the company must be structured as a limited partnership or limited-liability company and have a market capitalization of greater than $200 million. 6 . LLC EQUITY RESEARCH DEPARTMENT Figure 2. all securities already included in the Index that continue to meet the eligibility criteria remain in the Index.

Although the correlation between MLPs and the ten-year treasury has increased over time. but not that strong. Although the historical correlation to actual interest rate trends has been relatively low. The correlation between MLPs and these variables has been fairly consistent and below 0. Natural Gas Pipelines MLP Index B. Natural Gas MLP Index i. and five-year periods. the movements in MLP prices have not been highly correlated with changes in the broader stock market.40. provide good portfolio diversification. Petroleum MLP Index i. Over the past one. Relationship with the S&P 500 has been fairly consistent. respectively. Low correlation with the ten-year treasury. GP Composite Index General Partnerships 2. Refined Products MLP Index 7. 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.07. in our view. commodity prices or other yield-oriented investments.and five-year periods was 0. LLC Portfolio Diversification MLPs exhibit low correlation to most asset classes and thus. interest rates. the correlation between the MLPs and the ten-year treasury yield was 0. Propane MLP Index 6. on an absolute basis.43 and 0. threeyear. Gathering & Processing MLP Index Marine Transportation ii. LLC EQUITY RESEARCH DEPARTMENT Total Return 10% 20% 13% 5% (4%) 6% 11% 12% 11% 18% 10% 9% 10% (18%) 3% Figure 3. 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. it is still relatively low. in our view. While this is high relative to other asset classes. Processing. Historically. and NGLs Petroleum Refined Products Oil Field Services Crude Oil Source: Standard & Poor's and Wachovia Capital Markets. Midstream MLP Index Oil & Gas A. The low degree of association reflects the transformation of MLPs from primarily ‘‘income’’ investments to ‘‘growth and income’’ investments. Coal MLP Index 3.and five year periods. 2007 Natural Gas Natural Gas Pipelines Gathering. changes in investor 7 . Oil & Gas MLP Index Coal 4.36 and only 0. the correlation to the overall market is still less than one-half (see Figure 4). respectively.Third Edition WACHOVIA CAPITAL MARKETS. Historical Wachovia MLP Index Performance By Subsector Wachovia MLP Index WCM MLP Indices Performance Since 2005 WCM MLP Index 1. Marine Transportation MLP Index 5. Crude Oil MLP Index Propane ii.50 over the last one-year.MLP Primer -. The correlation between MLPs and the S&P 500 over the one.

As the number of publicly traded MLPs has grown in recent years and MLPs have established a track record of distribution increases. and refined products to a growing domestic market. the correlation with crude oil and natural gas prices was 0.36 0. MLP distributions have increased at a median five-year compound annual growth rate (CAGR) of 8.12) 0. Link to bonds is diminishing.40. annually. Over the past five years. For the past year.40 Natural Gas 0. the correlation with crude oil and natural gas prices was 0. crude oil.36 0.36 0. Figure 4.34 and 0.07).34 0.14 Crude Oil 0. overall.29 and 0.32 over the past one and five years.6% (2003-07).38 0.43 0. In Figures 5 and 6. and a partially tax-deferred distribution. Relationship with other yield-oriented investments also trending lower.21 0.12 0.31 and 0.31 10 Yr Treas (0. Utility stocks. Although MLPs’’ exposure to commodity price risk varies.36 0.10. we highlight the median yield of MLPs relative to other indices and the upward trend of MLP distribution growth over the past eight years. over the past five years. The MLP value proposition is underpinned by the sector’’s growing role in providing the backbone of U.02 0.42 0. and MLPs and the S&P Utilities Index were 0.24 0.31 0. MLP Value Proposition -.01) and (0.Tax-Efficient Income Plus Growth MLPs provide an attractive value proposition.33 0. in our view. in our view.16 0. The correlation between MLPs and REITs was 0.S.42 0.59 0. MLPs should be able to deliver low-double-digit total returns.21 and 0. Over the past one and five years.13 0. Utilities provide a median yield of about 3.34 0.05) (0.01) (0. respectively. Relatively weak correlation with commodity prices.00) (0.Master Limited Partnerships WACHOVIA CAPITAL MARKETS. Current income plus growth.2% and have increased dividends at an annual growth rate of approximately 9. the perception of commodity price risk can influence stock prices (over the short-term).14) 0.26 0. and visible distribution growth. respectively. For the next three years.47 0. all else being equal.42 0. MLPs can increase distributions paid to unitholders and increase their asset base via acquisitions and/or internal growth projects. in our view. the correlation between MLPs and Moody’’s Corporate Bond Index was only about (0. with high current and tax-deferred income. on average. Given median yields of 6-8% and a long-term sustainable distribution growth rate of 4-6%.42 0.41 0. with a median yield of 7.14.07) B.01) (0.2%. in our view. energy infrastructure.40 REITs 0. The influence of commodity price movements on MLPs is also relatively low.30 0.03 (0.31 0.8%.19 0.41 0.07 Utilities 0. as measured by beta. respectively. Investors also benefit from lower risk.35 0. 8 . Unlike bonds with fixed interest payments.S. in our view. are the most comparable energy securities relative to the MLPs.29 0. with their regulated earnings stream and significant dividend yields. 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 0.02 0.43 0.43 0. Bonds (0. respectively. we forecast distribution growth of 9% (10% including GPs) supported by a large slate of organic investments tied to the ongoing buildout of U. the movement of MLP unit prices have become tied more closely to the equities market than the bond markets. MLPs provide investors with current income.10 0. we believe it is generally low relative to other companies in the energy industry. Clearly though.21 0. respectively. LLC EQUITY RESEARCH DEPARTMENT psychology toward potential movements in interest rates (both the magnitude and timing) can affect the shortterm performance of MLPs.32 Corp. energy infrastructure to deliver natural gas.

MLP Primer -.0% 4.0% 2. During this time frame. The beta for the S&P 500 Utilities Index was between 0. The tax-deferred portion of the distribution is not taxable until the unitholder sells the security. GPs) (% 14. over the past five years (2004-2008).58 to 1.9% Dow Jones Industrial 30 2.30 over the past five years.0% 0.0% Wachovia MLP Index Source: Bloomberg and FactSet 7.0% 0. 1.31 over the past year and an average beta of 0.36.2% 2.0% 12.95.32 to 1. MLPs offer investors a tax-efficient means to invest in the energy sector. while the beta for the S&P 500 Oil & Gas Equipment & Services Index ranged from 0. Wachovia MLP Index Yield Versus Other Indices 8. oilfield services. and utilities have exhibited comparably more volatility with an average beta of 0. 9 .09.3% S&P 500 Index FTSE NAREIT All REIT Index S&P 500 Utilities Index Figure 6.6% 3. LLC EQUITY RESEARCH DEPARTMENT Figure 5.0% Yield 4.0% 10.0% 8.Third Edition WACHOVIA CAPITAL MARKETS. respectively.0% 2.14 and 0.0% 6.60. MLPs offer investors an alternative way to invest in energy with lower fundamental risk. MLPs have averaged a beta of just 0. the beta for the S&P 500 Oil & Gas Exploration & Production Index ranged from 0.0% 2000A MLP Distribution Growth 2001A 2002A 2003A 2004A 2005A 2006A 2007A 3% 5% 5% 5% 9% 10% 9% Source: Partnership reports Tax efficient.75. Low risk. Traditional energy companies such as those involved in exploration and production.6% 6. An investor will typically receive a tax shield equivalent to (in most cases) 80-90% of cash distributions received in a given year.31 for the Wachovia MLP Index.01. This compares with a range of 0. and 0. MLP Annual Distribution Growth (2000-07) Annual Distribution Growth (Excl.0% 6% 6.56 and 1.

Over the past 15 years.61 0. as the MLP sector has changed dramatically during the past 15 years. Wachovia Capital Markets LLC. Q2 2001 to Q2 2002.00 0.22 0.42 0.e.28 1 .1 1 0.98 0.1 billion. in our view.39 0. on average). Figure 8.3% during all four periods (the S&P 500’’s total return during these four periods was 12. the data do suggest that MLPs are defensive in nature given their relatively high yields and prospects for distribution growth. MLPs grew distributions by 7. Integrated (XOI).7%.66 0. there were just seven MLPs.64 0. The median distribution growth was 9. with a combined higher total return of 13.39 0.26 0.64 0. periods during which the GDP was 2% or less were analyzed.81 0.00 0.68 0.08 0.32 1 .Energy) Source: Bloomberg.30 0.60 S&P 500 Oil & Gas Exploration & Production 1 .39 0.47 0. MLPs have outperformed the market (S&P 500) in three of four periods of economic slowdown.32 0.1 1 ..1 10 .76 0.80 0. a decline in GDP for two or more consecutive quarters). and Wachovia Economics Group 10 . MLP (WCM Index Wachovia) Total Energy (S&P 500 . We caution that these data do need to be viewed with a skeptic’’s eye. Service (S15OILE). and Q2 2006 to Q1 2007.66 0.20 Beta 1.28 0.Master Limited Partnerships WACHOVIA CAPITAL MARKETS.60 1.34 0.56 0.34 0.1 4 0. Energy Sub-Sector Performance During Economic Slowdowns Note: Index Reference: E&P Index (S15OILP).57 0. Utilities (UTIL).20 0. with total sector market cap of $2.25 0.01 0. rather than just periods of true economic recession (i.36 1 . Q4 2002 to Q3 2003. In contrast.2% in 2007.98 0.83 0. Over the past 15 years. LLC EQUITY RESEARCH DEPARTMENT Figure 7.2%. For purposes of this study.1 4 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008YTD Source: FactSet C. Drillers (SPOILD).40 1. there are currently 78 MLPs with a combined market cap of approximately $134 billion. there were four periods during which GDP growth was 2% or less: Q1-Q4 1995.88 S&P 500 Oil & Gas Equipment & Services S&P 500 Utilities 1 .77 0. In 1994.25 0.1 9 0. MLP Beta Relative To Other Energy Sectors 1.1 4 0. 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.20 0.20 0. That year.60 0.40 0.80 MLP Composite 1.59 0.09 0.31 14 . FactSet.58 0. Thus.71 0.33 0.78 0.

7% 16. Many income-oriented investments such as REITs. LLC EQUITY RESEARCH DEPARTMENT D.Third Edition WACHOVIA CAPITAL MARKETS.705 19.061 40. Current yields range from 5% to 13% (excluding GPs).7% 25% 20% 15% 10% 5% 0% Source: U.4% 20. MLPs Are An Effective Hedge Against Inflation.000 60. Census Bureau 11 . Population Over The Age Of 65 Population (in thousands) 100.4% 13. relatively low risk (beta). in our opinion.000 0 2000A 2010E 2020E 65+ 2030E 2040E 2050E % of total U. In addition. population.0% 71.453 80. Figure 10. in our view. We estimate 10% distribution growth (12% including GPs) in 2008 and 9% growth (10% including GPs) in 2009.000 40. We believe MLPs represent an attractive investment class for retirees due to their significant (and growing) income stream.1% in 2007 (as measured by the CPI). By 2030. population 35.S.049 86. Demographics Demographics should continue to drive demand for income-oriented investments. and taxadvantaged structure. Census Bureau. seniors are expected to account for about 20% of the U. For example. In Our View MLPs current (and growing) income stream can provide an effective hedge against inflation.S. 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.S.632 12.S.MLP Primer -. utilities. as retiring Baby Boomers seek current income in a tax-efficient structure. MLPs are an effective estate planning tool. Historical MLP Distribution Growth (Excluding GPs) Versus The CPI 12% Distribution Growth (Excl.3% 20. 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. Figure 9. 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.000 20.000 80. while MLPs increased distributions at a median of 9% (11% including GPs). as MLP units can be passed to heirs with significant tax savings.S. inflation was 4. According to the U. Projected U.243 54.

Master Limited Partnerships

WACHOVIA CAPITAL MARKETS, LLC EQUITY RESEARCH DEPARTMENT

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
250 225
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

34 $1

46

$2

$1

$1

$1

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Source: National Association of Real Estate Investment Trusts®, Inc.

12

2007

Number of REITs

$ in billions

200 175

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

$19

$30

$38

$70

$112

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

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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.

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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. but decline rapidly for several years before leveling off. while 15 .MLP Primer -. 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. Figure 18. Accordingly. 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%). it makes sense for E&P companies to sell their mature properties and redeploy the proceeds into new plays with higher potential returns. these partnerships should be able to outbid E&P companies for acquisitions. initial production rates from new wells are high. At this point.Third Edition WACHOVIA CAPITAL MARKETS. LLC EQUITY RESEARCH DEPARTMENT Figure 17. LLC Typically. in our view. Appropriate Production Profile For The MLP Structure C-Corp Structure Oil And Natural Gas Production Curve MLP Structure Time Source: Wachovia Capital Markets.

S. there are approximately 211. with the remaining 31% of units held by institutions. 16 . Figure 19. To retain their special tax status as regulated investment companies (RIC). mutual funds are required to receive at least 90% of their income from qualifying sources listed in the tax laws. Figure 20. LLC estimates Until 2004. Potential Oil And Natural Gas Reserves Suitable For The MLP Structure Est. Who Can Own MLPs? MLPs have traditionally been owned by retail investors.Master Limited Partnerships WACHOVIA CAPITAL MARKETS. LLC estimates III. Source: EIA.8 billion barrels of proved reserves located offshore and in Alaska. oil reserves in MLP structure 6% Est. only 6% of crude oil and 7% of natural gas have been placed in the structure. we estimate that approximately half of these reserves are proved developed producing.3 Tcf of natural gas and 299 million barrels of crude oil.1 trillion cubic feet (Tcf) of proved natural gas reserves and 21.0 billion barrels of proved crude oil reserves in the United States (as of December 31. Market For MLP Suitable Oil & Gas Reserves Exceeds 75 Tcfe. reserves (excluding offshore and Alaska) are proved developed producing (PDP) and about 50% of this amount is suitable for the MLP structure. or approximately 152 Tcfe (91 Tcf of natural gas and 10 BBbls of crude oil/NGLs). Total crude oil and gas reserves in the MLP structure currently total only 3. 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. Partnership reports. proved natural gas reserves totaled 182 Tcf and proved crude oil reserves totaled 20 billion barrels in 2006 for the onshore/lower 48 states. both of which are likely not suitable for the MLP structure. and Wachovia Capital Markets. natural gas reserves in MLP structure 7% Note: Assumes 50% of total proved U. LLC EQUITY RESEARCH DEPARTMENT still generating a similar level of cash flow accretion to unitholders. Institutional And Retail Ownership Of MLPs Institutional 31% Retail 69% Note: Retail percentage include 7% ownership by foreign investors Source: Vinson and Elkins and Wachovia Capital Markets. 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. Of Which MLPs Own 7% According to the Energy Information Administration (EIA). 2006). After stripping these reserves out. This includes approximately 29 Tcf and 0. 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. All else being equal. Based on the average PDP ratio of large independent E&P companies in the United States. This is still true today. This implies that of the ““MLP-able”” reserves. Approximately 69% of total MLP units outstanding are currently held by retail investors.

the investor would be required to file IRS form 990-T and may be liable for tax on the UBTI. IRAs. Since some MLPs have operations (e. 17 . In certain instances. LLC EQUITY RESEARCH DEPARTMENT Institutional Interest Is Growing MLPs are undergoing a transition in ownership from a predominantly retail base to more institutional ownership.. Mutual funds begin processing their investors’’ 1099s in November. and the passage of legislation that allows mutual funds to own MLPs. There are potential administrative burdens related to state filing requirements. C. Tax-Exempt Vehicles Should Not Own MLPs Tax-exempt investment vehicles such as pension accounts. creating potential legal issues for mutual funds domiciled in that state.. and return of capital. In addition.7 billion of equity raised).. this could lead to excise tax liability for the mutual fund or a mutual fund investor paying taxes not owed.) have increased participation in the sector. For example. This means MLP income is considered income earned from business activities unrelated to the entity’’s tax-exempt purpose.g.000 per year. These closed-end funds offer investors a number of advantages.g. If a taxexempt entity receives UBTI (e. Mutual funds are required to designate investors’’ income as ordinary income. Clearly. a list of which follows: • Timing issues. As a result. high net worth brokers. Please see the Appendix for a list of states in which each MLP operates. We recommend consulting a tax advisor before investing in MLPs within any of these structures. professional investors with pools of private funds (e. long-term capital gains. 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). some states have not adopted the legislation as law. without the K-1s. However. A. and access to private market transactions typically at discounts to the market price.MLP Primer -. 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. hedge funds. • Federal/state law discrepancies.Third Edition WACHOVIA CAPITAL MARKETS. However. including the ability to participate in MLPs without the burden of K-1s (processed by the funds--investors receive a 1099). Mutual Funds Can Own MLPs……But Most Do Not With the passage of the American Jobs Creation Act in October 2004. While the mutual fund provision was adopted as federal law. 401-Ks.g. the administrative burden required for such an undertaking could be prohibitive. pipelines and storage tanks) in many states. mutual funds can now own MLPs. in our view. and endowment funds should not own MLP units because MLPs generate unrelated business taxable income (UBTI). a mutual fund would have to make estimates that could prove incorrect. B. This is due to a number of administrative challenges. Institutional interest in MLPs has increased with the formation of 11 MLP-focused closed-end funds ($4. income from an MLP) in excess of $1. mutual funds have not participated in the MLP sector in large numbers to date. mutual funds domiciled in certain states may still be restricted from owning MLPs. Challenges Remain For Mutual Fund Ownership Of MLPs Despite the passage of the American Jobs Creation Act. etc. but may not receive their MLP K-1s until late February or early March. professional management. Massachusetts (a state that is home to many mutual funds) has not adopted the federal Mutual Fund Act as law. • State filing requirements.

and gains from commodities. In general. an entity had to earn at least 90% of its income from ““qualified sources. and depleting reserve base. individuals should evaluate the strength of the company’’s management team.Size .Organic versus acquisition dependent . income from the sale of property. when Congress passed the Tax Reform Act of 1986 and the Revenue Act of 1987.”” These sources were generally limited to natural resources or mineral activities including exploration. process. These assets were typically spun out of larger entities that could realize a higher value from these assets as publicly traded MLPs. (2) project management capabilities (i.”” Investing in ““anchor”” or core MLPs is an effective way to build a solid foundation for an MLP portfolio. 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. Investors should consider their risk-tolerance level and make investments accordingly. a volatile natural gas market. and (3) ownership interests (i.Track record . which includes lower-risk.. futures. real property rents.Stock liquidity . should be considered. Other qualifying income includes interest.Leverage . or marketing. MLPs were reincarnated as entities that generally own midstream assets that are used to transport. dividend. In the late 1980s. development. Types Of Assets In Energy MLPs And Associated Commodity Exposure A Brief Review Of The Evolution Of The MLP Sector In the 1980s. were victims of low commodity prices. The modern day MLP got its start in 1986-87. gain from the sale of assets.Execution . The new laws stated that to qualify as a master limited partnership. mining. Like all investments. or in the case of E&P companies. • Balance risk and growth. refining. Without reinvestment.Commodity exposure . but potentially lower-return MLPs and higher-risk MLPs with potentially higher returns. 18 . aligned with those of the unitholder).Strength of sponsor V. LLC EQUITY RESEARCH DEPARTMENT IV. How To Build An Effective MLP Portfolio In building an effective MLP portfolio. ability to keep projects on time and on budget). MLPs present risk/reward propositions.Visibility . prospective investors should consider factors outlined in Figure 21 when building an MLP portfolio: Figure 21. Investors should consider a management team’’s (1) track record in successfully managing its business. and refined petroleum products and have limited exposure to commodity price risk. sports teams. In assessing risk/reward. (commodity related) forwards. the predecessor upstream MLPs were essentially selfliquidating partnerships and were unable to sustain their distributions. Risk And Growth Risk . restaurants.Master Limited Partnerships WACHOVIA CAPITAL MARKETS.Market position Growth . • Invest with top management.e. 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. These businesses were more cyclical in nature.. crude oil. The anchor tenants are companies that have established a successful track record of delivering solid and sustainable results year after year. exploitation and production operation). and other consumer activities. MLPs were involved in various businesses including exploration and production (E&P) of oil and natural gas. we believe there are three primary factors that investors should take into consideration.Capital requirements . and options (with certain limitations). more factory-like.Weather Source: Wachovia Capital Markets. a balanced portfolio. processing. In addition. income from the sale of stock. transportation.e. A. and store natural gas. These factors include the following: • ““Anchor tenants. LLC and . Prior to making any investment. which relied on exploratory drilling to sustain cash flow (current upstream MLPs own longer life reserves and employ a lower-risk.

Nevertheless.. and re-investment risk.. pursuing internal growth projects. gathering and processing operations. the impact of commodity prices on MLP cash flow varies according to asset class. the cash flow of some MLPs has been becoming more sensitive to commodity prices. propane distribution. marketing businesses. and oil and gas reserves (introduced in the 1980s) were re-introduced to the MLP structure in 2006. L. 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. fractionation facilities. For example. with varying degrees of commodity price sensitivity. asphalt.). This change in focus was partially due to the sudden availability of midstream assets on the market. to achieve returns superior to those of corporations. MLPs are engaged in every aspect of the energy value chain. reserve. involved in the plastics and fertilizer industry did not survive as partnerships due. These partnerships were dissolved.P. the risk profile of MLPs has been increasing. and ammonia. 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. Currently.MLP Primer -. in our view. with limited exposure to commodity price risk. across all commodities. with 78 being energy related. Although investors are becoming more comfortable with the MLP investment structure. Specifically. beginning with refined products pipeline assets in 1986 (Buckeye Partners.e. In a sense. In the following sections. Thus. LNG. in our view. pipelines and storage) to more commodity-sensitive businesses (e. Figure 22.) with higher risk. merged. we outline the effect of commodity prices on each major asset class owned by MLPs. refined products. and aggressively raising distributions. etc.Third Edition WACHOVIA CAPITAL MARKETS. drilling. MLPs were able to take advantage of their unique tax-exempt structure. the prototypical energy asset with the greatest degree of commodity. LLC 19 . These include onshore and offshore pipelines that transport natural gas. crude oil. and lower cost of capital. or restructured. and waterborne transportation. the MLP structure has evolved to include assets that operate progressively closer to the wellhead. 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. oil and natural gas assets. refining. Currently. B. the master limited partnership universe is made up of approximately 102 companies that are classified as publicly traded partnerships. natural gas.g. Beginning in the late 1990s. MLPs own assets involved in almost all aspects of energy. in part. MLPs began reorienting their focus toward growth. to the cyclical nature of their businesses. MLPs formed in the late 1980s and early 1990s generally owned pipeline and storage assets that were largely fee-based. storage assets. LLC EQUITY RESEARCH DEPARTMENT The MLP has seen a progression of different types of assets placed into the structure. oil and coal production. making significant acquisitions. Other MLPs. The MLP structure has evolved from stable cash flow generating assets (i. Some asset types such as refining. Asset Overview In aggregate.

