Not All MLPs are Created Equal

Transcription

1 Not All MLPs are Created Equal A discussion on energy master limited partnerships + identifying related accounting risks Julie Hilt Hannink, CFA Energy Sector Lead JulieHilt.Hannink@cfraresearch.com AUGUST 22, CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 1

2 Why MLP accounting matters General Partner and management discretion over Distributable Cash Flow (DCF) calculation and the resulting Distribution Coverage calculation means there is the potential for MLPs to use various adjustments and tricks to overstate their ability to sustain and grow distribution, the key MLP fundamental CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 2

3 Expect SEC focus A reshuffling at the Securities & Exchange Commission (SEC) enforcement division is expected to increase the focus on accounting fraud. Non-GAAP metrics are expected to be front and center as part of the SEC s potential crack-down on fraud and financial disclosure concerns. The SEC s Accounting Quality Model searches the filings of more than 9,000 companies, with one search point being big differences between net income and actual cash outflows available to investors. The non-gaap DCF figures can allow large cash distributions even if reported GAAP income and cash flow from operations (CFFO) results are weak. The Linn Energy (LINE) SEC informal inquiry includes derivative accounting, non-gaap metrics and the Berry Petroleum (BRY) merger CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 3

4 MLPs decade of growth National Association of Publicly Traded Partnerships reports a universe of more than 100 MLPs with a total market capitalization in excess of $450 billion. Growth drivers: Universe size Unit price performance Asset classes Alternatives MLP mutual funds Exchange-traded funds I-units Not all MLPs will make it and you can bet given so much management discretion there will be some stumbles. CFRA can help identify them before they fall CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 4

5 MLPs defined Partnerships are typically two-tiered structures with the operating MLP owned 2% by the GP and 98% publicly held by LP unit holders. Owners of these pass-through entities must treat part of the distribution as current taxable income and the rest as a return of capital. GPs are typically owned by a sponsoring corporation that is can be publicly traded but there are some GPs owned directly by the public or are privately held. Unlike other pass-through entities, royalty trusts or REITs, MLPs do not have statutory minimum distributions Most MLPs are engaged in energy and natural resource operations with midstream businesses (gathering, transport, storage and processing of oil, natural gas and natural gas liquids) being the most common. MLP operations are now more aggressively expanding into other areas including upstream energy, fertilizer manufacture, oil services and carbon dioxide operations CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 5

6 Why MLPs are attractive to investors High yields current average is around 6% Current tax shelter Unit price appreciation Midstream MLPs tend to have the most stable yields given: infrastructure nature stable cash flows fee-oriented revenue streams high barriers to entry 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 6

7 Why MLPs are attractive to sponsors Attractive sales price since MLPs have a lower cost of capital so can pay more for contributed assets Ability to redeploy cash Retention of ownership interest Incentive distributions for growing distribution rate Reimbursement of certain costs Payment of management fees Limited fiduciary responsibilities to unitholders 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 7

8 Energy Investment supporting MLP growth Source: INGAA Projected US infrastructure spending needs at $50-$300 billion+... MLP structure is a key investment vehicle for this growth. CFRA s caveat is that the market can change relatively quickly the attached map from 2011 that shows the US LNG inflows those terminals were thought to be imperative for US energy security just 7 years ago but today are being relicensed as export facilities CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 8

9 Energy Investment Needed, Supporting MLP Growth Although rails will remain an important transport option, additional oil shale pipelines needed Half of all oil coming out of the Bakken is transported by rail vs. a third by pipe. The train that crashed in Lac-Megantic, Quebec was carrying Bakken crude. Offset to increased pipeline is that rails are more flexible. Source: Geology.com Source: EIA 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 9

10 Shales Driving Growth: EIA Processing Plants 2009 Source: EIA 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 10

11 Non-traditional Energy MLPs Commodity-oriented asset classes: E&P Fertilizer Refining Oil Services Variable rate distributions CVR Partners LP (UAN) Nitrogen fertilizer from petroleum coke CVR Refining LP (CVRR) Refining & logistics Alon USA Partners, LP (ALDW)-- Refining Northern Tier Energy LP (NTI) Refining & Fuel Distribution Terra Nitrogen Company, LP (TNH) Nitrogen fertilizer from natural gas Dorchester Minerals LP (DMLP) Royalty Interests Rentech Nitrogen Partners, LP (RNF) Nitrogen fertilizer PetroLogistics LP (PDH) Processes propane in propylene Numerous 2012 IRS private letter rulings expanded qualifying income Renewables potential with introduction of Master Limited Partner Parity Act 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 11