. In theory. natural gas liquids (NGL). or withdraw the product from storage. risks related to investing in midstream MLPs include an economic slowdown. MLPs with pipeline and storage assets do not take title to the commodity. Some crude oil pipelines operate under buy/sell arrangements. whereby shippers reserve capacity on the pipeline and must pay the tariff regardless of their actual use of the capacity. and/or refined petroleum products. energy demand typically tracks GDP growth. depreciation. The rate is agreed upon by the pipeline’’s customers. The FERC also regulates crude oil and refined products pipelines (e. 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 FERC determined that the PPI for Finished Goods plus 1. which helps to provide a growing stream of income in excess of inflation trends. Finally. (2) Cost of service.g. natural gas pipelines receive demand charges. The rate is based on the actual costs experienced by the pipeline. high commodity prices have minimal (if any) direct effect. Historically these rates have averaged 11-13%. the pipeline is allowed to earn a reasonable return on its investment to cover operating costs.S. distillates). The rate is established by supply and demand dynamics in a competitive market. Intrastate natural gas pipelines are monitored by state agencies (e. jet fuel. 2006. natural gas. (3) Settlement rate. Drivers. which is in line with historical growth in demand for energy. crude oil.3%) should be the oil pricing index for the five-year period beginning July 1. and/or storage of crude oil. and (4) Market-based rates. Rates for these pipelines are established in four ways: (1) Indexing. Midstream MLPs with pipeline and storage/terminal assets are typically characterized as generating stable. The growth in pipeline volumes typically average 2-3% per year.3% (PPI plus 1.. storage assets (for natural gas. but overall operate in competitive markets with less regulatory oversight. Interstate natural gas pipelines are regulated by the Federal Energy Regulatory Commission (FERC). Railroad Commission of Texas). Growth can be higher depending on regional demographic growth patterns and expansions. gasoline. which could negatively affect energy demand. Interstate natural gas 20 . LLC EQUITY RESEARCH DEPARTMENT The types of assets in energy MLPs include the following: (1) Midstream (pipeline. transportation.g.Master Limited Partnerships WACHOVIA CAPITAL MARKETS. Typically. gathering and processing. inject. fee-based cash flow with minimal volatility in earnings. The maximum rate a pipeline can charge is adjusted annually based on changes in the Producer Price Index (PPI). 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. Acquisitions and major organic growth projects are generally required to meaningfully increase overall growth. energy infrastructure. (3) regulatory risk related to allowed rates of return. (2) an over build of U. Risks. In general. a government body that regulates tariffs and allowed rates of returns for pipeline companies. However. diesel. and (4) a decline in commodity prices (resulting in a decline in drilling activity). and refined products) typically have fee-based revenue structures whereby the customer reserves storage capacity and pays an additional fee to blend. (1) rising raw material and labor costs. In general. Midstream MLPs are involved in the gathering and processing. and hence. and taxes. Commodity price sensitivity.

then distribute the natural gas to residential and/or commercial customers. L. Primary pipeline customers are refiners and marketers of the product being shipped. diesel fuel.P. However. depending upon economic cycles. diesel. rail. L. TEPPCO Partners. High natural gas prices may spur drilling activity and benefit pipeline companies that can expand their systems that connect to basins of increasing supply. NuStar Energy. Figure 24.P. and jet fuel. El Paso Pipeline Partners. high prices could also have the effect of causing conservation and curtailing demand. Utilities or local distribution companies. L.e. and terminals/truck racks. LLC Magellan Midstream Partners. L. downturns). Kinder Morgan Management. Figure 23.P. L.P. 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 21 . for further distribution to retail outlets.. Spectra Energy Partners. L. rail yards. and residential end users. Thus.P. Sunoco Logistics Partners. L. consumer demand for refined products (i. Refined products pipelines are common carrier transporters of refined petroleum products. Earnings for crude and petroleum products pipelines are tied primarily to throughput (volume). however.P. TransMontaigne Partners. and barge) and government-regulated nature. L. utility companies. L. electric power sector. or storage facilities. L. 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. Natural gas transportation pipelines are generally large diameter interstate pipelines used for long-distance transportation.P. due to their low cost structure (versus other transporters. L. Natural Gas Pipeline MLPs MLP Boardwalk Pipeline Partners.P. Energy Transfer Partners. Throughput can exhibit minor fluctuations. Natural gas transportation pipelines receive natural gas from gathering systems and other pipelines and deliver it to industrial end users. L. Refined Products Pipeline MLPs MLP Buckeye Partners. TC Pipelines. such as truck. gasoline. 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. commodity prices do have an indirect impact on pipeline volume.3%). Pipeline and storage assets have historically been less exposed to economic cycles (i. L. Refined product pipeline cash flow is stable based on the relatively inelastic baseload demand from end users of gasoline.e.Third Edition WACHOVIA CAPITAL MARKETS.P. The following is a summary of the sub-sectors of the midstream segment: • Natural gas pipelines. Throughput in mainline natural gas transportation pipelines tends to be relatively stable due to continued growth in demand for natural gas from industrial.P. and jet fuel) and refinery demand for crude oil are the main drivers of pipeline volume. diesel fuel. L. Holly Energy Partners.P. 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.MLP Primer -.P. End-user destinations include airports.P. such as gasoline.P. commercial. etc. L.. Kinder Morgan Energy Partners. Martin Midstream Partners. Williams Pipeline Partners.P.

In the latter case. fee-based cash flow. such as ethane. terminal cash flow is more subject to the operational expertise of the terminal operator/marketer.g. Figure 25. steel. Terminals consist of either inland or marine terminals. Canadian imports. 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. coal. which are stored in above-ground facilities. LLC EQUITY RESEARCH DEPARTMENT Crude oil pipelines. gathering systems. U.S. wells. refiners are more dependent upon waterborne and Canadian imports because inland domestic crude oil production peaked during the 1970s. deliver them to end users.P. in turn is dependent upon petroleum product pipeline throughput. L. natural gas is primarily stored underground using (1) depleted reservoirs. butane. and some are located near consuming markets. L. in turn. • 22 . blending and other ancillary services to pipeline systems. petrochemicals. usually located near refineries. and refined products. FERC). Genesis Energy. and pipeline connections). existing refining capacity tends to be consistently used. as well as the amount of blending activity that takes place at the facility. vegetable oil products. NGL pipeline fees are either contractual or regulated by a government agency (e. petroleum coke. such as retail gasoline stations. Terminal cash flow is affected by the amount of petroleum products stored. and other dry-bulk materials. natural gas can also be stored in liquid form (LNG) using above-ground storage facilities.P. Crude oil pipelines provide stable. LLC Enbridge Energy Partners. less productive wells where gathering pipelines are not economical. natural gasoline. refineries. propane. Natural gas liquids (NGL) pipelines transport mixed NGL products. Storage/terminals. Crude oil gathering pipelines transport crude from the wellhead to larger mainlines.. NGL pipelines typically move NGLs from natural gas processing plants. and import terminals to fractionation plants and storage facilities. Plains All American Pipeline. (2) aquifers. Crude oil is also gathered via tank trucks from older. Main crude oil trunkline systems feed refiners from waterborne imports. L.P. Crude oil terminal operators may use terminals as a natural extension of their pipeline system or may actively seek terminal throughput from third parties. and domestic production. L. Crude Oil Pipeline MLPs MLP Enbridge Energy Management. and other hydrocarbons. These other products include asphalt. ore. Ticker Primary Business Line EEQ Crude Oil EEP GEL PAA Crude Oil Crude Oil Crude Oil SGLP Crude Oil Source: Partnership reports Figure 26. Given the difficulty in building new refineries in the United States. • NGL pipelines. Terminalling operations provide storage.P. industrial chemicals. which. Inland terminals generally receive product from pipelines and distribute them to third parties at the terminal. Most NGL pipelines generate cash flow based on a fixed fee per gallon of liquids transported and volumes delivered.Master Limited Partnerships • WACHOVIA CAPITAL MARKETS. Crude Oil Value Chain Source: Plains All American Pipeline. fertilizers. Unlike refined products and crude oil storage. L. or (3) salt cavern formations. There are also terminalling facilities that handle products other than crude oil. distribution. providing a steady source of demand for crude oil pipeline throughput. are large storage and distribution facilities that handle crude oil or refined petroleum products. SemGroup Energy Partners.P. However. iso-butane.e. natural gas. which. Marine terminals. The advantages of a depleted natural gas or oil field are that it uses existing infrastructure (i.

Processing.P. and NGLs Source: Partnership reports Figure 28. Processing.P. Processing.e. ONEOK Partners. Processing. Figure 27. to remove impurities in order to meet requirements for pipeline transportation.P. L. In a contango market. Processing. Processing.P. L. Quicksilver Gas Service. and NGLs EPD Gathering.P. In a backwardated market. and NGLs OKS Gathering. Gathering And Processing Value Chain Residue gas 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. and NGLs WES Gathering. Processing. To offset this decline and maintain overall gathering system volume. L. 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. Processing. 23 . Raw natural gas may be dehydrated to remove water. Processing. treated to remove chemical impurities. giving producers and marketers incentive to store the commodity. natural gas or crude oil) is below the current spot price.P. the future delivery price of the commodity (i. Williams Partners.P. L. Processing. and NGLs EROC Gathering. in part. LLC EQUITY RESEARCH DEPARTMENT Terminals are affected by backwardated and contango markets. Eagle Rock Energy Partners. L. production naturally declines. Duncan Energy Partners L. Enterprise Products Partners. L. Prior to long-haul transportation. Processing. Gathering.MLP Primer -. • Natural gas gathering.P.P. and NGL MLPs MLP Atlas Pipeline Partners. natural gas from the wellhead must often be processed. L.P.P Copano Energy. The cash flow stability of natural gas gathering and processing systems is dictated. Processing. L. commonly referred to as NGL raw mix or ‘‘y’’ grade.P. L. Natural gas prices influence producer drilling activity and the type of contract pricing. and NGLs WPZ Gathering. the future delivery price of the commodity is above the current spot price. and/or processed to remove natural gas liquids. Processing. and NGLs XTEX Gathering. and NGLs KGS Gathering. and NGLs DEP Gathering. DCP Midstream Partners. carbon dioxide. Processing. Targa Resources Partners L. Regency Energy Partners. Processing. resulting in less incentive to store the commodity. Ticker Primary Business Line APL Gathering. and NGLs HLND Gathering. and NGLs RGNC Gathering. sulfur.Third Edition WACHOVIA CAPITAL MARKETS. L. the natural gas gathering system must hook up additional wells. Hiland Partners. or refined. by natural gas prices.. and hydrogen sulfide. and NGLs CPNO Gathering. LLC Crosstex Energy.P.P.P. Western Gas Partners. and NGLs MWE Gathering. Natural gas is gathered at the wellhead and then collected at central delivery points and transported to treating and processing plants. Processing. L. and NGLs DPM Gathering. L. MarkWest Energy Partners. • Natural gas processing and fractionation. and NGLs NGLS Gathering. As natural gas wells age.

. Natural gas is typically processed under three primary contracts that expose the processor to varying degrees of commodity price risk. processes the natural gas. NGLs are then further refined or fractionated into separate liquids (i. heating water. partnerships with gathering and processing assets have more commodity price exposure and tend to benefit during periods of high commodity prices. 24 . A typical contract would entitle the producer to 80% of the proceeds from the sale of natural gas and NGLs through the plant.”” while decreases in the price of NGLs relative to natural gas reduces gross margin. which should. butane. Ethylene is used in the production of detergents.. 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. • Iso-butane is used as a gas in refrigeration systems (i. insulation. commonly referred to as the ““frac spread. but as a feedstock for the production of ethylene. High prices are likely to stimulate drilling activity and should increase production. The partnership gathers natural gas from the producer. and fueling gas fireplaces and barbecue grills. the liquids serve a variety of purposes.e. 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. • Propane is used for heating homes.Master Limited Partnerships WACHOVIA CAPITAL MARKETS. ethane. 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. drying clothes. and sells the resulting NGLs to third parties at market prices. for the production of isooctane--a clean source of octane enhancement for gasoline). • Keep-whole contracts. Under the percentage discount. • Natural gasoline is used primarily in motor gasoline blending and as a petrochemical feedstock. propane. It is also used as vehicle fuel and petrochemical feedstock. Fractionation. in turn. refrigerators and freezers). Because the extraction of the NGLs from the natural gas stream reduces the energy (Btu) content of the natural gas. increase volume on gathering systems. Commodity price sensitivity. iso-butane. and natural gasoline. In general. normal butane. Increases in the price of NGLs relative to natural gas increases gross margin. Once separated. not the price. LLC EQUITY RESEARCH DEPARTMENT Natural gas liquids. the processor must replace the natural gas (on the basis) that was extracted while processing.e. MLPs receive a fee for the volume of natural gas or NGLs that flows through its systems. • Ethane is not used as a fuel. and as a feedstock for the petrochemical industry (i. 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. Gross margin increases as natural gas prices and NGL prices increase and decrease as natural gas prices and NGL prices decrease. the processor must keep the producer ““whole”” on his natural gas that goes in and comes out of the processing plant. Put another way. cooking and refrigerating food. and other chemical products. The remaining 20% would be captured by the processing plant operator. plastic packaging materials.e. A list of some of the most common types of contracts follows: • Fee-based contracts. iso-butane. These liquids include ethane. synthetic lubricants. Gross margin is directly related to the volume. The processor gathers and delivers the natural gas to pipelines where the company resells the natural gas at the index price. The partnerships gather and process natural gas on behalf of producers. • Percent-of-proceeds contracts. a propellant in aerosol sprays. 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. of the commodity flowing through the system and the contracted fixed rate. gross margin increases when the price of natural gas increases and decreases when the price of natural gas decreases. • Percent-of-index contracts. and natural gasoline) at fractionation facilities. • Normal butane is typically used for motor gasoline blending and as a feedstock for the production of plastics.

NGL prices have been. tend to hedge 70-80% of their near-term exposure and. including swaps. Over the past three years. Derivatives classified as other than trading are also measured at fair value and recognized as assets or liabilities. However.MLP Primer -. Historical NGL-To-Crude Oil Ratio 100% NGL (Mt. MLPs. on average. We do not pay as close attention to earnings per unit (EPU).. For example. 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. 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). Gathering and processing MLPs with commodity price exposure typically have hedging programs to mitigate a substantial portion of that price risk.Third Edition WACHOVIA CAPITAL MARKETS. in general. as we believe the focus for MLPs should be on cash flow rather than earnings. collars. Partnerships use a variety of derivative contracts and option strategies to mitigate their exposure. if the company is able to qualify). the value of a futures contract with an expiration date of one year from today is not known until it expires. the futures contract is assigned a value based on current market prices. the NGL market has limited liquidity) and a historically strong correlation between crude oil and NGL prices. to a lesser degree. However. LLC EQUITY RESEARCH DEPARTMENT Hedging commodity price exposure. etc. on a 3-5 year basis. Realized gains and losses would be included in earnings. A company that uses mark-to-market accounting could report significant earnings’’ volatility.00 80% 70% Data Missing 60% 50% Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Source: Bloomberg Mark-to-market hedge accounting.96 Current oil price ($/Bbl): $140.”” Derivatives classified as trading are recognized as assets or liabilities with the corresponding loss or gain recognized in the income statement.0% Current NGL price ($/g): 1. In order to offset the mark-to-market movement of derivatives. Financial Accounting Standards Board (FASB) Statement No. 133 allows companies to recognize all derivatives as assets or liabilities and at fair value. with the changes in value included as a component of stockholders’’ equity until realized. some companies may employ hedge accounting (i. Mark-to-market hedge accounting assigns a value to a company’’s derivatives positions based on the current market prices for those derivative instruments. puts.e. The changes in the fair value of the derivatives are recognized in the company’’s earnings over time unless certain hedging criteria are met. 25 . Price relationship between crude oil and natural gas liquids. calls. Figure 29.e.. Hedge accounting. if the contract is marked-to-market. a majority of the volatility is usually non-cash. approximately 68% correlated with crude prices. however. the use of dirty hedges could prove ineffective if the correlation between NGL and crude oil prices deteriorates. 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. 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.

a commodity (i. hedge accounting cannot be applied. which could lead to significant volatility in a company’’s earnings. and agricultural customers.P. 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. Global Partners.S. There are three different types of hedge accounting: • Fair value hedges. Figure 30. The ineffective portion of the gain or loss is reported in earnings for the period in which the ineffectiveness occurs. A fair value hedge attempts to mitigate the exposure to changes in the fair value of a recognized asset.P Ferrellgas Partners.Master Limited Partnerships WACHOVIA CAPITAL MARKETS. L. Propane MLPs. and as a fuel for barbecues. If these criteria are not met. L. industrial. household energy needs. primarily for home and water heating. rising wholesale propane prices can squeeze margins when retail prices lag cost 26 . and the company must have hedge documentation in place at the inception of the hedge. A net investment hedge attempts to mitigate foreign currency exposure of a net investment in a foreign operation.. It is also an important feedstock used in the production of various chemicals and plastics. Propane MLPs distribute propane via truck to residential. Since propane distribution is a cost plus margin-type business.P. L. Residential heating sales command the highest margin and are the greatest source of profit for propane distributors. Although. while agricultural customers use propane for crop drying.P. Inergy. and chicken brooding. 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. liability. Propane Energy Value Chain Source: Inergy.e. Propane serves approximately 3% of total U.P. commercial.P. In general. (source FASB) • Cash flow hedges. LLC EQUITY RESEARCH DEPARTMENT To qualify for FAS 133 hedge accounting. tobacco curing. 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. Propane MLPs MLP AmeriGas Partners L. L. Propane is a by-product of natural gas processing and crude oil refining. A cash flow hedge attempts to mitigate the exposure to changes in cash flow of a forecasted transaction. (source FASB) • Net investment hedges. L. 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. or firm commitment. the hedged item) and its hedging instrument must have a correlation ratio between 80% and 125%. Industrial customers use propane primarily as a fuel for forklifts and stationary engines. quick changes in propane costs can affect short-term results. Star Gas Partners. declining wholesale propane prices aid earnings because retail prices tend to lag costs.

P. consumer conservation. Consumption Of Propane 500. OSG America. Shipping partnerships are subject to various governmental and industry regulations.000 200. lubricants. as propane is used primarily for heating. Teekay Offshore Partners L. The primary customers for shipping MLPs include large oil refiners. Shipping MLPs MLP Capital Product Partners. L.Third Edition WACHOVIA CAPITAL MARKETS. rising retail propane prices can lead to consumer conservation. Propane remains a very seasonal business. Teekay LNG Partners. 2006 and 2007 experienced some of the warmest average annual temperatures ever recorded during the winter heating season. petrochemical and commodity specialty products. 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 27 . in recent years the changing nature of competition has allowed margins to expand in the face of record propane prices. as propane companies generate a majority of their revenue during the winter heating season.000 Thousand barrels 400. Although influenced by weather.000 retailers holding the remaining market share. significant variations can occur in any given year. jet fuel. and crude oil. Shipping Partners. depending on the type of vessel and location. Drivers.S. L. Shipping MLPs transport energy products primarily via tankers or barges. Figure 32. Commodity price sensitivity. Under normal circumstances.000 300. sulfur. chemical producers. in our view. 61%.P. Propane prices fluctuate based on winter heating demand.000 100. Propane distributors tend also to have higher working capital requirements when prices are very high.P. Navios Maritime Partners. The propane industry remains extremely fragmented. However. extremely high propane prices may cause conservation and may expose distributors to higher bad debt expense. Shipping MLPs. and the inability to pass higher costs on to consumers. Although average annual temperatures have been fairly constant over the past 30 years.S. accretive acquisitions of smaller propane companies are a key to enhancing long-term performance. asphalt. diesel fuel. integrated oil & gas companies and energy marketing companies. Since the overall long-term growth rate for the propane distribution industry is less than 2% annually. L.P. heating oil. 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. approximately 70% of annual cash flow is earned during the winter heating season (October through March). L. For example. In addition. with the top ten retailers controlling approximately 39% of the propane market and more than 5.P. MLPs with propane assets are generally indifferent to price fluctuations as long as they can pass on price increases to customers. U. oil price trends. Risks to propane MLPs include warmer-than-normal weather.MLP Primer -. and chemical demand.000 0 1981 1983 1985 1987 1989 Source: Energy Information Administration 1991 1993 1995 1997 1999 2001 2003 2005 2007 Risks. fuel oil. LLC EQUITY RESEARCH DEPARTMENT increases.P. The more significant driver of propane consumption is weather. Historical U. L. Figure 33. Products shipped typically include refined petroleum products and by-products such as gasoline.P. L. K-Sea Transportation Partners. liquefied natural gas.

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

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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.

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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.

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. re-gasification). Significant declines in natural gas prices could make it uneconomical for liquefaction plants. (2) demand for refined products. the LNG is returned to its gaseous state (i.Third Edition WACHOVIA CAPITAL MARKETS. of which 10 are structured as master limited partnerships. 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. (2) inability to hedge asphalt prices. General partner interest. and construction of additional liquefaction plants. which house the GP interest and IDRs of the underlying MLP.. and (4) along intrastate and interstate pipelines. lower domestic natural gas production.e. which spur drilling activity. 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. the natural gas is stored in specially designed facilities or delivered to natural gas consumers through pipelines. and (3) a slowdown in commercial and residential construction. Upon delivery of the LNG to the receiving terminal. Factors driving LNG growth includes global demand for natural gas. LLC EQUITY RESEARCH DEPARTMENT Risks. 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. However. (2) throughout gathering and distribution systems. 31 .e. (3) into and out of processing and storage facilities. decline in commodity prices) and the inability to pass through rising operating costs. Compression MLPs (also known as Oilfield Services MLPs) provide natural gas contract compression services.e. a prolonged period of depressed natural gas prices could affect drilling activity and utilization rates. Commodity price sensitivity. crude oil)..MLP Primer -. Compression MLPs MLP Exterran Partners LP Ticker Primary Business Line EXLP Oilfield Services Source: Partnership reports Drivers. Compression is often applied (1) at the wellhead. environmental legislation (i. the primary risks include (1) volatility of asphalt prices (this includes seasonality). and (3) high natural gas prices. Figure 37. restricting construction of coal fired power plants).P. Some GPs also own LP units of the underlying MLP. Some of the risks associated with investing in refining MLPs include (1) rising feedstock prices (i.e.. Factors driving compression MLP growth include (1) production from unconventional resources. They do not take title to the natural gas they compress and typically charge fees for services regardless of throughput. LNG describes the process whereby natural gas is transformed from a gaseous to liquid state and shipped via marine tankers to consuming markets. relatively stable utilization rates) to commodity price fluctuations. Figure 38.e. Risks. 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. Risks. and (4) unscheduled refinery turnarounds. MLPs with compression assets have limited sensitivity (i. Liquefied Natural Gas. (2) acquisitions.. The primary risks associated with compression MLPs include a decline in drilling activity (i. Ticker Primary Business Line CQP LNG Source: Partnership reports Drivers. 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. Compression. 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. Once re-gasified. There are 11 publicly traded general partnerships. (3) alternative/competing products. Commodity price sensitivity. LNG MLPs MLP Cheniere Energy Partners L. The public GPs are typically corporate shells. With respect to asphalt.

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.P. unlike a C corp. and (3) receive cash distributions. Inc. L. L. The Basics A. 32 . 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. Instead.P.. Figure 40. Hiland Holdings GP. Risks. MLPs do not pay corporate level taxes. L. Source: Wachovia Capital Markets. Penn Virginia GP Holdings LP Atlas Pipeline Holdings. LLC Inergy Holdings. and AMEX) just like corporate stock (shares). The limited partners (or common unitholders) (1) provide capital. Energy Transfer Equity. L.P. VI.P.P. taxes are paid (on a partially deferred basis) by limited partner unitholders. The key differentiating factor for an MLP is that. 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. Magellan Midstream Holdings. NYSE. NuStar GP Holdings. Enterprise GP Holdings. NASDAQ.). Factors driving GP MLP performance include (1) distribution increases at the underlying MLP and (2) equity issuances. Limited partnership interests (limited partner units) are traded on public exchanges (i. L. 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).Master Limited Partnerships WACHOVIA CAPITAL MARKETS.. L. L. (2) typically holds a 2% ownership stake in the partnership. and (3) is eligible to receive an incentive distribution.P. The general partner (1) manages the daily operations of the partnership. L. Crosstex Energy. What Is An MLP? Master Limited Partnerships (MLPs) are companies that are structured as a limited partnership rather than a C corporation (C corp. (2) have no role in the partnership’’s operations and management. GP MLPs MLP Alliance Holdings GP. Buckeye GP Holdings.P.P.

7x TOO 7. LLC EQUITY RESEARCH DEPARTMENT B. MLP investors are not subject to double taxation on dividends. What Are The Advantages Of The MLP Structure? Due to its partnership structure. E. real estate rents.5x EXLP 11.7x EP 7. MLPs with C corp sponsors currently trade at an estimated median 2008 enterprise value-to-adjusted EBITDA multiple of 11. gain on sale of assets. A premium valuation. including the following: • A tax-advantaged structure with which to pursue growth opportunities. and income and gain from commodities or commodity futures.9x WMZ 11. due to their tax-advantaged status. Figure 42. mining or production. For example.1x 11. LLC estimates • • The ability to maintain control of the assets (via the GP interest). income from sale of real property.8x • Note: MLP ratios are EV/adjusted EBITDA Note: Data based on Q1 2008. In addition. Currently.7x APC 5. MLPs typically enjoy a competitive advantage relative to corporations. MLPs generally do not pay entity-level income taxes. Why Create An MLP? An MLP provides a number of benefits to the sponsor. unlike corporate investors. Assets within the MLP structure typically trade at higher valuations in the market than those same assets within a C corp structure. there are 102 MLPs traded on public exchanges.1x. Figure 41. development. In general.9x TK 10.3x PXD 6.MLP Primer -. What Qualifies As An MLP? To qualify as an MLP. in our opinion. which makes financing acquisitions and organic projects feasible.5x WES 9. transportation. 33 . C. 78 are energy related.5x for the associated C corp. Natural resource activities include exploration.1x 6. processing. This enhances the partnership's competitive position vis-à-vis corporations in the pursuit of expansion projects and acquisitions. 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. versus 6. and marketing of any mineral or natural resource.1x TGP 13. Types Of Publicly Traded Partnerships 90 78 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. How Many MLPs Are There? Currently. Valuation Arbitrage Between MLP And C-Corp EPB EV/EBITDA MLP median C-corp median 15. dividends. storage.1x EXH 7. Thus.1x SE 6.Third Edition WACHOVIA CAPITAL MARKETS. interest.3x SEP 15. most MLPs are involved in the energy markets. which are based on respective IPOs in Q2 2008 Source: Partnership reports and Wachovia Capital Markets.7x PSE 6.6x WMB 6. a partnership must receive at least 90% of its income from qualifying sources such as natural resource activities. refining. except for WES and PSE. Of those.7x WPZ 10. The opportunity to capture potential upside from incentive distribution rights (IDR). MLPs have traditionally enjoyed good access to capital.

royalty trusts are yield-oriented investments and have unique investment characteristics. federal income tax on the partnerships’’ income. In addition.S. In addition. it is considered a ““passive loss”” under the tax code and may not be used to offset income from other sources. Royalty Trusts? Canadian Royalty Trusts? No U. Instead. U. and credits) at his or her individual tax rate.. which elected to be taxed as corporations for U. 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. NuStar GP Holdings.g. federal income tax purposes.S.. 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. 90%) of profit is distributed to shareholders as dividends. deductions. and some can be retrieved online (via the company’’s website).S. Thus. Figure 43. H. G. including no corporate level of taxation and tax deferral for unitholders. K-1 forms are usually distributed in late February or early March. The primary differences between LLCs and MLPs are that LLCs do not have a GP or incentive distribution rights. Based on this election. investors would receive a Form 1099 rather than a K-1. Thus. 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). whereas MLP limited partner unitholders generally do not have voting rights. LLC EQUITY RESEARCH DEPARTMENT F.S. loss. Unlike MLPs. dividends from trusts fluctuate with cash flow and should eventually dissipate. 34 . What Is The Difference Between A LLC And MLP? As of July 2008. A trust’’s profit is not taxed at the corporate level provided a certain percentage (e. federal income tax on distributions received from the MLPs and sales of the MLPs’’ units. they are not MLPs. LLCs unitholders have voting rights.Master Limited Partnerships WACHOVIA CAPITAL MARKETS. the loss can be carried forward and used to offset future income from the same MLP. Six entities. since these MLPs are structured as corporations. 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. The qualified dividend income would be taxable to the U. In contrast.S. A U. Copano Energy. L.. LLC LP LLC C corp. and Vanguard Natural Resources are registered as a limited liability corporation (LLC).S.P. Linn Energy. U. they do not make acquisitions or increase their asset base. L.S. The dividends are then taxed as personal income. trusts are not actively managed entities. deductions. The investor pays tax on the portion of net income allocated to him or her (which is shielded by losses. but will be subject to U. and credits. there were 73 energy MLPs registered as a limited partnership (LP). common unitholder at the capital gains tax rate versus the ordinary income tax rate.P. It is similar to a Form 1099 received from a corporation. If the partnership reports a net loss (after deductions). holders will not directly be subject to U. and Teekay Offshore Partners. Are MLPs The Same As U.S. however. However.S. Navios Maritime Partners. Constellation Energy Partners.. cash flow is paid to investors as it is generated and only until the underlying asset is depleted. K-1 K-1 1099 There are three shipping MLPs: Capital Product Partners L. but may have management incentive interests (MII). gain.P. LLCs have all the tax advantages of MLPs. 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. Atlas Energy Resources.

679 for the two MLP units. I-shares have average trading volume of only 133. Currently. MLP distributions are managed to be steady and sustainable (and often growing). The ability to convert an i-share to a common unit was removed by the partnerships soon after the public offerings. Unlike MLP securities. i-shares can be owned in an IRA account without penalty. the i-shares are not entirely pari passu with the MLP common units. including the following: • Cash is king. both EEQ and KMR have traded at a discount to their MLP unit equivalent.8% premium to EEP and KMR trades at a 5. Since inception. except distributions are paid in stock instead of cash. On the other hand. • No natural arbitrage.MLP Primer -. Distributions to i-shareholders are treated similar to stock splits. Hence. a limited liability company.e. Canadian royalty trusts are more similar to upstream MLPs in that Canadian trusts are actively managed entities (i. The discrepancy between valuations can be attributed to a number of factors. MLP units are difficult to sell short. make acquisitions or investments to grow production). One year after purchase. Over the long term.869. The i-share structure is analogous to an automatic dividend reinvestment plan. • No conversion provision. LLC (KMR). the only other i-share security is Enbridge Energy Management.3% discount to KMP. is spread among more shares. Kinder Morgan was the first to offer i-shares with the creation and issuance of Kinder Morgan Management.. 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. versus 383.Third Edition WACHOVIA CAPITAL MARKETS. in our view. Thus. the i-share security could be an appropriate investment. 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. • Liquidity. Thus. Currently. though recently. an investment vehicle similar to LP units was created known as i-shares (the "i" stands for institutional). but instead. The cost basis of the initial investment does not change. i-shares do not require the filing of K-1 statements and do not generate UBTI. EEQ has traded at a premium to EEP. all gains (including the most recent share distribution) are treated as long-term capital gains. EEQ trades at a 3. no natural arbitrage opportunity exists. Thus. for investors who prefer to reinvest dividends. The i-shares are equivalent to MLP units in most aspects. which would cause the units to trade more closely. I. in May 2001. The i-share discount. LLC (EEQ). However. 35 . in our view. Investors prefer cash distribution to stock dividends. 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).

first-out (FIFO) method is used. 36 6/29/08 .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 5/29/08 KMP-to-KMR .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 Source: FactSet What Are The Tax Consequences Of Owning I-Shares? When a shareholder receives a quarterly distribution in the form of additional i-shares.) If shares were acquired for different prices or at different times.Master Limited Partnerships WACHOVIA CAPITAL MARKETS. Otherwise. A taxable event occurs only when a shareholder sells his or her share. An i-shareholder pays capital gains tax on the sale (long-term capital gains if the holding period is greater than one year). the basis of each lot of shares can be used separately in the allocation. this does not trigger a taxable event. LLC EQUITY RESEARCH DEPARTMENT Figure 44. EEP And KMP Relative To The Underlying I-Shares EEP-to-EEQ . the first-in. The holding period for shares received as distributions is marked to the date at which the original investment in the shares was made. 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. (This is similar to the way a stock split is calculated.

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 +/. publicly traded GPs have an average estimated three-year distribution growth CAGR of 21.2% and consequently trade at lower than average yield of 5. most MLPs have historically enjoyed good access to the capital markets. An MLP generates value for unitholders by investing in projects that generate returns in excess of the partnership’’s cost of capital. MLPs with investment grade credit ratings generally enjoy better access to capital at a lower cost. propane MLPs have a forecasted three-year distribution CAGR of 5. However. or cost-saving synergies should benefit from an approximate 0.. based on an estimated 0. Alternatively.one standard deviation Source: FactSet and Wachovia Capital Markets.0946 R2 = 0. Empirical evidence suggests there is an inverse relationship between anticipated distribution growth and MLP yield. For example. the market may be forecasting different growth assumptions for certain MLPs or factoring in different levels of risk. LLC estimates B. while slower-growing MLPs have traded at higher yields.5% and trade at an above average yield of 9. Distribution Growth Distribution growth has been one of the primary drivers of MLP price performance. The following chart plots our three-year distribution growth CAGR estimates against current yields. new debt and equity). 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. Fastergrowing MLPs have commanded lower yields..1%. This is due to the fact that MLPs distribute the majority of their cash flow in the form of distributions each quarter. 55% of the variation is explained). organic growth projects. all else being equal.74 correlation between the two variables (i. 37 . Drivers Of Performance A.7%. Figure 45.Third Edition WACHOVIA CAPITAL MARKETS.1781x + 0. In addition.MLP Primer -. An MLP that is able to increase its forecasted annual distribution growth rate by 1% via accretive acquisitions.2% reduction in 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%.e. LLC EQUITY RESEARCH DEPARTMENT VII. Correlation Between Distribution Growth And Yield 12% y = -0. In comparison. the potential flaw with this analysis is that our distribution growth forecasts could be incorrect.e.

our MLP Composite declined 20. Over that same period.S.000 $5.000 $4.505 $9.5%. This is due to the fact that MLPs are yield investments that were traditionally viewed as bond-like substitutes.000 $16. MLPs have historically traded at an average spread of 251 basis points (bps) to the 10-year U. while the Composite yield increased to 10. investors are able to receive a higher risk-adjusted rate of return from government-backed debt or treasury securities.07. the correlation between the 10-year Treasury yield and MLPs has been only 0.415 $5. the Fed increased the target rate three times to 5.00%.598 $0 2004A 2005A $5.206 $8. treasury (from 2000 to 2008 year to date). Interest Rates The movement of interest rates has historically been an important driver of MLP performance. LLC EQUITY RESEARCH DEPARTMENT Figure 46. Over the past five years. 38 . For example. the average spread between MLP yields and treasury yields declined to a low of 16 bps from a high of 512 bps.150 $14.965 $5.75% from 5.610 $9.000 $3. As MLPs have accelerated distribution growth over the past ten years (19982007) to approximately 9% from 4%. As MLPs have become more growth oriented.Master Limited Partnerships WACHOVIA CAPITAL MARKETS.6% from an average of 7. in 1999. Historical Equity And Debt Issuances $20.000 $4.701 $4. MLPs have underperformed during certain some periods of rapidly rising interest rates because as interest rates increase.975 $ in millions $12.687 2006A 2007A 2008YTD Equity Proceeds Source: Partnership reports Debt Proceeds C. the impact of modest interest rate movements on MLP price performance has decreased.7%.

a sustained reduction in natural gas or crude oil prices could curtail drilling by producers. LLC EQUITY RESEARCH DEPARTMENT Figure 47. What Are Incentive Distribution Rights (IDR)? At inception. In most partnerships. 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. 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) 500 400 300 200 100 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: FactSet D.MLP Primer -. Figure 48. and raise the quarterly cash distribution to reach higher tiers. This is known as the 50/50. 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. As the GP increases cash distributions to LPs. Key Terms A. historically it has been low relative to other companies in the energy industry. Although MLPs’’ exposure to commodity price risk varies overall. in our view. which benefits the LP unitholders. even long-haul pipeline MLPs could be affected from reduced transportation volume and/or fewer infrastructure opportunities.Third Edition WACHOVIA CAPITAL MARKETS. LLC VIII. this agreement can reach a tier in which the GP is receiving 50% of every incremental dollar paid to the LP unitholders. Near-term fluctuations in natural gas and crude oil prices are unlikely to have a material impact on pipeline MLPs.) 39 . For a more detailed discussion of the impact of commodity prices. but are likely to affect earnings (on the unhedged portion of production or volume processed) of upstream and gathering and processing MLPs. MLPs typically pay cash distributions to unitholders on a quarterly basis. What Are Distributions? Distributions are similar to dividends. as well. or ““high splits”” tier. (Please see the Appendix for a list of energy MLPs and their incentive distribution rights levels. Commodity Prices The influence of commodity prices on MLPs varies significantly by sub-sector. the GP receives an increasingly higher percentage of the incremental cash distributions. The theory behind this arrangement is that the GP is motivated to build the partnership. B. As a result. increase the partnership’’s cash flow. Longer term. please see the ““Asset Overview”” section beginning on page 18.

Based on this schedule.00.6% reflects distribution payments to both the LP and GP (i.00 ($4. the LP unitholders would receive 76% of total cash distributions.00 per limited unit.00 per unit but less than or equal to $2. which equates to $1. Thus.50.00 $2. which represents 98% of the distribution at that tier.04 $0. This $0.00.00 per unit.50 per unit. we assume MLP XYZ declares a distribution of $4.00/98%] × 2%). At the declared distribution of $4. As the cash distribution is increased beyond $4. At Tier 4.04 $2.00.00 $2. However. Thus.50 per unit and the GP receives $0. At this level.00 in our example. MLP XYZ Incentive Distribution Tiers Distribution up to: $2. the LP would receive $1. Tier 4 (i. which is the incremental cash flow above $3. LLC In this example.00 $4.30 ÷ $50.30 $5. or $0. the GP receives approximately 5% of the total distribution paid.00 in hand.04 $0.30 10.00 $2.00 $0. As outlined in Figure 50. LLC 40 . at Tier 1.00.00 distribution to LP unitholders by 98% and then multiplying by 2% ([$2.00 8.59 $0.04 $0. which represents 85% of the distribution at that tier.e. The GP receives 25% of the incremental cash flow.00 and $2. the LP receives $2. Tier 2 includes distributions greater than $2.00 $0. which represents 75% of the distribution at that tier. At Tier 3.00. the adjusted yield of 10. it actually needs $2.00 $2.00 per unit.00 $1. if the distribution is increased to $5. the LP receives $0.17 $1. MLP XYZ’’s yield of 8. and Tier 3 includes distributions greater than $2.00.00 and less than or equal to $2.00.00 received by LP unitholders represents 98% of the total cash distribution paid to the GP and LP unitholders. or the high-splits tier.00 per unit). up to: $2.6% Tier 1 Tier 2 Tier 3 Thereafter LP% 98% 85% 75% 50% GP% 2% 15% 25% 50% Above $3. Figure 49.00 per LP unit.50.e.00).67 $2.50 $0.30 = $5. while the GP would receive 24%.63 $3. In other words. 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). The GP receives 2%.00).13 $0.50 and less than or equal to $3. which equates to $0.50 $3. $4. or approximately 9% of total distributions paid. one to pay the LPs and one to pay the GP.50 $3. This same formula is applied at the subsequent tiers.50 per unit but less than or equal to $3.13 per unit. LLC EQUITY RESEARCH DEPARTMENT C..00 + $1. In other words.0% reflects distributions made only to the LP unitholders (i. if the MLP wants to raise its distribution to limited partners by $1. is achieved when distributions are greater than $3. The GP also receives 50% of the incremental cash flow. the LP receives $2.30 $5.09 per unit.00 ÷ $50.30 $2. MLP XYZ Distribution Tiers LP% Tier 1 Tier 2 Tier 3 Tier 4 98% 85% 75% 50% GP% 2% 15% 25% 50% LP distr. which is the incremental cash flow above $2.0% $5.00 $2. of that distribution at Tier 1.00 Source: Wachovia Capital Markets. between $0.. which is the incremental cash flow above $2. and for the incremental $1.00 per unit.00 per unit.30 $1.Master Limited Partnerships WACHOVIA CAPITAL MARKETS.00.00 and the GP would receive an additional $1.e.00 $4. the LP receives $0.50. 50/50 splits).00 Cumulative Cumulative distribution allocation of cash flow (%) Distribution per unit per unit LP GP Total LP GP Total LP GP $2. Figure 50.00 Source: Wachovia Capital Markets.50 $0. which equates to $0.30 98% 95% 91% 76% 2% 5% 9% 24% MLP XYZ Stock price Distribution to LPs Yield Total distributions Adjusted yield $50.. which represents 50% of the distribution at that tier. the $2.50 $3. $4. Tier 1 includes all distributions less than or equal to $2.00 to $5. as well.04 is derived by grossing up the $2.09 $0. the formulas for Tiers 1-4 would apply.04 per unit. the LP receives $1. The GP receives 15% of the incremental cash flow. the GP would receive 50% of the incremental cash. At Tier 2.30 per unit.00 Above $3.

For both CEP and ATN.Third Edition WACHOVIA CAPITAL MARKETS. propane MLPs that have a cash flow stream that is sensitive to weather typically carry coverage ratios of at least 1. management teams have significant discretion in determining what is considered available cash flow. Management’’s rationale for withholding cash flow is that the current earnings may not be sustainable due to unusual circumstances. NRP) or wide commodity spreads (PAA). of incremental cash flow.0. the MLP is required to pay out all ““available cash”” to unitholders in the form of distributions. Figure 52. high coal prices (ARLP. however. However. 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. In contrast. available cash flow for the GP and LP divided by distributions paid to the GP and LP).2-1. CEP and ATN’’s MIIs are capped at 15% and 25%. E.g. 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. 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.1x range. 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. Constellation Energy Partners (CEP) and Atlas Energy Resources (ATN) are currently the only MLPs that have MIIs. respectively. 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. we calculate distributable cash flow as the cash flow available to the partnership to pay distributions less cash paid to the GP.MLP Primer -. On the other hand.g. Thus.. The MIIs entitle the holder (e. D. 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. Are MLPs Required To Pay Out ““All”” Their Cash Flow? Under a typical partnership agreement.e. F. Some MLPs have generated significant excess cash (or maintain higher distribution coverage ratios) for reinvestment in organic growth projects. 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.g. Available and distributable cash flow is commonly calculated in the following ways: Figure 51..3x. reflecting the stable. Distribution Coverage Ratio Calculation Distributions paid (to GP and LP) Source: Wachovia Capital Markets. the MIIs are not paid out to the holder until certain criteria are met (e.. management) to receive an increasingly greater proportion of the MLP’’s cash flow as distributions exceed certain thresholds. 41 . e. target distribution levels and distribution coverage ratios)..”” including future capital expenditure and financing requirements. cash flow accrues to the MIIs until they are eligible to receive the cash flow. This usually includes all cash flow that would be required for ““the proper conduct of the business. most pipeline MLPs have coverage ratios in the 1. PVR. fee-based cash flow that underpins their businesses. For example. thereby increasing the partnership’’s base of sustainable earnings. this ““windfall”” of cash is being used to pay down debt or to fund internal growth projects.1.

investors have considered the coverage ratio to be representative of the cushion that a partnership has in paying its cash distribution. • All else being equal. return of capital). The unitholder is also allocated a share of the MLP’’s deductions (such as depreciation and amortization). LLC EQUITY RESEARCH DEPARTMENT The distribution coverage ratio is significant for two reasons: • Traditionally. This is how it works: (1) LP unitholders receive quarterly cash distributions from the partnership each year. in our view. an MLP with assets in Texas is required to pay margin taxes. The unitholder pays capital gains taxes as well as ordinary income tax on deferred income when he/she sells the security. when the investment was made. the higher the ratio. Given its effect on distributable cash flow. maintenance capex can be viewed as the capital needed to sustain cash flow. Who Pays Taxes? Because an MLP is a partnership and not a corporation. variance in the definition of maintenance capex can have significant ramifications for distribution policy and valuations. which has a maximum effective tax rate of 0. (2) Net income from the partnership is allocated each year to unitholders. 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. The third definition is the least meaningful. as it fully reflects the cost of maintaining the asset base. Focusing just on maintaining production may not be sustainable over the long term. and deductions. The amount of taxes a LP unitholder pays is determined by several factors including the unitholder’’s percentage ownership in the partnership. • A more lenient approach is to define the metric as the capital required to replace annual production • Finally. In general. These deductions often offset a majority of the allocated income. there is some tax leakage at the MLP level if the partnership owns foreign assets and/or operates in a state with margin taxes. thereby reducing the amount of current taxable income. Distributions reduce the unitholder’’s original basis in his/her units (i. However. and stock price at that time B. an MLP does not pay corporate-level federal income taxes. Growth capex is the investment a partnership can make to enhance or expand capacity and increase cash flow.e. an investor typically pays income taxes roughly equal to 10-20% of distributions received each year..7% of its federal gross income apportioned to Texas. 42 . Tax And Legislative Issues A. Taxes are not paid on the portion of allocated income that is shielded by deductions until the investor sells the security. a higher coverage ratio would give management increased flexibility to raise its distribution. and tax credits. There are currently three prevailing maintenance capex definitions used by upstream MLPs: • Under the strictest sense. 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. losses. G. as reserves would also need to be replaced at some point. IX. who are then required to pay tax on his or her share of allocated net income regardless of whether they receive distributions. gains. distributions are well in excess of any tax liability. 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. as it places a disproportionately large emphasis on commodity prices. maintenance capex can be defined as the capital required to maintain production and to replace reserves. including accelerated depreciation and amortization deductions. losses. For example. Upstream MLPs are currently divided on how to define maintenance capex.Master Limited Partnerships WACHOVIA CAPITAL MARKETS. In this context. Thus. The tax-deferred portion of the distribution is not taxable until the unitholder sells the security. the greater the safety of the distribution. We prefer the first definition.

When the units are sold. the difference between cash distributions and allocated taxable income) creates a tax deferral for the investor. Thus. the depreciation period for all of the assets within the MLP restarts. there is a recapture of the deductions (depreciation. An investor’’s tax basis is adjusted downward by distributions and allocation of deductions (such as depreciation) and losses. an investor will typically pay ordinary income tax equal to only 10-20% of cash distributions received. the amount of income in a given year that would be deferred would decrease over time below the typical 80-90% level. LLC EQUITY RESEARCH DEPARTMENT This is the tax-deferral benefit of owning a MLP. Investors should consult with a tax advisor concerning their individual tax status. Tax Deferral Can Go Below 80-90% If an MLP does not continue making investments. 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. Another circumstance in which an investor’’s tax shield could go below 80-90% is a termination of the partnership. A termination of the partnership occurs if more than 50% of the total outstanding units of the partnership changes hands in one year. and upward by the allocation of income. In that case.Third Edition WACHOVIA CAPITAL MARKETS. meaning the income that was deferred by the deductions becomes taxable income and is taxed as ordinary income.). 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% 43 . the 80-90% tax deferral would typically be restored in the following year. However. Figure 53. etc. Since most MLPs in recent years have been growing via acquisitions and expansion projects. the bottom line is this: in any given year.MLP Primer -. When the investor sells the security. The net effect (i. The remaining 80-90% is deferred until the investor sells the security. the tax shield created by depreciation and other deductions decreases. While this all may seem a bit confusing. this has not yet become an issue..e. When this occurs. 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.