12 Along with Growth Potential Comes Risk Economic Higher interest rates create competition Higher interest rates increase cost structure Regulatory Fracking/EPA/Environmental Focus on renewables Tax status Industry Technology Geology Geopolitics/Fiscal Regimes 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 12

13 MLPs within CFRA s Accounting Lens MLPs are no different than any other sector, industry, or geography. CFRA screens and analyzes MLP financial reports and disclosures to determine if the choices made by the MLP conceal the underlying position of the entity. For MLPs our reviews seek to determine if distribution rates can be maintained and grow as promised by management. IDR Relinquishment similar to distribution cut CFRA wants to determine if the MLP s GAAP and non-gaap metrics properly reflect its financial position CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 13

14 CFRA MLP Research Educational/Industry 10 Questions to Ask MLP Managements June 12, 2013 E&P: Alternatives to Raising Capital- July 24, 2013 Accounting Notebooks Enterprise Products Partners LP (EPD) -7/24/13 Linn Energy LLC (LINE) -7/24/13 Kinder Morgan Energy Partners (KMP) 7/18/13 Accounting Lens Kinder Morgan Energy Partners (KMP) 11/26/ CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 14

15 MLPs that Fall Within CFRA Market Cap Screens T icker C o mpany N ame Secto r ACM P Access M idstream Partners LP M idstream ATLS Atlas Energy L.P. M idstream APL Atlas Pipeline Partners L.P. M idstream BWP Boardwalk Pipeline Partners L.P. M idstream BPL Buckeye Partners L.P. M idstream CQP Cheniere Energy Partners L.P. M idstream CM LP Crestwood M idstream Partners LP M idstream DPM DCP M idstream Partners L.P. M idstream EROC Eagle Rock Energy Partners L.P. M idstream EPB El Paso Pipeline Partners L.P. M idstream EEP Enbridge Energy Partners L.P. Cl A M idstream ETE Energy Transfer Equity L.P. M idstream ETP Energy Transfer Partners L.P. M idstream EPD Enterprise Products Partners L.P. M idstream GEL Genesis Energy L.P. M idstream HEP Holly Energy Partners L.P. M idstream NRGY Inergy L.P. M idstream KM P Kinder M organ Energy Partners L.P. M idstream MMP M agellan M idstream Partners L.P. M idstream M WE M arkwest Energy Partners L.P. M idstream M M LP M artin M idstream Partners L.P. M idstream M PLX M PLX LP M idstream NGL NGL Energy Partners LP M idstream OKS ONEOK Partners L.P. M idstream PNG PAA Natural Gas Storage L.P. M idstream PAA Plains All American Pipeline L.P. M idstream PVR PVR Partners L.P. M idstream RGP Regency Energy Partners L.P. M idstream SEP Spectra Energy Partners L.P. M idstream SXL Sunoco Logistics Partners L.P. M idstream NGLS Targa Resources Partners L.P. M idstream TCLP TC PipeLines L.P. M idstream TLLP Tesoro Logistics LP M idstream WGP Western Gas Equity Partners LP M idstream WES Western Gas Partners LP M idstream WPZ Williams Partners L.P. M idstream T icker C o mpany N ame Secto r ARLP Alliance Resource Partners L.P. Coal & Consumable Fuels NRP Natural Resource Partners L.P. Coal & Consumable Fuels EXLP Exterran Partners L.P. Oil & Gas Equipment & Services USAC USA Compression Partners LP Oil & Gas Equipment & Services ARP Atlas Resource Partners LP Oil & Gas Exploration & Production BBEP BreitBurn Energy Partners L.P. Oil & Gas Exploration & Production EVEP EV Energy Partners L.P. Oil & Gas Exploration & Production LGCY Legacy Reserves L.P. Oil & Gas Exploration & Production LINE Linn Energy LLC Oil & Gas Exploration & Production M EM P M emorial Production Partners L.P. Oil & Gas Exploration & Production QRE QR Energy L.P. Oil & Gas Exploration & Production ALDW Alon USA Partners L.P. Oil & Gas Refining & M arketing CLM T Calumet Specialty Products Partners L.P. Oil & Gas Refining & M arketing XTEX Crosstex Energy L.P. Oil & Gas Refining & M arketing CVRR CVR Refining LP Oil & Gas Refining & M arketing NTI Northern Tier Energy LP Cl A Oil & Gas Refining & M arketing NS NuSTAR Energy L.P. Oil & Gas Refining & M arketing GM LP Golar LNG Partners LP LNG Floating Platforms TGP Teekay LNG Partners L.P. LNG & Crude Carriers TOO Teekay Offshore Partners L. P. Shuttle Tankers 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 15