07 $0.8% Year 2 $22 $1.07 on the $1.6% Year 3 $23 $1. 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.75 ([$25 .80 $0.80 $0..e.20 $0.07 $0.80 $0. and (3) sold at the end of year five for $25.4% Year 4 $24 $1. capital gains tax of $0.20 × 35% $0.$20] × 15%) and recapture of the deferred tax related to distributions in years 1-5 of $1. Figure 55.00 is maintained. In our example. (2) held for five years. 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.20 $0. the MLP’’s yield at the end of the year is 4.80 $0.00 per unit (and yields 5.40 ($0..07 Annual distribution minus tax deferred portion of distribution equals taxable portion of the distribution At the end of years 2-4.07 $2.75 $1. 44 .00 per unit increase in the unit price each year). the unitholder not only pays the $0. but also a capital gains tax of $0. Since we assume the unitholder sells the MLP unit at the end of year 5.80 $0.22 (i.07 $0.8% (i. 7% rather than the ordinary income tax rate of 35%).80 × 5 × 35%).00 4.00 × 80% $0.07. a $1.Master Limited Partnerships WACHOVIA CAPITAL MARKETS.e. In addition.00 per unit • Has an annual distribution of $1. LLC estimates $0.07). Figure 54.20 $0. the unitholder pays the same tax of only $0.40 + tax due on year 5 distribution of $0.. due to the MLP’’s tax-deferral rate of 80% (See Figure 55 for calculation).00).22 Unit Purchase Price $20 $1.80 $0.00 ÷ $21.00 per unit.00.00 per unit (i.75 + recapture of deferred taxes on prior year distributions of $1.07 $0.00 distribution (i. we assume the following about the MLP unit: • Is purchased for $20.e.0%) • Is 80% tax deferred At the end of year 1. as we assume the distribution of $1. LLC estimates $1. LLC EQUITY RESEARCH DEPARTMENT C. the unitholder is required to pay taxes of only $0.20 $0.e.00 5. to $21 from $20 per unit.2% Sell Unit At The End Of Year 5 $25 $1..0% 80% 35% 15% $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. $1. as we assume the MLP unit price has appreciated 5%.07 tax on the distribution of $1.0% At the start of year 1.07 Year 1 $21 $1. respectively.20 $0. 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%.40 $0.00 4.00 4.00 4. we assume one MLP unit is (1) purchased for $20.00 4. The total related taxes paid at the end of year 5 is $2.

$25. the investor would realize a before tax total return of 50% (i.. $5.000 would be subject to tax.40 ($0. divided by the original purchase price (i.00]-1). Therefore.00). 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.e.35] × 5) Figure 57.65 $27. The after-tax total return would be approximately 38% in this example. LLC estimates D. Please see the Appendix for a list of states in which each MLP operates.07 $2.00 $30.75 $1. LLC EQUITY RESEARCH DEPARTMENT Figure 56.93 × 5) Total return on investment Percent total return on investment $20.e.40 $4. State And Local Taxes.$0.75 ([$25 . UBTI exceeding $1. [total return ÷ original cost basis]-1 [$30. The investor’’s total return of $30 is composed of the unit sales price at the end of year 5 (i.. 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.00 $25.00 × 5) Total return on investment Percent total return on investment $20.$20] × 15%) • The recapture of the deferred tax related to distributions in years 1-5 of $1.00 $5. 45 .MLP Primer -. MLPs can be held in IRAs.15 $0. but we would not recommend it.00 ÷ $20.50 38% Source: Wachovia Capital Markets. E..40 $25 $20 $5 × 15% $0.00 $25. Income from an MLP is considered UBTI for tax-exempt entities such as an IRA. And Return Filing Requirements In addition to federal income taxes.00 $0.e.75 $2. Income from MLPs and other sources of UBTI that exceeds $1.000 per year in an IRA would trigger adverse tax consequences for the plan sponsor.80 × 5 × 35%) • The receipt of after-tax distributions of $4.00 × 35% $1. 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 ($1.22 In this simplified example. Can MLPs Be Held In An IRA? Technically yes. Our after tax calculation reflects the following: • The investor payment of a capital gains tax of $0.00).Third Edition WACHOVIA CAPITAL MARKETS.00 .00) plus the total distributions received from years 1 to 5 (i. 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. LLC estimates $4.00 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.. $20. 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.e.65 ([total distributions received –– tax paid on annual distributions when received] × 5 years) ([$5.

In our opinion. The association currently represents the interests of 73 publicly traded partnerships (PTPs). G. Thus. When doing so.naptp. the individual’’s MLP investments can be transferred to an heir.). The proposal is not yet law.to late 1980s. person are typically reduced by withholding taxes at the highest applicable effective tax rate.S. the PTP structure has come under scrutiny by Congress.C..S.Master Limited Partnerships WACHOVIA CAPITAL MARKETS. and pay federal income tax at regular rates on his or her share of net income or gain. Further.org. Canadian royalty trusts would be taxed like all other Canadian corporations. LLC EQUITY RESEARCH DEPARTMENT F. While most of the early trusts were confined to real estate and energy. mining. H. The advantages of the MLP tax structure were originally developed by Congress in mid. refining. transportation.e. states.S. In addition. 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. When an individual who owns an MLP dies. 35%). and U. The NAPTP hosts an annual conference that allows its PTP members to provide company presentations to current and prospective investors. etc. as Congress could use these potential tax revenues to reduce current and future deficits. Congress will continue to support MLPs’’ favorable tax treatment given their integral involvement in the buildout of U. or marketing. energy infrastructure in the past five years (2003-07) and are expected to invest significant amounts of capital over the foreseeable future. MLPs have invested more than $23 billion on U.5% rate. However. loss revenue due to the tax structure of a royalty trust). 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. development.e. loss. the tax liability created by the reduction of the original unitholders cost basis is eliminated. Mr. Additional information in regards to the association can be found at www. announced a tax fairness plan proposal that would change the favorable tax status of Canadian royalty trusts by 2011. while others would begin paying taxes in 2007. Under this proposal.S. of which 70 are energy MLPs. Trusts formed before November 2006 would be given a four-year reprieve until 2011. pipelines and storage facilities) that would efficiently move energy products to consuming markets. 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..S. processing. federal tax return to report his or her share of an MLP’’s gain.. 2006. Concern has also been raised over the fact that Blackstone is channeling its management fees (non-qualifying 46 . D. in our view. Foreign Investor Ownership A non-U. through the passage of the Tax Reform Act of 1986 and the Revenue Act of 1987. at the full 31. the risk of MLPs losing their tax-advantaged status is low. 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. These bills exempted MLPs from corporate taxation. District Court of Appeals recently upheld a new ruling by the FERC that allows MLPs to include an income tax allowance in pipeline ratemaking. person who owns an interest in a MLP may be required to file a U. James Flaherty. energy infrastructure. Canada’’s Finance Minister. Canadian Royalty Trusts Tax Status Expected To Change In 2011 On October 31. The incentives were put into place to attract sufficient capital to support infrastructure development (i.S.e. MLPs As An Estate Planning Tool MLPs can be used as a tax-efficient means of transferring wealth. the U. distributions to a non-U.S. or income deduction. as long as at least 90% of their income is derived from natural resource or mineral activities (including exploration. The Canadian government has taken this action to close what amounts to a significant tax loophole (i. the cost basis of the MLP is reset to the price of the unit on the date of transfer. many companies in other sectors have converted or are contemplating conversion to the trust structure.

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. U.S. federal income taxation. all MLPs but publicly traded GPs). the NAPTP has been working to educate Congress on the differences between energy GPs and private equity funds. The income tax allowance is a major component for owners of interstate pipelines in determining a pipeline’’s cost of service.MLP Primer -. An entity not subject to U. private equity funds attempt to convert services (ordinary) income into capital gains income and thereby. Again. which receive carried interest in the form of incentive distribution payments. 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.S. MLPs that own FERC-regulated pipelines require their unitholders to be ““eligible”” holders. In determining an allowable pipeline rate. Such an example may be to house a foreign operation because the MLP structure may not be accepted in other countries. However. we believe Congress will be able to differentiate between tax avoidance and a legitimate business rationale for a corporate subsidiary for an energy MLP. if an MLP thinks it deserves to charge a higher rate on its pipeline. it can seek a rate case wherein the FERC acts as a mediator. federal income tax on the income generated by the MLP. now that carried interest has made it onto a list of potential revenue offsets. Congress may disallow the use of ““blocker corporations. in our view. On April 17. The FERC’’s methodology for calculating ROE is the dividend yield plus the projected future growth rate of dividends (i. 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. An eligible unitholder is an individual or entity subject to U. District Court of Appeals upheld a policy decision made by the Federal Energy Regulatory Commission in May 2005. 2008. The inclusion of MLPs is a positive. it is likely to resurface in the future. 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. LLC EQUITY RESEARCH DEPARTMENT income) to corporate subsidiaries that then pay dividends back to the PTP (qualifying income).e. 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.. short-term growth rate two-thirds weighted + long-term growth rate one-third weighted). In addition. 2007. However. Specifically.e.S.. 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. given the increasing number of pipeline assets owned (and being constructed) by public MLPs. 47 . 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. This included both private equity funds and publicly traded GPs.”” Some energy MLPs hold corporate subsidiaries for purposes ancillary to their MLPs. In contrast. (unlike c-corps) an MLP’’s long-term growth rate (using GDP as a proxy) will be adjusted by 50% in calculating the ROE. as some rates are market based or negotiated with shippers. pay taxes at a lower rate.The carried interest issue has no bearing on conventional MLPs (i. in our view. While not all interstate pipelines are subject to cost of service ratemaking.S. the rates on new interstate pipeline systems are subject to FERC approval.Third Edition WACHOVIA CAPITAL MARKETS. 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. the FERC uses a proxy group of several publicly traded companies in the same industry as a benchmark. The earlier bills were written so as to target any PTP that received compensation in the form of carried interest. However.

A growing group of hedged funds and closed-end funds have emerged as significant investors in MLPs.000 units per day to date in 2008 from an average volume of 35. primarily hedge funds and closed-end funds). In addition.Master Limited Partnerships WACHOVIA CAPITAL MARKETS. 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. The number of MLP-focused closed-end funds has more than doubled.9 billion from $307 million. Sector Trends A. Dramatic Growth Of MLPs Over the past ten years. liquidity has improved dramatically for the MLP universe. These funds were early investors in the sector and now hold significant positions in a number of MLPs. MLP Investor Base Is Changing MLPs are still predominantly owned by retail investors. LLC EQUITY RESEARCH DEPARTMENT XI. The number of energy MLPs has increased more than tenfold. Likewise. as it is estimated that approximately 31% of MLP units (as measured by float) are currently held by institutions (i. Institutional ownership in MLPs is growing. Figure 59. to 11 from only 5 in 2004. increasing to 160.. the total market capitalization of the energy MLP universe has grown to roughly $147 billion in 2007 from approximately $1 billion in 1994. The funds also provide private funding for MLPs to supplement public equity offerings to finance growth initiatives. to 78 in 2008 (to date) from 7 in 1994. however. the MLP universe has grown by any measure. Over that time period. 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 $18 2001 Source: FactSet and National Association of Publicly Traded Partnerships B.000 units per day in 1994. the MLP investor base is changing. 48 . the average market cap has increased to $1.e. Figure 58.

Inc. thereby lending stability to MLP valuations. An investor in a closed-end fund receives a 1099 form.Third Edition WACHOVIA CAPITAL MARKETS. tax-exempt entities. • Closed-end funds can engage in private market transactions that are not readily available to the public.) and thus. etc. Benefits to investing in a MLP closed-end fund include the following: • These portfolios are professionally managed and provide diversification for investors. There are two closed-end funds that are now funding privately held MLPs that could ultimately become public entities when they mature. some funds may use the weakness as a buying opportunity. 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. Finally. LLC EQUITY RESEARCH DEPARTMENT Figure 60. MLP closed-end funds are playing an increasingly prominent role in the MLP sector. in our view. • These funds can be invested within IRA accounts without being subject to UBTI. are not subject to the restrictions related to qualifying income and UBIT. themselves. 15 Renaissance Technologies LLC 16 Energy Income Partners LLC 17 Magnetar Financial LLC 18 Eagle Global Advisors LLC 19 Glickenhaus & Co. 14 Omega Advisors. There are now 11 closed-end funds that invest solely in MLPs (and one with 25% invested in MLPs). The funds often provide private funding for MLPs to supplement public equity offerings to finance growth initiatives. Closed-end funds are organized as corporations (as opposed to regulated investment companies. 49 . the MLP sector witnessed the creation of closed-end funds that invest primarily in MLP securities. • Investors receive simplified tax reporting through a single 1099 rather than multiple K-1s.MLP Primer -. 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. The MLP closed-end funds pay a dividend that is meant to generate a yield on par with the MLP investments. when MLPs experience periods of weakness. 12 RR Advisors LLC 13 Fayez Sarofim & Co.

00 $20. 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.85 $30.00 $20. (2) The MLP universe has grown significantly.4% 9. and processing capacity. Shift In Supply Sources Is Driving Energy Infrastructure Investment The recent development of several new resource plays.7% 7.00 $15. traditional investors who want to own energy will need to seriously evaluate MLPs as an investment.71 $22. storage. primarily pipelines.00 $25.22 $21.0% 7. and the Rockies is creating the need for significant infrastructure development to transport supply from these new areas to the traditional consuming markets.4% 7.00 Source: Bloomberg and FactSet Will Mutual Funds Get More Involved In The Sector? In 2007.38 $26. We expect mutual fund participation to increase over time for a couple of reasons.9%) N/A (13.01 $22.2% 8. some mutual funds began to ““dip their toes”” in the MLP waters.9% (11.8% 7.4% 7.5% 7.6%) (8.00 $25.74 $17.35 N/A $30.5%) (7. The development of new resource plays in North Texas.60 $28.54 $24.3% 8.4% 7.66 $27.00 $25. C.3% 6.05 $19.9%) (12.00 $25.40 Premium (Discount) Market Cap to NAV ($ In MM) (14.4% 7.0% 7.39 $27. energy complex makes its way into the MLP structure.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. in our view.6% NAV/ Share $40. with a market cap of $134 billion.040 $142 $356 $228 $1. 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 $34.80 Current Yield 4. The U.93 $25.8%) (19. Appalachia.20 $11.S.7%) $1. As more of the U.3%) 2.Master Limited Partnerships WACHOVIA CAPITAL MARKETS.00 $25. LLC EQUITY RESEARCH DEPARTMENT Figure 61.7%) (12. While still comparatively small (the market cap of Microsoft is $235 billion). Louisiana.00 $20.09 $17. Oklahoma. 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.60 $23.00 $25.93 $22. 50 .9%) (0. the MLP sector is growing to a size that soon cannot be ignored.S.90 $26. and steadily increasing demand from traditional markets have created the need for significant energy infrastructure. MLPs are playing and should continue to play a major role in this energy infrastructure boom.38 $28. increasing imports (both LNG and crude products).

S.4 billion in 2005. The top five MLPs that invested accounted for $12 billion. as they typically provide (1) more attractive returns. we estimate that our MLP universe will spend approximately $35 billion of growth-capital expenditure.8 billion on organic growth projects. and (2) greater visibility to distribution growth. 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. storage. Organic projects remain the investment of choice (as opposed to acquisitions).S.MLP Primer -. MLPs invested approximately $65 billion in organic expansion projects and acquisitions. (Please see the Appendix for a list of the announced/proposed pipeline projects. 51 . and processing plants. During this time frame. gathering systems. up from $6. in our view.) We believe MLPs will continue to play an increasingly larger role in the growth of energy infrastructure in the United States.Third Edition WACHOVIA CAPITAL MARKETS. Natural Gas Supply Basin Map Source: Spectra Energy Corp. mostly centered on new interstate and intrastate pipelines. Between 2008 and 2012. LLC EQUITY RESEARCH DEPARTMENT Figure 62. MLPs Have Been Successful In Making Acquisitions And Investing Organically Over the past five years. U. Organic Investments Driven By The Buildout Of U. annual growth and acquisition capital investment increased to $28 billion from $4 billion. MLPs spent an estimated $10.4 billion in 2006 and $3. cash deployed in internal growth projects totaled $24 billion (or about 37% of the total investment). From FY2003 to FY2007. D. while cash paid for acquisitions tallied $41 billion. or 18% of FY2007 total expenditure. In 2007.

Historical Acquisitions $20.2%. The largest transactions in 2007 included LINE’’s $2.4x in 2005.0 $16.0 $12. gathering and processing assets. and coal properties.and upstream-related transactions. 31%.6 $10.3 2003A $1. up from $9. which largely include projected dropdown.0 $16.6 billion in 2007 from $2. MLPs paid an average EBITDA multiple of 9.4 $17. Currently. implying ample room for consolidation by this sector.0 $1.0 $0. The increase is being driven by the proliferation of new MLPs and the growth orientation of most management teams. other. 43%.5 billion in 2003.0 $8.7 2004A $3.0 $4.9 Total Capex ($B) 2005A 2006A 2007A 2008E Acquisition capex Source: Partnership reports Acquisition Multiples Have Risen Excluding oil and gas reserves. MLPs still announced acquisitions totaling $11. 1.5%--includes primarily asphalt and compression acquisitions.8 $4. approximately 37% of all energy pipelines in the United States are held by MLPs.4 $16. and higher than the average multiple of 8. aggregate MLP acquisition capital deployed has increased at an annual CAGR of 63%. and Texas.5 2003A $9.0 $12.1 billion in H2 2007. LLC EQUITY RESEARCH DEPARTMENT Figure 63.Master Limited Partnerships WACHOVIA CAPITAL MARKETS.8 billion in 2006. particularly for gathering and processing assets.5x in H1 2008.0 $4. acquisition multiples continued to climb. 12. to $17.0 $2. Acquisition activity was focused around oil and gas reserves.8 $6. MLPs made/announced 92 acquisitions totaling $17.05 billion acquisition of Dominion’’s natural gas and oil exploration and production operations in the Mid-Continent Basin and APL’’s $1.7 2004A $6.6 billion.0 $0. LLC estimates Acquisition Capital Deployed Has Been Steadily Rising Since 2003.4 2005A $10. Notwithstanding the market’’s overall turbulence and the credit meltdown. Historical Organic Capex Investments $20. In our models.0 $8. we are forecasting $32 billion of acquisitions for 2008 to 2012.2 Total Capex ($B) 2006A 2007A 2008E Organic growth capex Source: Partnership reports and Wachovia Capital Markets.85 billion acquisition of Anadarko’’s gathering and processing assets in Kansas. up from 9. In 2007.1x in 2006. Figure 64. 52 . Oklahoma.

Historical Acquisition Multiples 12x EBITDA Multiple 10x 8. LLC estimates The increase in multiples can be attributed to a number of factors.g. Investors seem willing to pay a premium for the visibility of future visible growth. MLP management teams typically feel a certain pressure to increase distributions. With so many new entrants to the MLP market (ten IPOs since 2005) competition for assets has been intense.4x.9% and 11.Third Edition WACHOVIA CAPITAL MARKETS. there is less integration risk with ““dropdown”” assets than with third-party acquisitions. geographic). shipping. there have been nine IPOs of dropdown MLPs.7x 8x 8. etc. in our view. in our view.8x 9. compression. in August 2005. as evidenced by the premium valuations afforded in the market for MLPs with this business model. 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.3%. In addition. the market is clearly ascribing a certain value to the growth afforded by having a parent company with significant ““MLP-able”” assets. which can potentially be sold to the MLP to support future distribution growth.5x. in general. has enabled them to make acquisitions even at higher multiples. in our opinion.9%.P.1x 9. Since then. in our view. ……But Returns Still Exceeding Cost Of Capital MLPs continue to possess a competitive (and low) cost of capital. thereby making the acquisition look more attractive on a forwardlooking basis.5x 6x 2005 Average Weighted EBITDA Multiple 2006 Median EBITDA Multiple 2007 2008 YTD Source: Partnership reports and Wachovia Capital Markets.2x 9. Thus. The first dropdown MLP to launch an IPO was Williams Partners. as distribution growth has been one of the primary drivers of price performance. These partnerships can be involved in any area of the energy sector (midstream. LLC EQUITY RESEARCH DEPARTMENT Figure 65. Thus. in our view. we expect their cost of capital will begin to increase. as returns will have to be higher to justify the increased cost of capital. MLPs that have dropdown opportunities are not reliant on third-party acquisitions or on finding internal organic projects to fuel growth. even at higher multiples. versus 7. As this occurs. This strategy bears watching. newer MLPs are typically paying only 2% of their cash flow to the general partner. The dropdown model has proven to be a successful strategy. which.8% and 2009E enterprise value (EV)-to-adjusted EBITDA multiple of 11. as we believe it introduces additional risk in the form of execution and timing.0x 9. In addition. the median cost of capital of our MLP Composite is now 11. E.MLP Primer -. interest rates have remained relatively low.7x 9. upstream. 53 . As interest rates inevitably rise and MLPs are successful in raising distributions and incentive distributions to the GP. Further.). While the timing of ““dropdown”” acquisitions is not always certain.. in our view. in our view. For perspective.4x 8. 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. we expect acquisition multiples to decrease. returns are exceeding cost of capital. L. Master limited partnerships that have ““dropdown”” opportunities trade at a median yield of 6. respectively for the midstream MLP peer group. 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. Dropdown MLPs have sponsor companies that own MLP qualifying assets.

$3.598 $2.5x 10. and $3. raising $1. and total amount of capital raised by MLPs continue to increase.794 $5.823 $1.415 $2. there were three hybrid securities issued.972 $3.9% P/DCF 2008E 2009E 10. Figure 67.259 $454 2004A $1. Total debt and equity issued topped $18.5 billion raised via direct placement of equity from institutional investors.4 billion.2x 9. LLC EQUITY RESEARCH DEPARTMENT Figure 66.549 $10. On the equity front. This included $8.000 $4.000 $9.6x EV/Adjusted EBITDA 2008E 2009E 11.Master Limited Partnerships WACHOVIA CAPITAL MARKETS. which was given partial equity credit by the rating agencies.379 2005A 2006A 2007A $3.171 $817 2008YTD $2.7x 11.836 $5.981 $8.756 $3. MLPs Continue To Enjoy Good Access To Capital The number.0 billion for secondary offerings.802 $0 Source: Partnership reports 54 . size.000 Equity Proceeds ($MM) $14. Historical MLP Equity Offerings Gross Proceeds From Equity Offerings $20.7 billion. up from $14. The year 2007 marked another record in terms of capital-raising by MLPs.7 billion of equity. Dropdown MLPs Versus Midstream MLPs Yield Dropdown MLPs Midstream MLPs 6.8% 7.000 IPOs Private Placements Public Secondaries Units To Sponsor/Seller $15.5x Source: FactSet and Wachovia Capital Markets. LLC estimates F.1x 10. In addition.610 $5.781 $1.701 $2.2 billion for IPOs.9 billion in 2006.8x 11.572 $2.4x 11. MLPs raised a total of $14.

Investment Grade Versus Non-Investment Grade During the recent credit crunch and economic slowdown.90% 6.475 $3.MLP Primer -. investment grade MLPs have raised $7.000 $2.50% 6. Investment grade MLPs continue to have good access to the public markets for both debt and equity.50% 5. During the recent credit crunch.000 $4. For 2008.50% 7.50% 5.956 $8. For non-investment grade MLPs. Figure 69.1 billion in new issues at an average interest rate of 6.030 $4.050 55 . 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 6.65% 7.150 $5.50% 7.975 $6.Third Edition WACHOVIA CAPITAL MARKETS.65% 6.000 $3.40% 6.00% 6.000 Investment Grade Non-Investment Grade $8.6%. the public debt markets have been volatile and more expensive. LLC EQUITY RESEARCH DEPARTMENT Figure 68. accessing credit facilities has been the best alternative for debt financing.156 Debt Offerings ($MM) $6.475 $2.750 $0 2004A 2005A 2006A 2007A 2008YTD Source: Partnership reports A Dichotomy In The Market -.95% 6.505 $1.50% 6. Historical MLP Debt Offerings Gross Proceeds From Debt Offerings $10.675 $3. thus. 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.55% 6.800 $2.60% Term (Yrs) 10 10 30 5 5 10 30 5 10 30 5 10 10 30 10 10 10 Proceeds ($MM) $300 $600 $300 $250 $250 $350 $400 $350 $600 $550 $400 $700 $400 $400 $350 $600 $250 $7.340 $5. we have seen a stark dichotomy develop between investment grade and non-investment grade MLPs.05% 5.95% 5.625 $3.000 $3.70% 7.965 $1.65% 6.