16 MLPs & Screening Accounting and financial reporting techniques that may mislead investors about a company s financial performance or economic health: Earnings: Adjusting accrual-based performance numbers by managing reported revenue and expenses GAAP earnings pale in comparison to cash flow due to MLPs main purpose of distributing cash to unit holders Cash Flow: Employing techniques to report misleadingly high operating cash flow and free cash flow MLPs focus on cash available for distribution (CAD) or distributable cash flow (DCF) vs. cash flow from operations (CFFO) or GAAP free cash flow (FCF); however, need to access capital markets means CFFO is a key screening tool. Key Metrics: Misusing accepted non-gaap metrics or creating misleading ones to overstate performance or distort economic health. CAD/DCF and Distribution Coverage are the central non-gaap key metrics for MLPs 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 16

17 MLPs within CFRA s Accounting Lens When analyzing these partnerships it is crucial to: Review GAAP items due to continued need to access capital markets to fund growth Analyze non-gaap items due to the need to maintain and/or grow LP distribution rates Key non-gaap metrics: Distributable Cash Flow (DCF)/ Cash Available for Distribution (CAD) Maintenance/Sustaining Capital Spending (Capex) Distribution Coverage A High Level of Management Discretion: DCF/CAD and Maintenance Capex are either defined in the operating or partnership agreement Limited fiduciary responsibilities of GP to LP unitholders CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 17

18 Distributions Could be at Risk if an MLP... Operational Is unable to maintain or attain planned growth benchmarks Needs access to debt markets as interest rate spikes Issues excessive LP units Accounting Changes how DCF/CAD is calculated. Has difficulty maintaining a coverage ratio above 100%. Maintains a 100% or more coverage ratio by lowering indicated maintenance capex levels CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 18

19 10 Questions to Ask MLP Management an Update 1. What is the definition of DCF/CAD?. 2. What is the Distribution Coverage ratio? 3. What is the break-out of Fee vs. Commodity exposure? 4. How is the Sustaining/Maintenance Capex determined? 5. How many distributions do current cash balances cover? 6. What is the ownership structure? 7. How are service costs and reimbursements allocated between related parties? 8. How has the MLP grown? 9. How has growth been funded and is there a target level of debt? 10. What are the governance policies? 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 19

20 1. Definition of DCF/CAD? Not always easy to find Traditional DCF = Net Income + (DD&A Maintenance Capex) Many companies provide the adjustment to Adjusted EBITDA and then adjust this Non-GAAP figure to arrive at DCF/CAD. The problem many of the adjustments are not decipherable from looking at the either the press release or the SEC filings. Complicating matters are things such as: Incentive Distribution Rights (IDRs) Relinquishment of IDRS GP income 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 20

21 1. Definition of DCF/CAD? For some MLPs, clear disclosure and easy to follow the adjustments. A good example is Kinder Morgan Energy Partners (KMP) as shown by this excerpt from its 2Q13 Press Release. Three months Ended Six Months Ended 6/30/13 6/30/12 6/30/13 6/30/12 Net income before certain items $ 627 $ 467 $1,282 $ 1,001 Less: Noncontrolling Interest before certain items (7) (5 ) (14 ) (11 ) Net income attributable to KMP before certain items , Less: General Partner s interest in net income before certain items (13) (418) (337) (819) (658) Limited Partners net income before certain items Depreciation, depletion and amortization (14) Book (cash) taxes - net (2) 12 7 Express & Endeavor contribution (6) 3 (5) 3 Sustaining capital expenditures (15) (70) (52) (118) (96) DCF before certain items $ 505 $ 366 $1,055 $ 828 Net income / unit before certain items $ 0.49 $ 0.37 $ 1.14 $ 0.98 DCF / unit before certain items $ 1.22 $ 1.07 $ 2.67 $ 2.44 Weighted average units outstanding CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 21