G.88% 8. MLPs raised approximately $363 million of equity via PIPEs. in part.75% 9. A PIPE is a direct equity investment in publicly traded equity.156 MLPs have traditionally been disciplined acquirers.75% 7. This shift in the financing paradigm can best be described as follows.2 billion in eight offerings at an average interest rate of 9. After the announcement of the event. the median size of equity deals has increased to approximately $162 million year in 2007 from $79 million in 2003.25% 9.g. The number of MLP equity deals steadily increased to 62 in 2007 from 37 in 2003.25% 10. A Paradigm Shift In PIPE Dynamics Market psychology shifted in late 2007 as it related to PIPE issuances. Investors (in the PIPEs) benefited by purchasing the stock at a discount that was based on the preview price of the units. (2) in conjunction with the acquisition. high yield debt markets remain open for MLPs. In the new paradigm. the MLP would announce a PIPE. the MLP (1) announces an acquisition.0% Figure 70. fewer regulatory issues) and less costly (e. in our view. PIPEs can be an effective way to raise capital as they are typically more time efficient (e.75% 8.75% 8. as the high yield and term loan B credit markets remain volatile and expensive. Nevertheless. MLPs raised more than $8. In 2004.5 billion of equity via PIPEs. In 2008. as the expected financings created an overhang on MLP unit prices. organic and acquisitions). This dynamic has caused MLPs to be disciplined acquirers. PIPE investors who had purchased the stock at a discount to the previewed price would get a double boost in their returns. 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. LLC EQUITY RESEARCH DEPARTMENT Non-investment grade MLPs have relied mostly on revolving credit facilities to finance debt. MLPs with equity financing needs were punished in their valuations in H2 2007. strategic. they must access the capital markets to finance growth (i. Since MLPs distribute all available cash to unitholders. etc. non-investment grade MLPs have raised $2. and the opportunity to forego the sometimes tedious process of filing and marketing a secondary offering. In 2007. no need for a roadshow) than secondary offerings. In addition. the stock typically responded favorably (assuming the deal was accretive. and (3) the stock price would respond positively. and the current low interest rate environment explain.. Growing institutional interest. MLPs Are Employing Creative Financing Solutions To Fund Growth PIPE Mania The amount of equity raised from institutional investors participating in private investments in public equity (PIPE) has grown over time and reached an all-time high in 2007... the increasing strong demand for MLP capital. 2008YTD High Yield Debt Offerings Date Issuer 1/7/08 ATN 4/8/08 MWE 4/23/08 NRGY 5/6/08 ATN 5/13/08 CPNO 6/5/08 NGLS 6/16/08 LINE 6/23/08 APL Average / Total Source: Partnership reports and FactSet High Yield Offerings Rate 10.75% 8. thereby eliminating the equity overhang. as management teams must demonstrate to unitholders that acquisitions and projects are accretive to justify financing. an MLP would (1) announce an acquisition or large capex project.01% Term (Yrs) 10 10 8 10 10 10 10 10 Proceeds ($MM) $250 $500 $200 $150 $300 $250 $256 $250 $2.). (2) in conjunction with the 56 . yield-seeking investors. in our view. 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. MLPs’’ favorable relative price performance.e. Investors in many of the early PIPEs outperformed because the equity placements were typically tied to an event (acquisition or investment). In the old paradigm. which provided the investors with additional return. the relatively attractive pricing (discounts of 6-7%).Master Limited Partnerships WACHOVIA CAPITAL MARKETS. In 2007. Management teams are now more guarded when talking about equity needs and are exploring ways to avoid excessive equity issuances.g.

e. everyone focuses on the lock-up expiration date. $300 million in July 2006. In the case of MLPs.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. 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. LLC EQUITY RESEARCH DEPARTMENT acquisition. it demonstrates the beneficial impact to the GP when the MLP makes an acquisition. LLC Although there has been a shift in the market psychology surrounding equity issuances.. PIPE Dynamics--Perpetual Equity Overhang Old Paradigm MLP announces an acquisition or organic growth project New Paradigm -.. 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. The additional stock received by the unitholder is equivalent to the value of the quarterly distributions paid to common unitholders. the GP temporarily forgoes incentive distribution rights payments in order to make an acquisition immediately and sufficiently accretive to limited partnership unitholders.e. the GP can afford to temporarily subsidize an acquisition to improve the accretion for the LP unitholder. GP Subsidies Another creative financing solution used by MLPs is to have the general partner effectively subsidize a transaction. This could be an indication of a high price being paid for an asset.. Because acquisitions are so accretive to GP owners. Thus.e. 57 .e. Figure 71. In 2006. future PIPEs will likely be smaller in size with fewer investor participants. EPD became the first MLP to issue junior subordinated (i. In these instances.Third Edition WACHOVIA CAPITAL MARKETS. similar to i-shares).e. Paid-In-Kind (PIK) Equity Paid-in-kind equity is an LP unit that receives distributions in the form of additional stock (i.MLP Primer -. However. but also realizes an increase in cash flow as the MLP issues additional equity to finance the transaction. hybrid) securities. typically at LIBOR + bps premium). $200 million in August 2006. that is. Hybrid Securities A hybrid security is an investment vehicle that has characteristics of both a debt and equity security. the partnerships’’ hybrid securities (i.. In addition. raising $550 million via three tranches (i. The reason is that the GP receives the benefit of higher distributions (as the LP raises the distribution). Hybrid securities are given partial equity credit by the rating agencies. we believe PIPEs will continue to play a role in financing MLP growth. and $50 million in September 2006). 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.. and (3) the stock goes down because either there is an overhang to finance the transaction or the PIPE creates the overhang. In addition. the MLP announces a PIPE or instead announces that it will issue equity in conjunction with closing. Paid-in-kind equity is typically eligible to convert into common units after a certain period. in our view. 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. 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.

The multiplier is determined by a number of structural characteristics related to the assets owned by the GP. LLC EQUITY RESEARCH DEPARTMENT Figure 72. For example. 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. Inc. distribution growth for successful GPs can be significantly higher than that of LPs. Publicly Traded General Partners -. Other MLPs have chosen to amend the IDRs to limit the cash flow that goes to the GP. there are three publicly traded partnerships (i. Crosstex Energy. GPs have been able to raise their distributions at a three-year CAGR of 32% (2005A to 2007A). 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.5 yrs 4 yrs Reason For Subsidy Help finance $530MM acq.7MM ~$1. The Multiplier The multiplier represents the rate of cash flow growth to the GP relative to LP growth. Hence.85B acq.4MM Length Of Subsidy 2 yrs 2 yrs 5 yrs 1 1.4B acq. 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. from Shell Help finance $230MM Stagecoach acquisition Help finance $2. Figure 73. of PPX Help finance $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. 58 . Finally. For example.Recognizing The Value Of The GP In January 2004.. in our view. buyers of GPs have recognized the value of the IDRs typically held by the GP. held the first initial public offering for a stand-alone pure-play general partner interest.8MM ~$1. 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.Master Limited Partnerships WACHOVIA CAPITAL MARKETS. Copano Energy.e. publicly traded entities to highlight and maximize their value. Publicly Traded General Partners GP Alliance Holdings GP LP Atlas Pipeline Holdings LP Buckeye GP Holdings LP Crosstex Energy Inc. from Anadarko Help finance $689MM Rainbow acquisition Help finance $200MM acq. Linn Energy. The role of the GP and the incentive distribution rights typically held by the GP have gained recognition. Eleven GPs have been spun out as separate.5MM $20-15-15-10-5MM ~$6. from ExxonMobil up to $20MM / $15MM 2 yrs / Forever SXL Apr-08 Source: Partnership reports H. while the underlying MLPs have only been able to increase their distribution at a rate of 11%.

0x 1.0x AHD NRGP MGG NSH BGH Median Source: Partnership reports and Wachovia Capital Markets.9x 1. LLC EQUITY RESEARCH DEPARTMENT Figure 74..2x 2.2x 3.0x 0.7x 1.8x $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% 59 .7x 2. 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.9x 1.1x 2.0x 2.9x 1.8x 1.00 50 $200 24% 5 Current period Incremental $200 $65 $265 $20 $65 $5 $80 2. Our example assumes the following at the underlying MLP: • A current distribution of $4.0 million of incremental SG&A expenses • 5 million underlying MLP units owned by the GP Figure 75. 50/50 tier) • Distribution tiers from Figure 49 And the following assumptions at the GP: • $5.MLP Primer -.0x Multiplier Effect 2.e. LLC Current period $4. except per unit data) Current distribution per unit Units outstanding (in millions) Total distribution % of cash flow to GP MLP common units owned by GP ( in millions) GP distributable cash flow Cash flow to LP unitholders Cash flow to GP Total cash distribution to LP & GP Distributions to GP from LP units Distributions to GP from GP interest and IDRs Incremental SG&A expense GP distributable cash flow Multiplier effect Source: Wachovia Capital Markets. Forward GP Multiplier Estimates 4.8x 1. LLC estimates PVG EPE XTXI ETE HPGP AHGP How the math works. GP Multiplier Underlying MLP ($ in millions.6x 1.00 per unit • 50 million common units outstanding • A 10% distribution increase • High splits level (i.Third Edition WACHOVIA CAPITAL MARKETS.0x 3.

Most IDRs are capped at 48%. The underlying partnership should have a lower cost of capital (relative to MLPs with maximum IDRs of 48%).. interest and SG&A expense and taxes). Not All GPs Are Created Equal When comparing publicly traded pure-play GPs and their leverage to the underlying MLPs (i. Taken to the extreme. all else being equal. Over time. However. Thus. • Structure of the GP (i. such as interest expense. all else being equal. Corporate taxes.e. 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). NS. With the exception of MGG. all 11 publicly traded pure-play GPs do not own any independent assets. • Incremental expense at the GP (i. 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. the IDRs of which are capped at 23%. reduce the cash available to pay dividends. The reason is that the growth of distributions to L.. The incremental expenses at the GP level. (For a list of publicly traded entities holding GP interests.e. Their cash flow is based solely on distributions declared by the underlying MLPs.) 60 . the ratio of the pure-play GP’’s distribution growth relative to that of the underlying MLP).. if the MLP raises its distribution per unit by 10%. in our view. Other GP interests are held within companies involved in other businesses or that own other energy assets. • Percentage of cash flow accruing to IDRs. 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. 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). Hence.P. and TPP are the only underlying MLPs with publicly traded GPs. • Maximum IDR level. Thus. the partnership would need to pay incremental distributions to LP unit holders and the GP of $20 million each. EPD. C-Corp versus MLP). • Percentage of GP’’s cash flow attributable to LP units held. the cumulative percentage of distributions attributable to IDRs increases. reduce the cash available to pay the GP’’s unit holders. 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.e.e. its growth rate slows and converges with the growth rate of the underlying MLP. which should enable it to compete more effectively for acquisitions and realize higher returns on all investments (acquisitions and expansion projects). 50%).. management’’s decision to cap the IDRs may benefit the GP in the long run. please see the Appendix. XTXI is the only publicly traded pure-play GP structured as a corporation. the 2% GP interest and IDRs entitle the GP to receive a disproportionate amount of the MLP’’s incremental cash flow (i. Hence. General Partners Are Held In Different Entities Publicly traded GPs are housed in a variety of public entities.8x (i. All of the publicly traded pure-play GPs incur incremental SG&A expense. all else being equal. publicly traded pure-play GPs typically own limited partnership units of the underlying MLP. The greater the number of LP units held at the GP. LLC EQUITY RESEARCH DEPARTMENT Based on these assumptions.e. Currently.Master Limited Partnerships WACHOVIA CAPITAL MARKETS. Since the underlying MLP is at the ““high-splits”” level. the GP’’s growth rate of 28% divided by the underlying MLP’’s distribution growth of 10%). Thus. the multiplier effect is approximately 2. a 10% distribution increase at the MLP would enable the GP to raise its distribution by approximately 28%. the slower the growth. as the cumulative percentage of distributions to the GP increases. all else being equal. 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. unit holders is generally slower than the growth rate achieved by the IDRs. if the GP is receiving 50% of the distributions of the underlying MLP.

modest debt) and a more robust distribution coverage ratio (i. these partnerships relied on relatively risky drilling to sustain production. A displacement in either of these markets could hamper a partnership’’s ability to pursue acquisitions and increase distributions. • Constellation Energy Partners LLC (CEP).e. i. but on a base of $500 million is less so at 4%. An incremental $20 million of cash flow on a base of $100 million is meaningful at 20%. LP (BBEP). MLPs with more volatility in their underlying businesses should maintain a more conservative balance sheet (i. can pressure earnings and narrow coverage ratios. As upstream MLPs increase in size. the factory-like development of a well-known reserve base. ever cut the distribution. There are inherent challenges associated with a depleting asset base. Oil and gas MLPs should focus on exploitation. Why? The business model was flawed and execution was poor.. with slow depletion rates. • Commodity price exposure. Reserves suitable for the oil and gas MLP structure should be characterized as predominantly proved developed and long-lived. LP (QELP).P.MLP Primer -. • Active hedging strategy. Generally.Third Edition WACHOVIA CAPITAL MARKETS. they will likely need to make ever larger acquisitions to sustain growth. an oil and gas MLP can set distributions at a long-term sustainable level. What Should Be The Criteria To Invest Today? Appropriate reserve base. in our view. • Linn Energy LLC (LINE).”” With price certainty. Absent acquisitions. • Quest Energy Partners. • Legacy Reserves. LLC (VNR) Upstream MLPs Failed in the 1980s. instead of relying on exploration to support cash flow. low development costs. • Dependence on acquisitions. The oil and gas MLP needs to be actively and conservatively managed to maintain reserves and roll over hedges. The MLP mantra must be strictly adhered to. a prolonged period of low commodity prices could force upstream MLPs to cut their distribution absent acquisitions. consisting of the following: • Atlas Energy Resources LLC (ATN). There are currently ten publicly traded upstream MLPs. Upstream MLPs are suitable for yield-oriented investors that seek more direct exposure to oil and gas assets and have a higher risk tolerance. and hedging tools were not available to mitigate commodity price risk. • Conservative balance sheet and high distribution coverage ratio. Return Of Upstream MLPs The IPO of Linn Energy in January 2006. all else being equal. • Financing growth. (PSE). Upstream MLPs are dependent on debt and equity markets to finance acquisitions. • Exploitation and not exploration--low drilling risk.e. L. 70-90%) in order to lock in prices and reduce commodity price exposure. in our view. a partnership’’s asset base is eroding and reinvestment opportunities may be limited.. • Encore Energy Partners. • Pioneer Southwest Partners.”” • Upstream MLPs Are Faced With Unique Challenges And Risks • Depleting asset base. balance sheets were over-leveraged. • EV Energy Partners. 61 ..e. LP (LGCY). Although an active hedging program mitigates commodity price risk. ““never. • Strong management team.2x). in our view. Reserves in certain regions of the United States are more appropriate for the MLP structure. Declining commodity prices. We would prefer an oil and gas MLP to lock in prices for a multiyear time period (to the extent the market allows). • BreitBurn Energy Partners.. and • Vanguard Natural Resources. The partnerships should hedge a significant percentage of their expected production (i. in our view. LLC EQUITY RESEARCH DEPARTMENT I. 1. LP (EVEP). marked the return of oil & gas producing assets to the MLP structure. even with hedges.e. LP (ENP). even at the expense of ““leaving some upside on the table.

Properly defining and forecasting cost of equity has important ramifications for (1) making investment decisions. 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 + Growth Note (1): Forward yield = next four quarterly distributions divided by current unit price Source: Wachovia Capital Markets. as the MLP is more successful in raising distributions. 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. As the MLP increases its distribution. high drilling activity can lead to faster decline rates as new wells typically come online with steeper decline rates. which. LP equity.Master Limited Partnerships • WACHOVIA CAPITAL MARKETS.e. an investor’’s required rate of return). or the forward cash yield (distributions paid to LP unitholders over the next four quarters adjusted for the GP cut) plus total distribution growth. Cost of LP equity. Figure 76. competition over MLP suitable assets could intensify. all else being equal. it must pay a greater percentage of its total cash flow to the GP. Cost of GP equity. Cost of capital is therefore the weighted average cost of GP equity. This represents an LP unitholder’’s expected return for the risk undertaken in owning LP units of an MLP (i. The general partner typically has just a 2% interest in the assets of the MLP. paradoxically. Competition. this cost-ofcapital benefit is temporary and exists only when the MLP is at the lower incentive distribution level. As an upstream MLP’’s asset base increases in size. An MLP’’s total cost of equity is the weighted cost of LP equity plus the weighted cost of GP equity. In fact. driving acquisition multiples higher and reducing potential accretion.. The conventional methodology used to calculate an MLP’’s cost of equity is flawed. In addition. but also to future distributions that will presumably be higher. In Our View J. Because of this high degree of leverage. GP equity is substantially more expensive than LP equity. the level of spending required to sustain production also increases. By ignoring the growth component. 2%. Thus. increases annual maintenance capital requirements. as it incorrectly equates an MLP’’s cash yield to the partnership’’s cost of equity. and debt. There Are Three Components To An MLP’’s Cost Of Capital MLPs have three principal sources of capital: LP equity. in turn. LLC EQUITY RESEARCH DEPARTMENT • High maintenance capex. but could be entitled to 50% of the MLP’’s cash flow through IDRs. we believe the cost of equity is best defined as adjusted yield (forward yield adjusted for GP promote) plus distribution growth. 62 . This advantage erodes over time due to the GP incentive distribution rights. The cost of LP equity is the forward yield (distributions paid to LP unitholders over the next four quarters) plus expected distribution growth. However. due to their taxadvantaged partnership structure and low cash flow outlay to the general partner. (2) setting distributions and (3) choosing among financing alternatives. For an MLP. Cost Of Capital Is Becoming A More Prominent Issue. MLPs are generally thought to have a lower cost of capital than C-corps. LLC estimates Equity owners are entitled not only to the current distribution. 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. An MLP’’s hurdle rate for new investments should therefore be greater than the weighted average cost of these three capital sources. its cost of capital increases and this advantage erodes away. in our view. we argue that today’’s yield (the unit price) reflects some underlying distribution growth assumption. GP equity. and debt. As upstream MLPs increase in size and number.

if the partnership wanted to continue returning 10% to investors. the percentage of cash flow accruing to the general partner increases. 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. the cost of equity would be less than the cost of debt.5% premium over the 10% targeted return to investors. If that were the case. 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 many instances. LLC estimates Intuitively. the partnership with IDRs will have a higher cost of equity than an MLP without IDRs. it is a mistake to think of cost of equity for a MLP as just the yield.3% perpetual distribution growth) over the life of the partnership. the GP commands 50% of available cash flow. Figure 78.Third Edition WACHOVIA CAPITAL MARKETS.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. Lifecycle Of MLP With 50/50 Splits--IDR Premium 20. it would have to make investments in excess of this 11. representing a 1.0% 8.5%. For simplicity. At year 0. LLC estimates 63 .0% 12. we assume the MLP targets a 10% return to investors (6. the partnership should have a cost of equity of approximately 11. 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. In other words.0% 10. As the partnership increases its distribution and triggers higher distribution tiers. At the extreme. which.0% 16. when the MLP is first created.MLP Primer -.0% Cost Of Equity 14.5% equity hurdle rate. Figure 78 illustrates the lifecycle of a hypothetical MLP with IDR tiers capped at 50% of cash flow. an MLP with IDRs needs to make increasingly larger (or more accretive) investments in order to prevent erosion in investor returns. increases the partnership’’s cost of equity.7% forward yield + 3. When 15% of cash flow is accruing to the GP. LLC EQUITY RESEARCH DEPARTMENT Figure 77. As a result.0% Total Cost Of Equity 18. equity owners demand a higher return because of the higher incremental risk that they carry. For two MLPs targeting an equal rate of return to unitholders. cost of equity should be higher than the cost of debt because creditors get paid before equity owners. Alternatively. In other words. 2% of cash flow accrues to the general partner. in turn. Again.

Citi. in our view.. Alerian Capital Management. Comparison Of MLP Indices Comparison of MLP indices Index launch date Ticker . our MLP index has delivered a historical ten-year average total return of approximately 18% (versus 6% for the S&P 500). However. an investor’’s required rate of return). up from the historical 4-6% rate during 1998-2004. it is this tax-advantaged structure that allows MLPs to trade at a premium to C-Corps. we believe it provides a better guide for LP cost of equity (i. we believe cost of equity under the capital asset pricing model (CAPM) does not capture the cost of GP equity.Master Limited Partnerships WACHOVIA CAPITAL MARKETS. LLC EQUITY RESEARCH DEPARTMENT CAPM Understates The Cost Of Equity As it relates to MLPs. in our view.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. four financial institutions (Wachovia. For our MLPs under coverage. and an average beta of 0. instead. and ultimately. the average cost of equity as defined by CAPM is about 7. LLC. Alerian.e. Emergence Of MLP Indices Due to the growth and prominence of the MLP sector over the past couple of years. and LLCs Standard & Poor's Standard & Poor's Source: Wachovia Capital Markets. it equates to excess returns for the investor. In comparison. 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%. 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. lower market capitalization threshold and unrestricted number of index constituents) provide a more representative picture of MLP industry performance. We estimate our universe of MLPs will increase distributions by an average of 9-10% in 2007 and 2008. in our view. and Standard & Poor’’s The primary advantage of the Wachovia MLP Index is that the broader index inclusion requirements (i. and LLCs MLPs. 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. the calculation is not calibrated to capture the increasingly higher percentage of cash flow that accrues to an MLP’’s general partner over time. which is significantly higher than the required rate of return as defined by CAPM methodology. If the MLP increases its distribution at a greater rate. 64 .. in our view. Figure 79. and LLCs Standard & Poor's MLPs. the fact remains that MLPs are tax-efficient vehicles to pass cash flow to unit holders. K. GPs.3). a market-risk premium of 5%. One explanation for the disparity between required rate of return and actual return is that investors could be underestimating future distribution growth.8% (assuming a risk-free rate of 4%. In other words. GPs. Citi. 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.e. The following chart outlines the differences between the indices.

LLC L. WCM Gathering & Processing MLP Index ii. WCM Marine Transportation MLP Index 5. 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.g. The Wachovia and Alerian instruments provide diversification for investors and are administratively less burdensome than direct ownership in MLPs (e. if the percentage change in the value of the index is positive. WCM Coal MLP Index 3. Wachovia introduced cash-settled call warrants linked to the performance of the Wachovia Composite MLP Index. The counterparty owns the underlying MLP and receives payments from the investor over the life of the swap based on a set rate. In October 2007. However. With more institutional investors involved in the sector. 65 . net of fees. 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. Upon exercise of the warrant. In May 2007. • BearLinx Alerian ETN. new financial products have been created to facilitate investment in the MLP sector. Source: Standard and Poor’’s and Wachovia Capital Markets. Financial Products Facilitate Participation In MLPs In the past few years.Third Edition WACHOVIA CAPITAL MARKETS. We expect additional structured products around the MLP market to be created over time to spur additional investment in the sector. an investor receives a synthetic security which mimics the performance of the underlying security. No principal protection on the ETN exists. investors receive a cash payment (settlement value) equal to the notional amount of the warrant multiplied by the percentage change. WCM Petroleum MLP Index i. WCM Natural Gas Pipelines MLP Index B. WCM Crude Oil MLP Index ii. This includes any distributions generated by the underlying MLP and the benefit of the MLP’’s price appreciation over the life of the swap. if the price of the MLP decreases over the swap's life.”” BSR investors receive distributions in the form of a monthly coupon. the MLPs have experienced an increase in options trading volume. 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. 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 MLP Sub-Indices And Related Bloomberg Tickers WCM MLP Sub-Indices WCM MLP Index 1. LLC EQUITY RESEARCH DEPARTMENT Figure 80. receive 1099s and not K-1 statements). WCM GP Composite Index 2. WCM Oil & Gas MLP Index 4. • Total return swaps.. Alerian Capital Management launched the BearLinx Alerian MLP Select Exchange Traded Note (ETN). WCM Propane MLP Index 6. Investors can also gain exposure to an MLP without direct ownership via a total return swap agreement. WCM Natural Gas MLP Index i. 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. WCM Midstream MLP Index A. In a total return swap. net of fees.MLP Primer -. • Wachovia MLP index warrant. • Options.

assets subject to commodity price risk. and cash distributions to the GP. and interest rate environment. Valuation Of MLPs A. MLP Option Contract Trading Volume 225. resulting in a higher total return.500 75. faster-growing MLPs should command a lower yield because it is assumed that the growth in cash flow would generate increases in distributions that.000 112. we focus on price-to-distributable cash flow (DCF) multiples. See ““Drivers of Performance –– Distribution Growth”” for additional information. Distributable cash flow is defined as the cash available to be distributed to limited unitholders after payments are made for sustaining capital expenditures. ranging from a high of 10. LLC EQUITY RESEARCH DEPARTMENT Figure 81. We believe the focus for MLPs should be on cash flow rather than earnings (or P/E). B. and management team.3%. we project a distribution growth rate over five years.Master Limited Partnerships WACHOVIA CAPITAL MARKETS. Growth prospects. Two-Stage Distribution (Dividend) Model Our primary tool for valuing MLPs is a two-stage distribution (dividend) discount model (DDM). 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. For example..000 37. would translate into greater appreciation of the underlying security. The disparity in yield among MLPs can be explained by several factors including risk profile (financial and operational).000 187.5%. Some investors will look at yield to determine relative value. our MLP universe has had a median yield of 7. 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.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. D. Enterprise Value-To-Adjusted EBITDA When comparing MLPs’’ value on the basis of an EV-to-EBITDA multiple. Our DDM assumes a required rate of return (ROR) of 9. depending upon the individual MLPs outlook. Risk profile.0-11.1%. we use adjusted EBITDA rather than adjusted enterprise value. which employs a risk-free rate (using the 10-year Treasury yield as our benchmark) and a market-risk premium. weather risk. The most common valuation method typically focuses on yield due to the fact that MLPs are income-oriented securities. EBITDA generated by the partnership is used to support the cash distributions 66 .0%. growth prospects.g.500 Daily trading volume 150. other cash obligations. For our DDM model. higher leverage.0-3. C. We believe the disparity in yield can also be partially explained by the growth profile of various MLPs. Price-To-Distributable Cash Flow To determine relative value. Distribution Yield MLPs can be valued using a number of techniques. From 1998 to 2007. MLPs with profiles that are perceived to be riskier (e. We then use a long-term growth rate of 0. asset mix.8% to a low of 5. in turn.

it is the distribution that could be paid such that the distribution coverage ratio equals 1. Therefore. in order to produce an ““apples-to-apples”” comparison. 2. and growth orientation of MLP investments has changed over time.MLP Primer -. 3. Figure 83.9x = = = = EV EV $200 $200 ÷ ÷ ÷ ÷ adjusted EBITDA EBITDA . 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. LLC E. However. with an average of 238 bps over the ten-year period from January 1998 to 2007. Alternatively. Figure 82. For example. enterprise value reflects only the interest of the limited partners. We believe this is the most appropriate way to adjust EBITDA when comparing it to enterprise value. LLC EQUITY RESEARCH DEPARTMENT to both the limited and general partners. Midstream MLP Spread To The 10-Year Treasury (1998-2007) 600 MLP Yield Spread To 10-Yr Treasury (Bps) 500 400 300 200 100 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: FactSet F. 67 . What Is Maximum Potential Distribution? Maximum potential distribution (MPD). Yields on midstream MLPs have maintained spreads over the 10-year treasury as wide as 512 bps and as narrow as 16 bps.5 million from EBITDA in calculating our EV-to-adjusted EBITDA multiple. in theory. we would deduct approximately $2. size.($25 × 10%) $23 Source: Wachovia Capital Markets. pay if it distributed all of its sustainable available cash flow. 4 EV-to-adjusted EBITDA EV-to-adjusted EBITDA EV-to-adjusted EBITDA 8. Spread Versus The 10-Year Treasury The midstream MLP yield is currently trading at approximately 400bps above the 10-year treasury. we deduct the cash flow accruing to the general partner from EBITDA. Enterprise Value-To-Adjusted EBITDA Calculation 1. the percentage of cash flow accruing to its general partner. Potential distribution upside based on MPD is a function of a partnership's sustainable cash flow.Third Edition WACHOVIA CAPITAL MARKETS.(EBITDA × % cash flow to GP) $25 . 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. This is the maximum distribution a partnership could. we caution that measuring current spreads versus a historical average may not be valid as the number.0x. However. and its current distribution coverage ratio.

g. A ratio above 1 indicates that the partnership is generating more than sufficient cash flow to pay its distribution. other factors to consider before investing include a partnership’’s risk profile (e. in our view. DCF is divided by the declared annual distribution. We prefer to calculate the distribution coverage ratio as available cash flow (i. LLC EQUITY RESEARCH DEPARTMENT MPD is a proxy for free cash flow to limited partners. financial leverage).2-1. while the latter measures excess cash flow available to pay both limited partners and the general partner. MPD should not be used in isolation to analyze MLPs. • 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. growth outlook. before the subtraction of cash paid to the GP) divided by the cash distributions paid to both the LP unit holders and GP.. 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. In concert with MPD. although we suspect that it may sometimes be erroneously defined as such. in general. MPD Is Different Than Distributable Cash Flow (DCF) MPD is different than distributable cash flow (DCF).e. their distribution coverage ratios are often above 1. The latter is typically the cash flow that is left after maintenance capital expenditure.3x because of the impact of weather on cash flow. • 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. The former more precisely quantifies free cash flow to limited partners. Coal MLPs typically maintain a distribution coverage ratio of 1. For example. To do so. 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. This is to ensure that MPD is based on a sustainable cash flow base. This is to account for distributions associated with anticipated equity issuances. cash interest expense. in our view. Consequently. DCF should be more appropriately used as a measure to determine the safety of the declared distribution.Master Limited Partnerships WACHOVIA CAPITAL MARKETS. and distributions paid to the general partner. reflecting their exposure to coal prices. 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. 68 . Caveat -. In other words. propane MLPs. DCF is not equivalent to how high the distribution can be set. This calculation determines the distribution coverage ratio. Thus. set their distributions below MPD to maintain a coverage ratio of at least 1.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.2x or greater. and management team.. we consider price-to-MPD multiples in addition to price-to-DCF multiples. in our view.

gathering fees. A decline in drilling activity. which could result in lower earnings and cash flow. which could negatively affect cash flow and earnings in the near term. are dependent on cold weather for their earnings. Thus. and (4) underlying MLP equity issuances benefit the GP regardless of whether the acquisition or project is accretive. the GP of the partnership and the parent company that owns the GP are controlled and run by the same management teams. A severe economic downturn could reduce the demand for energy and commodity products. Risks Growth is dependent on access to external capital. Coal is one of the most heavily regulated industries in the country. and ultimately. propane demand. and local authorities.MLP Primer -. Because MLPs pay out the majority all of their cash to unit holders. Regulatory risk. For certain MLPs. Even though these issues may appear daunting. volume. particularly those involved in the transportation (pipeline) and distribution of propane. A terrorist attack or environmental incident could disrupt the operations of an MLP. Energy demand is closely linked to overall economic growth. MLPs’’ ability to grow is dependent. on their ability to complete identified organic growth projects on time and on budget and/or to successfully identify and execute future acquisitions. many MLPs have assets tied to unconventional shale plays. as 2008 progresses. gathering and processing. this could inhibit longterm distribution growth. could be negatively affected. Execution risk related to acquisitions and organic projects. Specific to the former. investor psychology could be influenced by election rhetoric concerning tax laws. Weather risk. Tax and legislative risk. throughput volume into processing plants. which typically have a higher cost structure. Some MLPs have significant exposure to commodity price fluctuations including partnerships involved in oil and gas production. and coal. such as pipelines and storage assets. 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. and therefore. Some MLPs. Any number of regulatory hurdles could affect MLPs’’ ability to grow. Commodity price risk. 69 . If commodity prices are weaker than expected. (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. Headline risk exists related to potential legislative changes on the treatment of carried interest and challenges to FERC tariff regulations. In particular. future cash flow and distribution growth rates could be adversely affected. If an MLP’’s operating region experiences unseasonably warm weather.Third Edition WACHOVIA CAPITAL MARKETS. A severe economic downturn. A slowdown in drilling activity could reduce oil and gas producer revenue. MLP management teams have been successful in dealing with similar uncertainties related to the MLP landscape over recent years. MLPs are regulated across a number of industries. MLP valuations could also be negatively affected if Congress revoked MLPs’’ special tax treatment. LLC EQUITY RESEARCH DEPARTMENT XII. If the MLPs are unsuccessful in completing projects on time or within budget or if the partnerships cannot identify attractive acquisitions. pipeline volume. in part. Environmental incidents and terrorism. state. lower commodity prices are more likely to affect drilling in these regions before drilling is curtailed in more convention oil and gas fields. being subject to regulation by federal. Some potential areas of conflict include (1) the price at which the MLP is acquiring assets from the GP. Conflicts of interest with the GP. Intrastate pipelines are typically regulated by the FERC. (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 that have been designated by the Department of Homeland Security as potential terrorist targets. they must continually access the debt and equity markets to finance growth.

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MLP Primer -.Third Edition WACHOVIA CAPITAL MARKETS. Appendix 71 . LLC EQUITY RESEARCH DEPARTMENT XIII.

3P reserves (proved + probable + possible). LLC Future price Contango. Available cash flow. A market condition in which future commodity prices are lower than spot prices. Figure 85. Amine. Possible reserves indicate there is at least a 10 % probability or ““less likely than probable”” chance that the reserves will be producing. The higher future price is often due to the cost associated with storing and insuring the underlying commodity. A market condition in which future commodity prices are greater than spot prices. 2P reserves (proved + probable). LLC Future price Base gas (or cushion gas). and/or salt cavern) to maintain adequate pressure and deliverability rates throughout the withdrawal season. Contango Market Contango Market Conditions Commodity price $150 $100 $50 $0 Spot price Source: Wachovia Capital Markets.. Blendstocks. For example. Backwardation. Amine is a type of chemical used to remove impurities from natural gas in order to make the natural gas suitable for pipeline transport. aquifer.e. 72 . Proved reserves indicate there is at least a 90% probability or ““reasonable certainty”” that the reserves will be producing in the future.Master Limited Partnerships WACHOVIA CAPITAL MARKETS. blendstocks are mixed with motor gasoline to increase the gasoline’’s octane or oxygen content. Base gas refers to the volume of gas that is needed as permanent inventory in a storage reservoir (i. depleted natural gas or oil field. A backwardated market usually occurs when demand exceeds supply. A blendstock is a liquid compound that is mixed with petroleum products to improve the petroleum’’s characteristics. LLC EQUITY RESEARCH DEPARTMENT MLP Glossary Of Terms 1P reserves (proved). Available cash flow is the cash flow available to the common unit holders and the general partner. Figure 84. 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. Backwardated Market Backwardated Market Conditions Commodity price $150 $100 $50 $0 Spot price Source: Wachovia Capital Markets.

Dirty hedge.e. Dekatherm. Deliverability is usually expressed in terms of millions of cubic feet per day (MMcf/day) or dekatherms per day. Cash or adjusted yield. However. Natural gas is compressed to a higher pressure to facilitate delivery of gas from one point to another. The injection capacity of a storage facility is also variable. 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. injection capacity is usually expressed in MMcf/day or dekatherms/day. the cash yield would be 7. limited liability). DCF is the cash flow available to be paid to common unit holders after payments to the general partner. 73 . and is dependent on factors comparable to those that determine deliverability. the MLP is required to distribute all of its ““available cash. Injection capacity (or rate). Distributable cash flow (DCF). which may have a claim on corporate earnings and assets. The current yield is calculated by taking the current declared quarterly distribution annualized and dividing it by current stock price. the deliverability rate it is at its highest when the reservoir is most full and declines as working gas is withdrawn..Third Edition WACHOVIA CAPITAL MARKETS. tax authorities. withdrawal rate. Figure 86. In a typical partnership agreement.8% (current yield / [1 . LLC OR EBITDA (-) interest expense (-) maintenance capex Available cash flow (-) Cash flow to general partner Distributable cash flow Distribution. As with deliverability. and provides an alternate definition of the required rate of return (or cost of equity) of a given asset.”” MLPs typically distribute all available cash flow (i. A storage facility’’s injection rate is the amount of gas that can be injected into a storage facility on a daily basis. In contrast to the deliverability rate. As a separate legal standing entity. Methane found in coal seams. For example. In general. One dekatherm is the approximate energy content of 1. separate from its shareholders and employees.. minus the risk-free rate. Corporation. Compression. A corporation (C Corp. The shareholders contribute capital. A dekatherm is a measurement of energy content. cash flow from operations less maintenance capex) to unit holders in the form of distributions (similar to dividends). if the GP is receiving 10% of an MLP’’s total distributions and the partnership’’s units trade at a 7% yield.000 cubic feet of natural gas (or 1 Mcf). Current yield. management typically has some discretion in how much cash flow it chooses to pay out. Coalbed methane (CBM). the injection rate is at its lowest when the reservoir is most full and increases as working gas is withdrawn. 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. A dirty hedge is the use of crude oil derivatives to hedge natural gas liquids (NGL) exposure. but have no liability to business creditors.MLP Primer -.) is a distinct legal entity. We define cash yield as an MLP’’s current yield adjusted for its GP share of cash flow.% of cash distributions paid to GP]). 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). A storage process in which the same quantity of natural gas is injected into and withdrawn from storage within a certain period of time. 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. or any other parties. Cycling. Deliverability. The CAPM maps the relationship between risk and expected return. a corporation protects its owners from being personally liable in the event that the company is sued (i.e. or withdrawal capacity). Capital asset pricing model (CAPM).

5 million on an annual basis (or a 12. LLC Distribution coverage ratio = Available cash flow (to GP and LP) Distribution tiers. The FERC is an independent agency that regulates the interstate transmission of electricity. would be expected to generate approximately $12. For example. Figure 87. Earnings per unit (EPU). the higher the ratio is. and oil. LLC Distribution yield. the processor receives a fee for processing. Investors typically associate as the ““cushion”” a partnership has in paying its cash distribution.Master Limited Partnerships WACHOVIA CAPITAL MARKETS.gov) 74 . a $100 million investment at an 8x EBITDA multiple. Fee-based. A dropdown is the sale of an asset from the parent company (or sponsor company) to the underlying partnership. An EBITDA multiple is the expected return an acquisition or organic growth project is estimated to generate. The coverage ratio indicates the cash available for distribution for every dollar to be distributed.00 $2. therefore. 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. An MLPs’’ EPU is synonymous with a C corp. Dropdown.5% return). (Definition source –– www. taxes. up to: $1.00 $4. It is also associated with the sale of products after they are refined or processed.00 $3. Excess cash flow is the cash flow that remains after distributions have been paid to common and subordinated unit holders and general partner. Expansion capital expenditures (CAPEX).ferc. as well as licensing hydropower projects. Under the fee-based arrangement. 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. EBITDA is a non-GAAP measure used to provide an approximation of a company’’s profitability.’’s earnings per share (EPS). The distribution yield is synonymous to a dividend yield. Federal Energy Regulatory Commission (FERC). EBITDA multiple. The producer retains ownership of both the dry gas and the NGLs. natural gas. In this context. See definition for Organic capex. LLC EQUITY RESEARCH DEPARTMENT Distribution coverage ratio. Hypothetical Distribution Tiers Percent of cash flow to: Distribution tiers Tier 1 LP 98% 85% 75% 50% GP 2% 15% 25% 50% LP distr.00 Distribution tiers Tier 2 Tier 3 Tier 4 (high splits) Thresholds Percent allocations Source: Wachovia Capital Markets. Figure 88. depreciation and amortization (EBITDA). The ratio is calculated by dividing available cash flow by distributions paid. the greater the safety of the distribution. Downstream relates to the refining and marketing sectors of the energy industry. This measure excludes the potential distortion that accounting and financing rules may have on a company’’s earnings. Earnings before interest. Downstream. Excess cash flow. Distribution Coverage Ratio Calculation Distributions paid (to GP and LP) Source: Wachovia Capital Markets. Dropdowns can also be defined as a transaction between two affiliated companies. The FERC also reviews proposals to build liquefied natural gas terminals and interstate natural gas pipelines. 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.

.e. ethane. We define forward yield as an MLP’’s next four quarterly distributions (i. The LP (1) provides capital. LPGs are typically a mixed form of propane and butane. provincial. except the payment of distributions is in stock instead of cash. An intrastate pipeline is a pipeline that operates within one state. Intrastate pipelines are regulated by state. In most partnerships. Interstate pipelines are regulated by the FERC. I-shares do not generate UBTI. deductions. I-Shares. gain. This is known as the 50/50. normal butane. total distributions received over the next 12 months) divided by an MLP’’s current unit price. 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.MLP Primer -. An organic compound made of carbon and hydrogen atoms used as sources of energy. Limited partner. LLC EQUITY RESEARCH DEPARTMENT Forward yield.”” 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. Incentive distribution rights.. April 1 to October 31) during which producers and pipelines inject natural gas into storage for use during the winter months. An interstate pipeline is a pipeline that transports product across state lines. (2) has no role in the MLPs’’ operations or management. Fractionation is the process that involves the separation of the NGLs into discrete NGL purity products (i. This refers to the period of time (i. Investors in i-shares receive a 1099 statement (not K-1). and (3) is eligible to receive an incentive distribution (through the ownership of the MLPs’’ incentive distribution rights). General partner (GP).Third Edition WACHOVIA CAPITAL MARKETS. propane. and credits. 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. whereas unit holders of a standard MLP structure (LP) do not have this right. Keep-whole.e. iso-butane. LNG is natural gas that has been condensed into liquid form (via either pressure or refrigeration). Intrastate pipelines. IDRs can reach a tier wherein the GP is receiving 50% of every incremental dollar paid to the LP unit holders. Hydrocarbon. Incentive distribution agreement. Fracturing. and crude oil. The LLC structure affords the additional benefit of better corporate governance relative to the typical MLP structure. or local jurisdictions. LPGs are created (as a by-product) during the refining of crude oil or from natural gas production. coal. Liquid petroleum gases. LLC unit holders have voting rights. K-1 statement. The GP (1) manages the day-to-day operations of the partnership. 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. including natural gas. The crack in the rock exposes an increased surface area that allows a greater amount of natural gas to be produced. (2) generally has a 2% ownership stake in the partnership. 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. Fractionation.e. loss. 75 . The LLC structure provides some additional benefits as compared to the LP structure. A K-1 is similar to Form 1099 received by shareholders of a corporation. and (3) receives cash distributions. A holder of a keepwhole contract would be long NGL prices and short natural gas prices. In a keep-whole arrangement. By extracting the NGLs. the processor retains title to the NGLs produced from the natural gas stream to sell at market prices. Liquefaction. Liquefied natural gas.. Injection season. Interstate pipelines. Limited liability company. At inception. the volume and BTU content of the dry gas is reduced. or ““high splits”” tier. Frac spread. and natural gasoline). This is referred to as ““shrinkage. See definition for processing margin. I-shares are equivalent to MLP units in most aspects. The process that changes natural gas from a gaseous state to a liquid state.

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. Processing. Oil or gas play. NGLs are extracted from the raw natural gas stream into a liquid mix (consisting of ethane. Midstream relates to the gathering. Pipeline quality gas. and cash flow to the GP).0x (no excess cash flow).Master Limited Partnerships WACHOVIA CAPITAL MARKETS. 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. A play is a proven geological formation that contains petroleum and/or natural gas. they are not fully shielded in the way shareholders are. It is the most commonly found hydrocarbon gas. Maintenance capital expenditure. Organic capex is investments used to expand a company’’s operating capacity or operating income over the long term. As a practical matter. Looping involves the installation of additional pipeline next to an existing pipeline to increase the system’’s capacity. A partnership is not considered to be a separate entity. MQD is the minimum distribution the partnership plans to pay to its common and subordinated unit holders. and natural gasoline). Master limited partnership. Under percent of liquids (POL) contracts. Partnership. is an aggregate of all the partners. Natural gas liquids. expenses. The NGLs are then typically transported via pipelines to fractionation facilities. Maximum potential distribution. Midstream. but before it is distributed to the end use market for consumption. Parking is the temporary storage of natural gas for a pipeline customer. MLPs are limited partnership investment vehicles consisting of units (rather than shares) that are traded on public exchanges. but instead. Pricing differential. (Source: NAPTP) Percent of proceeds or liquids. Looping. Pipeline customers may park natural gas to avoid selling the gas at a low price. Long. Organic growth capital expenditure. This is natural gas that has impurities removed. 76 . This right survives the termination of a partner’’s interest. MLPs are also commonly referred to as ““partnerships. The processor receives a percent of the resulting dry gas and/or NGLs. LLC EQUITY RESEARCH DEPARTMENT Local distribution company. it is the distribution that could be paid such that he distribution coverage ratio equals 1. Methane is also known as natural gas. Pipeline quality gas is typically 95% methane. however. MPD represents the maximum distribution a partnership could. although limited partners enjoy limits on their liability. Minimum quarterly distribution. or storage of a product after it is produced from the wellhead. propane. pay if it distributed all of its sustainable cash flow. Maintenance capex is the investment required to maintain the partnership’’s existing asset. All partners are liable for the obligations of the partnership. If a holder is ““long”” natural gas. the processor gathers and processes the natural gas and then sells the residue gas and produced NGLs at market prices. maintenance capex. iso-butane. the processor receives a percentage of the NGLs only.”” Methane. treating. transportation. MLPs consist of a general partner and limited partners. In a percentage of proceeds (POP) arrangement. this is unlikely to happen to a PTP investor. Alternatively. butane. Holders of POP or POL contracts are effectively long on natural gas or NGL prices. The partnership does not guarantee its ability to pay out the MQD during any quarter. upon initial public offering (assuming the company is able to generate sufficient cash flow from its operations after the payment of fees. 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. Natural gas processing involves the separation of raw natural gas into ““pipeline quality”” gas and natural gas liquids. it owns natural gas and benefit when the price increases. The pricing differential is the difference between a pipeline’’s contractual cost of natural gas supply and the market price. Parking. in theory. processing.

The process that changes natural gas from a liquid state to a gaseous state. had been previously completed) for production. etc.e. The index system is based on the Producer Price Index for finished goods plus 1. LLC EQUITY RESEARCH DEPARTMENT Production decline rate. natural gas. Processing margin. kerosene. In addition. Subordinated units are subordinate in the capital structure to common units. the subordination period could be terminated at an earlier date if the partnership achieves certain criteria. The total gas in storage refers to the volume of storage in the underground facility at a particular time. PUDs are reserves that are recovered through new wells (on undrilled acreage) or from existing wells that require significant capital expenditure (to be recompleted). PV-10 (standardized measure). This is a measure of the decline in production from crude oil and natural gas reserves. Proved undeveloped reserves. PV-10 is the after tax present value of estimated future cash flow of proved reserves. Residue gas. Shale is a form of sedimentary rock that contains crude oil or natural gas. diesel. Regasification. For a period of time. Subordinated units increase the likelihood that (during the subordinated period) there will be sufficient available cash to be distributed to the common units. jet fuel. A royalty is a type of payment received based on either a percentage of sales revenue or a fixed price per unit sold. Reside gas is the natural gas that remains after processing and treating. The subordination period typically last for three years from the date of the partnership’’s initial public offering.MLP Primer -. 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. These products are primarily used as fuels by consumers (gasoline. PDPs are reserves that can be recovered via existing wells and through the use of existing equipment and operations. The tax deferral rate is an approximation provided by the partnership and is only effective for a certain period of time. subordinated units are not entitled to distribution arrearages.e. Refined petroleum products. Upon expiration of the subordinated period. However. If a holder is ““short”” natural gas. The current index is valid for a five-year period that began on July 1. 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.. For example. Tax deferral rate.3%. The amount of natural gas or NGLs transported through a pipeline system. the buyer is obligated to pay for a product (i. 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. the subordinated units will not be entitled to receive distributions until the common units have received the MQD plus any arrearages from prior quarters. Under this type of agreement. The processing margin is the difference between the price of natural gas and a composite price for NGLs on a BTU-equivalent basis. Shale. 2006. and heating oil). the units will convert to common units on a one-for-one basis. Companies are allowed to increase their rates on an annual basis on July 1. Total gas in storage. Producer Price Index (PPI) adjustment. 2011. crude oil.Third Edition WACHOVIA CAPITAL MARKETS. they benefit when the price of natural gas declines. Subordination period.. Subordinated units. Proved developed producing reserves. Crude oil refineries process and refine oil into refined petroleum products. and extends through July 1. Take-or-pay contract. A percentage of the cash distribution to the unitholder that is tax deferred until the security is sold. Short. Royalty payment. The tax deferral rate on distributions ranges from 40-90%. 77 . The calculation is based on current commodity prices and is discounted at 10%. Recompletion. Throughput. NGLs.) regardless of whether the buyer takes delivery of the product.

Working gas is available to the marketplace. MLPs do not realize a tax benefit on their debt (since they do not pay corporate taxes). 401-K. Well bore. 78 .e. A workover is the operations on a producing well to resume or increase production. and endowment funds) is considered ““income earned from business activities unrelated to the entity’’s tax-exempt purpose”” or UBTI. WACC represents the cost to the entity of financing and should be the hurdle rate for new investments.g. it is the proportional weight of equity and debt in a partnership’’s capital structure. MLP units are synonymous with C Corp. Weighted average cost of capital. installed equipment. Unlike C Corps. As it relates to MLPs. Upstream relates to the production of oil and natural gas from the wellhead (also known as exploration and production). Working gas capacity. amine) to remove the impurities. Treating. LLC EQUITY RESEARCH DEPARTMENT Total gas storage capacity. Working gas is the volume of gas in the reservoir above the level of base gas. A well bore is the hole created by a drill bit. pension accounts. November 1 to March 1) in which natural gas supplies are withdrawn from storage for use during the heating season. Workover. Working gas capacity refers to total gas storage capacity minus base gas.. Natural gas gathered with impurities higher than what is allowed by pipeline quality standards is treated with liquid chemicals (i.. MLP income received by a tax-exempt entity (e. 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.e. Upstream. Units. A tax-exempt entity that receives more than $1. The wellhead is also the point at which natural gas or crude oil emerges from the ground to the surface..’’s shares. The natural gas is treated at a separate facility before being processed.000 per year of UBTI may be held liable for the tax on the UBTI. Wellhead. and operating procedures at the site. The equipment at the surface of a crude oil or natural gas well used to control the pressure of the well. Withdrawal season. The period of time (i. Unrelated taxable business income.Master Limited Partnerships WACHOVIA CAPITAL MARKETS. Working gas.

Third Edition WACHOVIA CAPITAL MARKETS. 79 . MMBtu/d: One million Btus per day. LLC EQUITY RESEARCH DEPARTMENT Energy Industry Abbreviations Bbls: Barrels Bcf/d: One billion cubic feet per day MBtu: One thousand Btus. MBbls: One thousand barrels. MM: In millions. MMBbls: One million barrels. MMBbls/d: One million barrels per day. MBbls/d: One thousand barrels per day. Mcf: One thousand cubic feet of natural gas. MMcf/d: One million cubic feet of natural gas per day. Tcf: One trillion cubic feet of gas. MMcf: One million cubic feet of natural gas. MMBtu: One million Btus.MLP Primer -.

000 Btu (nominal) = 1.000.000.000.000.9 Btu (actual) 1 barrel of oil = 6 Mcf of natural gas 1 barrel of oil = 5.000 cf 1 Bcf = 1.000.1667 barrels of oil 1 MBtu of natural gas = 0.000 cf 1 MMcf = 1.026.000 cf 1.1724 barrels of oil 80 .000.Master Limited Partnerships WACHOVIA CAPITAL MARKETS.000 cf 1 Tcf = 1.8 MBtu of natural gas 1 Mcf of natural gas = 0. LLC EQUITY RESEARCH DEPARTMENT Basic Energy Conversion Factors 1 barrel = 42 gallons 1 Mcf = 1.

40 $0.40 $0.42 $0.45 $0.72 $0.99 $1.59 $0.99 $0.38 $0.44 $0.63 $0.64 $0.38 $0.43 $0.15 $0.47 $0.53 $0.52 $0.38 $0.40 $0.35 $0.55 $0.51 $0.61 $0.47 $0.41 $0.60 $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 $0.65 $0.38 $0.50 $0.46 $0.29 $0.45 $0.44 $0.63 $0.95 $0.70 $0.67 $0.33 $0.29 $0.32 $0.54 $0.50 $0.45 $0.31 $0.94 $0.49 $0.53 $0.62 $0.55 $0.33 $0.68 $0. LLC EQUITY RESEARCH DEPARTMENT Figure 89.28 $0.Third Edition WACHOVIA CAPITAL MARKETS.60 $0.33 $0.38 $0.55 $0.42 $0.45 $0.31 $0.46 $0.44 $0.43 $0.25 $0.40 $0.56 $0.41 $0.42 $0.72 $0.96 $0.99 $0.78 $0.70 $0.29 $0.43 $0.50 $0.25 $0.50 $0.MLP Primer -.33 $0.43 $0.43 $0.33 50% Tier $0.49 $0.44 $0.31 $0.53 $0.38 $0.54 $0.38 $0.50 $0.61 $0.64 $0.36 $0.58 $0.50 $0.43 $0.56 $0.25 $0.33 $0.40 $0.70 $0.31 $0.28 $0.49 $0.28 $0.46 $0.33 $0.28 25% Tier $0.82 $0.44 $0.36 $0.38 $0.40 $0.76 $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 Coal Shipping MLPs Propane MLP Upstream MLPs Drop Down MLPs Midstream MLPs 81 .38 $0.59 $0.58 $0.70 $0.46 $0.38 Current Quarterly Distribution $0.50 $0.28 $0.94 $0.45 $0.33 $0.53 $0.23 $0.35 $0.28 $0.39 $0.57 $0.49 $0.70 $0.50 $0.35 $0.75 $0.50 $0.87 $0.53 $0.35 $0.41 $0.63 $0.44 $0.60 $0.59 $0.45 $0.28 $0.59 $0.39 $0.29 $0.44 $0.53 $0.45 $0.40 $0.25 $0.44 $0.69 $0.39 $0.60 $0.56 $0.87 $0.62 $0.68 $0.83 $0.90 $0.51 $0.33 $0.55 $0.75 $0.90 $0.66 $0.04 $0.59 $0.74 $0.55 $0.35 $0.53 $0.40 $0.45 $0.46 $0.33 $0.68 $0.43 $0.59 $0.30 $0.36 $0.66 $0.96 $0.54 $0.53 $0.45 $0.32 $0.15 $0.70 $0.71 $0.53 $0.18 $0.53 $0.63 $0.30 $0.50 $0.23 $0.62 $0.18 $0.45 $0.50 $0.47 $0.36 $0.40 $0.50 $0.42 $0.60 $0.85 $0.56 $0.56 $0.48 $0.40 $0.63 $0.95 $0.45 $0.42 $0.53 $0.47 $0.75 $0.53 $0.40 $0.

Texas To Mississippi Expansion Southeast Expansion Denali .Master Limited Partnerships WACHOVIA CAPITAL MARKETS. LLC EQUITY RESEARCH DEPARTMENT Figure 90.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 MLP 82 .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. Major U. 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. LP & TC Pipelines. ConocoPhillips. & 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.S. Pipeline Projects Sponsor Boardwalk Pipeline Partners Boardwalk Pipeline Partners Boardwalk Pipeline Partners Boardwalk Pipeline Partners BP.

MLP Primer -. LLC EQUITY RESEARCH DEPARTMENT Figure 91. 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 X X X X X X X X X X X X X X X X X X X X X 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 83 .Third Edition 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 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 84 .Master Limited Partnerships WACHOVIA CAPITAL MARKETS. LLC EQUITY RESEARCH DEPARTMENT Figure 92.

MLP Primer -. LLC EQUITY RESEARCH DEPARTMENT Figure 93.Third Edition 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 X X X X X 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 85 .

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 X X X X X X X X X X X X X Source: National Association of Publicly Traded Partnerships 86 . LLC EQUITY RESEARCH DEPARTMENT Figure 94.

L. Enterprise Product Partners.P. L. U. L.P.P. Inc. LLC EQUITY RESEARCH DEPARTMENT Figure 95. Shipping Partners. L. L. L. Energy Transfer Partners. Atlas Energy Resources. NuStar GP Holdings. Dorchester Minerals Management L. Cheniere Energy Partners. (Morgan Stanley Capital Group Inc. Rio Vista Energy Partners. Enterprise Products Partners. Quest Energy Partners. DCP Midstream. L. Global Partners. Teekay Shipping Corporation Teekay Shipping Corporation The Heritage Group (and others) TransCanada Transmontaigne. DCP Midstream Partners.P. Exterran Holdings Inc. Penn Octane Corp. Amerigas Partners.P. L. Western Gas Partners. L. L. L. L. Exterran Energy Partners. Teekay Offshore Partners. Williams Pipeline Partners.P. StarGas Partners. L. Kestrel Heat. Penn Virginia GP Holdings. Quicksilver Resources. L. L.P.MLP Primer -. Loews Corporation Magellan Midstream Holdings. Transmontaigne Partners. L. LLC Atlas Pipeline Partners. L. Targa Resources Partners. L. L. OSG America. L.P. L.P.P. L. L. Spectra Energy Sunoco.S.P. L. Inc. L.P. SemGroup. L.P.P. L. Encore Acquisition Company Energy Transfer Equity.P.P. SemGroup Energy Partners.P. Inc.P. L.P. L.P. Cheniere Energy Inc. Constellation Energy Partners.P. TEPPCO Partners. L.P. L.P. Sunoco Logistics Partners.P. L. K-Sea Transportation Partners. L. Inc.P. Inc. Robertson. Inc. Jr.P.P. L.P.P. United States Shipping Master. Regency Energy Partners. L.P. Crosstex Energy.P.P. L.P.P. Buckeye Partners. Inc. 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 87 . Navios Maritime Partners L. Eagle Rock Energy Partners. Magellan Midstream Partners.P. Ferrellgas. Inergy. Constellation Energy Group Corbin J. L. Martin Midstream Partners. L.P. L. L.P. El Paso Corporation Enbridge. L.P. L. LLC (which is a 50/50 joint venture between Spectra Energy / ConocoPhillips) Denbury Resources. L.P. L. Holly Energy Partners.P.P. Quicksilver Gas Service. EV Energy Partners. Enervest and EnCap Enterprise GP Holdings. Spectra Energy Partners. Inc. Atlas GP Holdings.P. L. L.P.P. Ferrelgas Partners. Kinder Morgan. Williams Partners.P. Overseas Shipholding Group Inc. Hiland Holdings GP.P. Holly Corporation Inergy Holdings. Capital Products Partners. L.P. L. Duncan Energy Partners. Inc. LLC Capital Maritime & Trading Corp. L. Quest Resource Corp.P. Kinder Morgan Energy Partners. LLC ONEOK.P. Encore Energy Partners.P. L. Pioneer Southwest Energy Partners. L.P.P.P.P.P.P.P.) UGI Corp. 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. Calumet Specialty Products Partners.P.P. K-Sea General Partner. Penn Virginia Resource Partners. GE Energy Financial Services Global Companies LLC and Global Montello Group Corp. L. Inc. L. Martin Resource Management Corp. L. Hiland Partners. L. NuStar Energy L. L. L. Natural Resource Partners. Natural Gas Partners Navios Maritime Holdings Inc. Buckeye GP Holdings. Anadarko Petroleum Corp. L.P. TC Pipelines.P.P.P. L.P.Third Edition WACHOVIA CAPITAL MARKETS.P. Genesis Energy. Atlas America. Inc. L. L. Targa Resources. ONEOK Partners. Crosstex Energy. LLC Pioneer Natural Resources Plains GP Holdings. Boardwalk Pipeline Partners. Dorchester Minerals. Enbridge Energy Partners.P. L. Enterprise GP Holdings.P. GPs And Their Underlying MLPs Publicly Traded GP Interest (except where noted) Alliance Holdings GP. L.P. El Paso Pipeline Partners. L. L.P. L.P. L. Plains All American Pipeline.P. Teekay LNG Partners.

544 $12.1% 7.953 $382 $1.97 $16.200 $1.8% 8.47 $65.89 $60.844 $2.140 $7.9% 7.79 $21.01 $23.113 410.50 $51.365 184.74 $28.89 $23.0% 11.328 $2.696 $608 $483 $283 $732 $2.5% 10.0% 5. LLC EQUITY RESEARCH DEPARTMENT Figure 96.21 $55.0% 7.5% 7.7% 6.1% 9.60 $48.22 $18.025 457.378 226.516 $1.8% 7.407 231.30 $13.382 55.000 114.92 $12.439 151.9% 5.781 243.68 $24.954 $462 $640 $2.62 $24.324 $411 $639 $399 $731 $2.212 $1.81 $11.033 $4.51 $12.75 $38.66 $16.6% 7.384 $1.683 $567 $3.01 $31.021 $1.706 42.7% 8.00 $53.47 $54.60 $19.10 $30.00 $25.53 $18.614 $2.93 $9.388 $4.24 $23.88 $22.50 $57.10 $37.00 $28.994 7.306 $1.43 $26.0% 7.79 $52.934 87.8% 6.41 $47.726 $1.046 10.061 353.2% 7.02 $20.53 $33.133 4.45 $24.4% 8.96 $41.115 3-Month Avg.2% 6.45 $15.50 $58.54 $37.38 $26.73 $44.65 $41.99 $29.11 $21.00 $38.117 $5.60 $20.32 $30.20 $14.2% 6.8% 8.373 $2.920 $711 $3.410 $676 $846 $1.3% 4.00 $19.50 $46.31 $43.246 27.465 69.517 $3.8% 9.90 $41.33 $28.12 $35.216 244.264 71.552 $725 $818 $556 $1.762 $1.3% 8.66 $29.90 $19.5% 9.2% 8.20 $13.10 $26.22 $14.05 $30.0% 4.33 $25.70 $51.88 $32.99 $42.013 182. MLP Market Data MLP Market Data ($MM.84 $31.367 $353 $4.660 $2.10 $46.570 Est.01 $39.40 $25.04 $37.911 $2.00 $21.725 $2. 285.57 $35.1% 8.40 $38.736 $1.558 238. 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 88 General Partnerships Coal Shipping MLPs Propane MLPs Upstream MLPs Drop Down MLPs Midstream MLPs .187 71.64 $63.12 $33.19 $31.229 $687 $1.86 $2.00 $62.237 $2.258 15.853 $2.9% 0.75 $19.897 34.022 $818 $799 $2.410 $676 $843 $1.99 $49.51 $33.4% 13.7% 6.660 $223.1% 12.950 10.00 $17.554 $456 $2.9% 9.11 $20.56 $21.696 35.39 Market Cap $1.74 $40.187 $145.1% 6.696 138.71 $19.194 132.11 $32.279 55.988 $1.5% 6.00 $32.726 $470 $1.7% 7.17 $36.50 $69.61 $41.358 33.079 103.08 $36.61 $21.570 133.13 $27.187 $1.48 $20.0% 8.437 $28 $1.188 338.2% 9.98 $20.915 $748 $640 $294 $481 $2.03 $32.29 $38.193 93.00 $31.994 28.25 $26.25 $15.990 $930 $1.89 $46.9% 6.99 $25.13 $15.24 $11.50 $15.780 27.60 $55.8% 5.392 148.39 $58.201 $322 $2.35 $28.61 $18.440 $718 $1.808 358.80 $52.00 $17.50 $48.624 73.30 $17.9% 8.203 300.308 127.86 $33.837 16.9% 52-Week Low High $37.905 37.00 $16.094 $352 $1.680 $7.37 $52.48 $10.55 $26.9% 8.996 206.81 $19.53 $44.92 $71.50 $17.513 $1.8% 15.929 43.24 $61.07 $28.55 $25.39 $28.8% 8.70 $47.73 $39.5% 7.516 $1.803 67.08 $40.40 $36.9% 7.332 66.171 28.822 119.53 $21.1% 8.4% 9.087 200.6% 6.12 $24.911 $941 $1.803 $3.89 $57.809 $558 $1.541 29.5% 11.521 $752 $900 $695 $633 $21.958 78.4% 20.918 $1.33 $24.15 $26.272 $1.151 $2.9% 10.529 183.41 $16.604 $919 $2.50 $33.95 $18.663 15.674 $10.00 $31.592 $6.15 $1.210 $194 $1.00 $50.03 $34.49 $20.3% 5.199 $396 $306 $140 $404 $928 $375 $25 $375 $1.70 $27.36 $42.11 $19.41 $2.35 $34.881 $670 $544 $460 $550 $14.50 $55.32 $46.75 $18.32 $42.65 $17.57 $29.799 67.3% 4.452 111.14 $8.16 $27.82 $54.55 $13.147 $55 $1.5% 9.8% 6.443 $1.212 $1.17 $4.226 156.60 $28.686 $1.82 $30.114 113.3% 10.892 $1.4% 4.718 179.041 104.00 $45.39 $49.914 66.189 39.08 $30.88 $31.764 $457 $5.9% 5.38 $40.00 $34.005 55.7% 6.50 $32.51 $18.151 $966 $1.75 $23.1% 10.273 $9.3% 8.84 $22.Master Limited Partnerships WACHOVIA CAPITAL MARKETS.31 $13.822 82.350 157.462 138.02 $25.223 98.410 114.50 $39.00 $35.65 $40.28 $19.575 $1.1% 7.45 $37.17 $15.253 $4.53 Current Yield 9.230 462.86 $23.654 257.95 $45.290 157.1% 9.87 $24.16 $45.6% 7.169 197.25 $16.018 $1. 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 $38.1% 8.00 $38.93 $43.00 $24.3% 4.64 $1.237 $558 $1.706 121.212 $2.552 37.7% 6.57 $30.0% 9.206 92.65 $22.90 $44.781 $1.217 576.111 878.209 $541 $7.86 $11.394 82.67 $48.178 $1.541 198.8% 5.13 $56.1% 10.90 $40.07 $31.375 $1.224 $2.00 $43.40 $39.89 $19.99 $31.497 90.604 $1.26 $16.262 $13.683 $567 $4.68 $17.48 $24.632 $608 $359 $181 $624 $1.59 $41.04 $29.22 $31.628 $20.274 $7.98 $37.237 $164 $1.38 $35.5% 8.4% NM 10.672 $5.212 $1.6% 6.85 $20.131 $5.7% 11.52 $45.08 $21. Vol.47 $26.17 $22.95 $41.2% 5.1% 9.9% 8.569 $3.2% 5.4% 5.5% 5.1% 9.15 $23.295 $19.14 $26.2% 6.262 $2.82 $28.57 $18.43 $23.099 197.50 $23.29 $7.45 $17.704 126.689 Enterprise Value $2.4% 6.360 $584 $2.475 $1.07 $17.015 203.53 $27.898 $1.392 25.232 113.14 $12.455 $547 $795 $669 $867 $4.78 $19.048 $753 $2.

2 $46.5 $91.189 $11.4 $10.3 $27.2 $79.1 $10.870 $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 $4.0 $196.9 $67.7 $63.203 $1.607 $30 $2.5 $27.4 $8.0 $35.8 $360 $29.0 $12.0 $321 $28.4 $54.1 $18.2 $208.152 $300 $500 $246 $700 $1.0 $35.000 $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 $7.8 $3.6 $14.100 $24 $48 $35 $82 $2.4 $18.3 $8.279 $1.5 $6.6 $24.2 $19.2 $348 $60.6 $21.5 $62.5 $23.3 $13.1 $69. LLC EQUITY RESEARCH DEPARTMENT Figure 97.0 $11.7 $21.2 $6.2 $28.3 $23.4 $60.7 $8.8 $2.4 $61.3 $81.0 $16.540 $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 $6.505 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 $3.5 $11.1 $111.0 $1.0 $5.111 $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 $13.4 $18.3 $20.1 $65.2 ARLP NRP PVR $76.7 $34.2 $32.4 $25.1 $38.2 $21.3 $20.2 $82.920 $1.7 $15.2 $77.027 $140 $7 $1.5 $64.671 $483 $485 $194 $0 $0 $0 $4.0 $207.2 $13.9 NA NA NA NA NA NA NA NA NA NA NA NA $40.9 $209.2 $141.0 $20.5 $2.6 $6.418 $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 $16.6 $24.1 $54.8 $66.6 $33.9 $7.3 $20.6 $24.5 $29.4 $199 ATN BBEP CEP EVEP LGCY PSE QELP VNR $54.0 $60.5 $25.9 $34.1 $72.4 $21.1 $21.5 $23.2 $6.415 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 $3.498 $571 $0 $0 $0 $713 $41 $0 ($0) $0 $300 $127 $13 $7 $13 $0 $6.083 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 $1.5 $220.900 $0 $200 $150 $200 $150 $250 $0 $50 $1.253 $13.8 $114.2 $101.4 $11.0 $128.7 $14.6 $241.198 2009E $270 $50 $562 $70 $0 $1.0 $7.2 $15.1 $30.400 $1.2 $37.8 $37.0 $71.4 $134.313 % 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 $1.7 $3.2 $55.6 $43.000 $4.2 $18.9 $74.3 $5.9 $14.893 2009E $17.4 AHD AHGP BGH EPE ETE HPGP MGG NRGP NSH PVG XTXI NA NA NA NA NA NA NA NA NA NA NA NA $36.7 $20.4 $27.5 $65.725 $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 $11.2 $25.000 $5.479 $407 $514 $0 $580 $1.365 $109 $300 $450 $175 $854 $420 $105 $50 $475 $300 $14.6 $42.0 $28.4 $8.0 $1.4 $137. 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 $24.5 $5.5 $20.1 $4.268 $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 $13.3 $1.4 $35. MLP Capex Forecast Maintenance Capex Spending ($MM.2 $60.5 $2.5 NA NA NA NA NA NA NA NA NA NA NA NA $44.5 $70.2 $3.2 $121.8 $268 APU FGP NRGY SPH $27.450 $500 $30 $645 $24 $40 $56 $40 $808 $20 $150 $225 $150 $150 $320 $105 $60 $192 $83 $6.0 $23.5 KSP TGP TOO $22.5 $93.9 $30.4 $41.2 $11.1 $12.2 $70.8 $17.1 $54.7 $77.5 $71.940 2007A $1.0 $3.7 $83.7 $22.2 $62. LLC estimates Date: 07/14/08 89 .MLP Primer -.0 $28.608 $615 $0 $0 $705 $55 $0 $0 $0 NA $828 $2.0 $4.4 $39.3 $24.9 $42.0 $110.1 $12.111 2010E $18.0 $23.0 $13.7 $66.5 $28.2 $15.9 $13.0 $14.8 $29.1 $5.489 2008E $217 $100 $3.856 $41 $0 $708 $0 $0 $36 $683 $1.000 $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 $5.752 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.2 $16.159 $72 $112 $1.966 $50 $998 $10 $10 $88 $18 $3.9 $1.4 $275 $58.104 $63 $151 $309 $192 $647 $548 $81 $25 $176 $392 $12.1 $61.1 $72.3 $32.2 $16.0 $67.120 DPM EPB EXLP NGLS RGNC SEP SGLP WES WMZ WPZ $6.6 $77.Third Edition WACHOVIA CAPITAL MARKETS.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.

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 $1.751 $6.020 $2.710 $474 $135 $2.088 $1.640 $82 $356 $235 $83 $7. and Wachovia Capital Markets.Master Limited Partnerships WACHOVIA CAPITAL MARKETS.601 $3.287 $2.293 $1. MLP Credit Metrics Total ($MM.000 $1. LLC EQUITY RESEARCH DEPARTMENT Figure 98.150 $857 $549 $928 KSP TGP TOO $333 $1.579 ARLP NRP PVR $240 $513 $414 $414 AHD AHGP BGH EPE ETE HPGP MGG NRGP NSH PVG XTXI $25 $1 None $1.647 $1. LLC estimate 90 .000 $503 ATN BBEP CEP EVEP LGCY PSE QELP VNR $829 $131 $136 $270 $136 None $123 $103 $136 APU FGP NRGY SPH $1.271 $1.579 $1.096 $651 $188 $2.366 $255 $953 $796 $2.084 $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.289 $1.091 $465 $296 None $243 $1. Standard & Poor's.120 DPM EPB EXLP NGLS RGNC SEP SGLP WES WMZ WPZ $655 $503 $217 $639 $1.572 $0 None None $3 None None $14 $1.793 $557 $4.

3% 16.0% 3.8% 11.7% 5.3% 4.1% 2002A (14.4% 0.0% 5.3% 9.2% 18.2% 11.7% 3.6% 9.1% 6.0% 0.6% 2000A 10.9% 14.7% 16.4% 7.7% 2.4% 10.1% 0.1% 4.0% 26.5% 0.0% Shipping Not Under Coverage 10.4% 16.8% 35.8% 14.0% 10% 9% 4.2% 0.3% 12.4% 1.3% 33.2% 3.5% 6.0% 3. 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. GPs) 3.5% 15.5% 47.1% 22.0% 0.4% 9.4% 3.7%) 3.5% 6.4% (64.8% 4.2% 13.1% 6.2% 27.9% 40.2% 21.5% 7.0% 7.6% 27.0% 6.9% 4.5% 4.6% 3.9% 9.3% 25.2% 11.2% 4.5% 8.7% 2.0% 0.9% 16.4% 2.9% 7.6% 1.3% 29.4% 9.9% 7.7% 30.5% 0.2% 7.5% 9.5% 19.6% 12.4% 0.5% 6.0% 3.2% 20.4% 25.4% 18.1% 14.0% 0.3% 8.7% 18.7% 12.9% 14.0% 0.8% 5.7% 11.9% 37.9% 5.8% 13.2% 23.5% 13.7%) 2.1% 3.0% 0.0% 25.5% 6.0% 0.2% 0.7% 8.9% 4.7% 11.6% 13.2% 4.8% 12.4% 9.9% 7.7% 0.7% 43.1% 8.6% 49.3% 5.5% 21.6% 12.5% 7.8% 7.3% 7.2% 21. LLC EQUITY RESEARCH DEPARTMENT Figure 99.0% 3.6% 8.2% 24.5% 11.9% 28.7% 12% 10% 8.0% 7.8% 25.8% 4.4% 8.6%) 2.2% 7.1% 11.6% 17.9% Not Under Coverage 1.8% 9.9% 2005A 18.1% 0.5% 0.4% 1999A 3.0% 32.7% 2.2% 14.1% Not Under Coverage 22.5% 6.0% 5.6% 16.0% 12.5% 23.8% 7.0% 9.9% 6.6% 6.0% 2004A 11.9% 11.1% 22.8% 5.1% 6.1% 7.5% 21.8% 7.1% 3.6% 14.0% 0.0% 0.6% 5.6% 9.8% 19.6% 7.7% 12.0% 0.5% 0.6% 0.2% 8.3% 0.2% 3.1% 8.7% 6.6% 1.3% 10.8% 6.0% 2.0% 13.6% 4.7% 1995A 0.0% 6.1% 2.0% 18.2% 8.0% 12.1% 1.2% 6.2% 8.1% 6.5% 7.8% 10.0% 1.4% 25.0% 0.3% 10.1% 5.7% 6.9% 6.8% 10.0% 12.0% 49.8% 0.4% 25.1% 8.3% 12.8% 2.0% 1.5% 6.8% 3. LLC estimates 91 .5% 14.8% 21.0% 0.8% 8.8% 22.2% 12.5% 0.3% 100.8% 12.0% 9.4% 18.0% 1.0% 15.5% (15.4% 13.4% 14.5% 8.6% 8.1% 37.0% 19.3% Midstream MLPs 4.2% Not Under Coverage 20.0% 0.7% 4.7% 5.9% (0.3% 35.3% 12.4% 22.3% 5.0% 0.9% 5.1% 25.7% 10.8% 4.0% 3.0% Not Under Coverage 8.6% 3.1% 8.6% 11.9% 5.1% 8.8% 1.0%) 0.2% 16.1% 35.8% 15.2% 9.9% 18.0% 4.0% 0.1% 1.1% 8.5% 7.0% 0.5% 11.3% 17.2% 21.9% Not Under Coverage 9.1% 4.5% 9.0% 10.0% 15.1% 7.3% 15.4% 23.5% 61.0% 10.8% 7% 6% Propane 0.0% 7.8% 5.1% 0.1% 19.0% 13.5% 6.0% 0.9% 15.5% 0.1% 30.5% 12.8% 6.0% 27.3% 8.5% 31.5% 2006A 7.5% 0.0% 0.0% 12.7% 9.8% 9.8% 17.1% 18.0% 10.0% 5.8% 13.1% 9.1% 17.1% 9.1% 11.0% 4.3% 1.6% 13.0% 10.7% 6.3% 1.4% 9.7% 1.0% 8.2% -19.1% 4.5% 14.0% 5.1% 14.5% 35.0% Coal Upstream MLPs 0.4% 19.6% 6.3% 16.0% 5.7% 5.0% 0.9% 5.4% 7.3% Source: Partnership reports and Wachovia Capital Markets.2% 0.6% 26.1% 10.7% 8.8% 7.0% 0.3% 0.7% 7.3% 6.7% 23.0% 9.6% 26.9% 6.8% 16.1% 44.6% 1.9% 5.0% 4.9% 6.2% 5.6% 8.2% 33.0% 0.3% 13.2% 2.0% 12.4% 13.2% 5.0% 0.0% 0.7% 0.4% 6.0% 5.7% 30.6% 12/30/08 12/30/09 12/30/10 2008E 2009E 2010E 9.8% 10.3% 0.6% 3.9% 5.Third Edition WACHOVIA CAPITAL MARKETS.4% 2.2% 17.4% 14.1% 4.2% 15.0% 9.0% 18.0% 1.1% 22.2% 16.8% 0.3% 8.1% 1997A 14.9% 3.9% 6.0% 12/30/07 2007A 5.1% 9.0% 7.9% 0.0% 2003A 11.3% 14.5% 23.2% 18.7% 5.6% 13.3% 20.6% 9.5% 11.6% 7.0% 0.1% 0.0% 16.0% 8.5% 13.4% 11.4% 5.4% 7.5% 2.8% 5.0% 50.MLP Primer -.3% 1998A 22.3%) 13.2% (66.7% 19.4% 12.3% 25.8% 0.3% 12.0%) 4.4% 6.1% 6.0% 0.8% 5.0% General Partnerships 19.1% 7.2% 2.5% 11.6% 2.3% 0.4% 0.2% 8.4% 11.2% 10.9% Not Under Coverage 31.2% Not Under Coverage 12.2% 10.2% (50.1% 5.2% 6.0% 15.1% 12.8% 6.9% 6.1% 35.9% 32.0% 0.5% 17.5% 12.0% 0.0% 4.1% 4.9% 10.9% 7.3% 16.3% 15.5% 12.5% 0.0% 0.5% 9.3% Drop Down MLPs 24.2% 22.6% 30.1% 20.0% 4.1% 28.6% 4.7% 10.0% 0.7% 8.5% 0.6% 9.9% 7.5% 10.0% 0.0% 6.0% 42.3% 0.3% 2001A 27.0% 0.7% 9.6% 0.6% 6.4% 15.5% 37.5% 13.4% 21.2% 6.9% 18.1% 9.1% 4.3% 22.0% 1996A 7.1% 5.1% 11.9% 5.

Master Limited Partnerships WACHOVIA CAPITAL MARKETS.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 92 .MLP Note: Distribution CAGRs based on annualized quarterly distribution growth rate since IPO (i.General Partnership .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% . 1. LLC EQUITY RESEARCH DEPARTMENT Figure 100.

P.. Atlas Pipeline Holdings. Pioneer Southwest Energy Partners.. Plains All American Pipeline.P.com or write to 7 Saint Paul Street. NuStar GP Holdings..P.P. Crosstex Energy. Martin Midstream Partners... Energy Transfer Equity. Inergy Holdings.P.P. Energy Transfer Partners..P. L. L.. LLC.. Copano Energy L.P.. Baltimore.. Boardwalk Pipeline Partners. L. Williams Pipeline Partners. Atlas Pipeline Holdings.... L. LLC. L.. L. L.P. L. L.P. L. Duncan Energy Partners.. L.P.. L.P. AmeriGas Partners. Enbridge Energy Partners. L.P. Crosstex Energy.. Penn Virginia Resource Partners.. BreitBurn Energy Partners L. El Paso Pipeline Partners. Magellan Midstream Partners. DCP Midstream Partners..P.P. Pioneer Southwest Energy Partners. L. Targa Resources Partners..P. L.P.P. Vanguard Natural Resources. L.P.P.. MarkWest Energy Partners.. Inc.P. L.. El Paso Pipeline Partners. L. LLC. Buckeye Partners.P. Plains All American Pipeline. L. Genesis Energy.. EV Energy Partners.P. Buckeye GP Holdings L. L. or will be. Atlas Pipeline Partners.. Boardwalk Pipeline Partners.P.. L. LLC or its affiliates received compensation for investment banking services from AmeriGas Partners... L. L. 1st Floor. Atlas Pipeline Partners.P. Sunoco Logistics Partners L. L..P. Exterran Partners. L..P.P. Copano Energy L. Atlas Energy Resources..P.L.P. L..P. L. DCP Midstream Partners.P.P. L. ONEOK Partners.. Legacy Reserves.P.P. L..P. SemGroup Energy Partners.P..P.P. Buckeye GP Holdings L. L. Legacy Reserves.P. Buckeye GP Holdings L.P. Wachovia Capital Markets.P.....P.. have beneficial ownership of 1% or more of any class of the common stock of BreitBurn Energy Partners L. L. 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.. TransMontaigne Partners L. ONEOK Partners. Enbridge Energy Partners..P.. L. Penn Virginia GP Holdings..P. L.P..P.. L...P. L.P. L. Regency Energy Partners. Buckeye Partners. Enbridge Energy Partners.. L. L.... NuStar Energy. L..P. Exterran Partners... NuStar GP Holdings..P.. L.. L.P. L.. TEPPCO Partners..P. related to the specific recommendations or views expressed by me in this research report. L. L.P.P. L.. L. Western Gas Partners. ONEOK Partners.....P. L. LLC maintains a market in the common stock of Alliance Holdings GP. L. Eagle Rock Energy Partners.P. L. Buckeye Partners.. K-Sea Transportation Partners.P... L. Constellation Energy Partners LLC..P. LLC.. L.P.MLP Primer -.. L..P.P.P.P. L.P. Enterprise Products Partners L. Crosstex Energy. Holly Energy Partners.P.P. L.. L.. L..P.P.P.P. L. Genesis Energy. AmeriGas Partners. Inergy. Atlas Energy Resources.P..P. Enbridge Energy Partners. L.. Spectra Energy Partners. Legacy Reserves. L. Crosstex Energy. L.P. L. Legacy Reserves. Alliance Resource Partners.P.P.. Teekay LNG Partners.P.P.. EV Energy Partners..P. Plains All American Pipeline. L.. Genesis Energy.. L. TransMontaigne Partners L. Penn Virginia Resource Partners. Enterprise Products Partners L.. Regency Energy Partners..P. Quest Energy Partners. Spectra Energy Partners.P. L. MarkWest Energy Partners.. L. L. Targa Resources Partners.. L. L. LLC.P.P. Hiland Partners. Enterprise Products Partners L. L.P.. L.C...P. Williams Partners L. Boardwalk Pipeline Partners. Williams Partners L.P. Enterprise GP Holdings L.L.. L..P. L.C..... Copano Energy L..P.P.P.P.P.P.P. Energy Transfer Partners. Sunoco Logistics Partners L.. LLC...P. Crosstex Energy. MarkWest Energy Partners..P.P.... L. L.P. LLC. TEPPCO Partners. Buckeye Partners.. L. Magellan Midstream Partners.. L. L.. Inergy Holdings... Atlas Energy Resources. L. L. L.P.P. Teekay LNG Partners. L. Energy Transfer Equity. Wachovia Capital Markets. SemGroup Energy Partners.C.P. Inc. Quest Energy Partners. L. Copano Energy L.P. Genesis 93 . L. L. L. LLC.P.. L.. L. Penn Virginia GP Holdings.. DCP Midstream Partners. L.P.. L.L. L. Williams Pipeline Partners.P.C. L..P. Regency Energy Partners. L. L.P. Eagle Rock Energy Partners.. L. TransMontaigne Partners L.. Kinder Morgan Energy Partners. L..P. SemGroup Energy Partners.P. LLC and/or its affiliates. L. L. L.P. L. Suburban Propane Partners.. Natural Resource Partners L. L. Energy Transfer Equity. Quicksilver Gas Services. is. Williams Partners L. Duncan Energy Partners.P. Atlas Pipeline Holdings.. Teekay LNG Partners. L. Energy Transfer Partners. Quest Energy Partners. L..P.P.. Hiland Holdings GP. L. L. L. Inergy.P.. L.P. Magellan Midstream Holdings.. Magellan Midstream Partners.. Atlas Pipeline Partners..L. Hiland Holdings GP. L. Inc. and 2) No part of my compensation was.P. L. L.Third Edition WACHOVIA CAPITAL MARKETS. El Paso Pipeline Partners. directly or indirectly... SemGroup Energy Partners.P. L. L.P.. Kinder Morgan Energy Partners. Regency Energy Partners.P. L. L. LLC.P...P.. Quest Energy Partners..P. Enterprise GP Holdings L.. L..P. Copano Energy L. DCP Midstream Partners.. Enterprise GP Holdings L. Williams Pipeline Partners..P. Magellan Midstream Holdings. L. Exterran Partners.P.. Hiland Partners. Wachovia Capital Markets. El Paso Pipeline Partners.. L. L. Enterprise Products Partners L. Genesis Energy.P.P.. TEPPCO Partners. Crosstex Energy.P. L. L.wachoviaresearch. Teekay Offshore Partners. L. L.P. L. L.. Wachovia Capital Markets...P. L. Hiland Partners..P. Duncan Energy Partners. please go to www.. Exterran Partners.P. Ferrellgas Partners.. L..P. in the past 12 months...P. Crosstex Energy.P. L. L.P. 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.P. NuStar Energy. L. Boardwalk Pipeline Partners..P. L. Energy Transfer Partners. NuStar Energy.. Hiland Holdings GP. LLC..P. MD5202. Vanguard Natural Resources....P.P.P. L.P.. BreitBurn Energy Partners L. Penn Virginia Resource Partners. Vanguard Natural Resources. Targa Resources Partners.P.. L. L.P. Targa Resources Partners. within the past 12 months. L. Western Gas Partners.P.P. Inergy. LLC or its affiliates managed or comanaged a public offering of securities for Atlas Energy Resources. LLC EQUITY RESEARCH DEPARTMENT Required Disclosures To view price charts for all companies rated in this document. Kinder Morgan Energy Partners..P.P... K-Sea Transportation Partners. L.P..P. Inergy.P.P. L.P... L.... L. Wachovia Capital Markets..C. L.P. L.P.P.P.P. Atlas Pipeline Partners.P.P.P.L.P. L. Martin Midstream Partners. Kinder Morgan Management. L. Crosstex Energy..

Wachovia Capital Markets.P. TEPPCO Partners.P.P.P.P. Boardwalk Pipeline Partners... Enterprise Products Partners L. L.. Williams Partners L. LLC EQUITY RESEARCH DEPARTMENT Energy.. L. Crosstex Energy. LLC provided nonsecurities services to Atlas Energy Resources. Kinder Morgan Management.P. L.P. Inc. L.P.. L. BreitBurn Energy Partners L. Eagle Rock Energy Partners.P.P. Duncan Energy Partners. L. Atlas Pipeline Partners. L. L.. L.. L. Regency Energy Partners. Kinder Morgan Management.. L. DCP Midstream Partners.. Exterran Partners. MarkWest Energy Partners.P.P. L. L. L.P.. MarkWest Energy Partners. L. LLC.P. TEPPCO Partners.P.. ONEOK Partners. L.P. Crosstex Energy. SemGroup Energy Partners. Kinder Morgan Energy Partners..P.. currently is. L.P. L.P. Eagle Rock Energy Partners.P. L. K-Sea Transportation Partners... Inc.. Spectra Energy Partners... Boardwalk Pipeline Partners... L. Inergy Holdings. L. Enterprise Products Partners L. Constellation Energy Partners LLC..P. LLC..P.P. Hiland Partners. L. Kinder Morgan Energy Partners.. Teekay Offshore Partners. Sunoco Logistics Partners L. L.P. Atlas Pipeline Holdings. Magellan Midstream Holdings.. Inc. L. LLC.P. Enterprise Products Partners L. Energy Transfer Partners.P.P. Duncan Energy Partners... L.P. LLC.P.P.. Targa Resources Partners. Boardwalk Pipeline Partners. MarkWest Energy Partners. L.. L.P.. L. Constellation Energy Partners LLC. LLC. LLC... LLC does not compensate its research analysts based on specific investment banking transactions.P. L. L. L. Enbridge Energy Partners.P. L.. Copano Energy L.. Spectra Energy Partners.. L.. L.P.P. MarkWest Energy Partners.P. L. L.P.P. TEPPCO Partners. L. L..P..P. Energy Transfer Equity.. L.P. Penn Virginia Resource Partners. Pioneer Southwest Energy Partners. L... L. Enterprise GP Holdings L. Kinder Morgan Energy Partners. L. Kinder Morgan Management.... TEPPCO Partners.. LLC.. L... BreitBurn Energy Partners L. L. Spectra Energy Partners. L. LLC... LLC. L.P.. LLC..P. L..P.P. L.. Energy Transfer Partners. L.P.P. Exterran Partners. a client of Wachovia Capital Markets. L.P.. L. L. L.P... L. Williams Pipeline Partners. SemGroup Energy Partners.P. WCM’’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm. Quest Energy Partners..P.. TransMontaigne Partners L. L.. L.. Penn Virginia GP Holdings.P.P. L. L.. L. Hiland Holdings GP..P...P.. Enbridge Energy Partners. Teekay LNG Partners.P. Hiland Holdings GP. SemGroup Energy Partners.P. Spectra Energy Partners. L. L. L. Vanguard Natural Resources.P..P.. L.L. Atlas Pipeline Holdings.. Teekay LNG Partners.. Inergy.P. Atlas Pipeline Partners. DCP Midstream Partners. Kinder Morgan Management.... Spectra Energy Partners.. L. L. Pioneer Southwest Energy Partners. Eagle Rock Energy Partners. L. ONEOK Partners. Crosstex Energy. or during the 12-month period preceding the date of distribution of the research report was. L. Legacy Reserves.P..P. MarkWest Energy Partners..... Kinder Morgan Energy Partners. L.. 94 .P. or during the 12-month period preceding the date of distribution of the research report was. L.P. DCP Midstream Partners.. but is not limited to investment banking revenue..P. L. L. Regency Energy Partners.P.P. Kinder Morgan Management. Magellan Midstream Holdings..P..P. L. L. L. Energy Transfer Equity. L.P.P.P. LLC. L.P. L. Targa Resources Partners.P. L. L. Crosstex Energy. L. LLC provided investment banking services to AmeriGas Partners.P. L.P. Wachovia Capital Markets... Magellan Midstream Partners.P. L.. Magellan Midstream Partners. Duncan Energy Partners. Pioneer Southwest Energy Partners. Pioneer Southwest Energy Partners. Enbridge Energy Partners. LLC. ONEOK Partners.P.. LLC.P. El Paso Pipeline Partners.. currently is. L.P.P.P. L... Atlas Pipeline Holdings. LLC received compensation for products or services other than investment banking services from Atlas Energy Resources.P.P.P.P. Atlas Pipeline Partners... Targa Resources Partners.. L. L. Penn Virginia GP Holdings. Inergy. Pioneer Southwest Energy Partners.P. L.P... Pioneer Southwest Energy Partners. Crosstex Energy. Atlas Pipeline Partners. Exterran Partners.P.P. Kinder Morgan Management. L. L. Energy Transfer Partners... Buckeye GP Holdings L..P. in the past 12 months. Regency Energy Partners.... Wachovia Capital Markets. L.. L.. Plains All American Pipeline. L.P. L. Western Gas Partners. currently is.P.P. L. Targa Resources Partners. ONEOK Partners.P.P. L.. LLC. L..P.P. NuStar Energy.P. L.P.P.P. Crosstex Energy. Inc. Pioneer Southwest Energy Partners. L.C..P.P. Enterprise GP Holdings L..P. Kinder Morgan Energy Partners... Wachovia Capital Markets.P. L. L. NuStar Energy. L. Targa Resources Partners.P....P. Energy Transfer Equity. Kinder Morgan Energy Partners.P. L. Wachovia Capital Markets.P. Enbridge Energy Partners. TransMontaigne Partners L. L. LLC.P. SemGroup Energy Partners..P... L. LLC. L.P.P. Sunoco Logistics Partners L... L. LLC provided noninvestment banking securities-related services to BreitBurn Energy Partners L.. LLC.. Atlas Energy Resources.P.. Hiland Partners. L.P. Enterprise Products Partners L. L. K-Sea Transportation Partners. LLC. Enterprise GP Holdings L.P.P. L.P. which includes. L. L. Plains All American Pipeline.. ONEOK Partners. Western Gas Partners..P. Energy Transfer Equity. L..P.P. Western Gas Partners.P. L. Penn Virginia Resource Partners.. Atlas Pipeline Holdings.P. TEPPCO Partners.P.P. Legacy Reserves...Master Limited Partnerships WACHOVIA CAPITAL MARKETS.P.P. L... Exterran Partners.. L.P. Crosstex Energy. DCP Midstream Partners. Kinder Morgan Energy Partners. NuStar GP Holdings.. L. Natural Resource Partners L. Energy Transfer Partners.P.P. L. Inergy Holdings. L.P.P.. or during the 12-month period preceding the date of distribution of the research report was.P. Teekay Offshore Partners. Kinder Morgan Management.. Vanguard Natural Resources.... Regency Energy Partners... Williams Partners L. L.. Boardwalk Pipeline Partners. Enterprise GP Holdings L..P. Buckeye Partners.P. Atlas Energy Resources. a client of Wachovia Capital Markets.P. L. Natural Resource Partners L. L..P..P. L... Constellation Energy Partners LLC. L. L..P.P. L. L. Regency Energy Partners. Duncan Energy Partners.. Natural Resource Partners L. L. a client of Wachovia Capital Markets. Genesis Energy.P. Quest Energy Partners.P.P..P.P.P. L.P.P. NuStar GP Holdings..P. Williams Pipeline Partners.. L. SemGroup Energy Partners. L. L.P.P. Crosstex Energy.. L..P..

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