22 1. Definition of DCF/CAD? In contrast to the clear KMP disclosure, here is a summary of the Energy Transfer Partners (ETP), DCF disclosure. Beginning in 1Q13, ETP simplified its calculation but a significant portion of the DCF is tied to its subsidiaries so they need to be analyzed as well. ETP also changed how it calculated DCF in 4Q12. 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Net Income/ Adjusted EBITDA Beg 1Q ,069.0 Amort. Finance Cost in Int Exp Deferred Income Tax 1.6 (0.0) Depreciation Loss on Debt Extinguishment Non-Cash Compensation Gain on Asset Sales/Deconsolid (0.0) Unrealized deriv (gains) Losses - Inter (1.0) (7.5) AFUD 1.1 (1.2) (0.6) (0.3) Unrealized deriv (gains) Losses - Comm (7.1) (0.6) Impairments Distribution (<) > Earnings Unconsold 4.7 (2.8) DCF for non-controlling 0.0 (10.1) (11.9) (13.3) Adjusted EBITDA Unconsolidated Subs (99.0) (97.0) (106.0) (178.0) (165.0) (158.0) Distributions Unconsolidated Subs Interest Expense Net of capitalized (141.0) (191.0) (147.0) (186.0) (211.0) (211.0) Income Tax (2.0) (7.0) (27.0) (27.0) (3.0) (89.0) Maintance Capex (19.6) (29.5) (31.4) (53.6) (24.0) (77.0) (69.0) (143.0) (51.0) (121.0) Other DCF DCF attributable to SXL (165.0) (195.0) (184.0) Distributions from SXL Distributions to ETE respect to LoneStar (75.0) (50.0) 0.0 Distributions to RGP respect to LoneStar (11.0) (21.0) (14.0) (17.0) (23.0) (16.0) DCF attributable to ETP Partners CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 22

23 2. Distribution Coverage ratio? Some MLPs do not disclose Distribution Coverage nor do they disclose enough detail to calculate the ratio In contrast, others clearly disclose all pertinent information. KMP s quarterly press release the MLP clearly states its declared distribution per unit and its weighted average units outstanding. For 2Q13 this was $1.32/unit and 413 MM units, respectively. With a total DCF of $505 million, this is a DCF/Unit of $1.22 with a 93% coverage ratio for 2Q13 and a rolling 4 quarter coverage of 103%. 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 DCF LP NI Before Certain Items/Unit $0.44 $0.30 $0.44 $0.55 $0.61 $0.37 $0.57 $0.75 $0.66 $0.49 LP DCF/Unit $1.21 $1.01 $1.19 $1.27 $1.37 $1.07 $1.28 $1.35 $1.46 $1.22 Rolling 4-Quarter DCF/Unit $4.45 $4.40 $4.57 $4.68 $4.84 $4.90 $4.99 $5.06 $5.16 $5.31 Average LP Units Declared Distribution/Unit $1.14 $1.15 $1.16 $1.16 $1.20 $1.23 $1.26 $1.29 $1.30 $1.32 Coverage Ratio 106% 88% 103% 110% 114% 87% 101% 104% 113% 93% Rolling 4-Quarter Distibution/Unit $4.47 $4.53 $4.58 $4.61 $4.67 $4.75 $4.85 $4.98 $5.08 $5.17 Rolling 4-Quarter Coverage Ratio 100% 97% 100% 101% 104% 103% 103% 102% 101% 103% If an MLP does not clearly provide its coverage ratio, or make it easy for investors to calculate it on their own, CFRA skepticism make us think they have something to hide CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 23

24 3. Break-out of Fee vs. Commodity Exposure? Investors need to understand what they are buying and it is not always easy to ascertain without management disclosure. Becomes even more problematic once a parent MLP has multiple subsidiary MLPs. Regency Energy Partners (RGP) provides details on its Segment Margin: FY 2010 FY 2011 FY 2012 FY 2013 Target Fee-based 76% 83% 83% 70% Hedged Commodity 21% 11% 8% 20% Un-hedged Commodity 3% 6% 9% 10% Fee Based + Hedged 97% 94% 91% 90% Fee-based and Hedged Commodity are not created equal. Even fee-based can fall off : HiCrush Partners LP (HCLP) fell 30% when Baker Hughes terminated its contract. RGP stopped reporting Haynesville JV volumes in 2012 Three Months Ended December 31, Year Ended December 31, ($ in thousands) Haynesville Joint Venture Financial data: Segment margin $ 43,901 $ 47,450 $ 12,157 $ 183,309 $ 174,347 $ 52,051 Operating data: Throughput (MMbtu/d) 1,054,392 1,543, ,166 1,321,266 1,277, , CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 24

25 3. Break-out of Fee vs. Commodity Exposure? Gas Processing Contract Types: Fee Based Percentage of Proceeds (POP) Processor/midstream company shares in the commodity exposure. Wellhead Purchase processor s profits dependent on gathering, processing and production costs vs. the purchase price so commodity impact. Fixed Efficiency Profits are tied to NGL pricing. Keep Whole A processor agrees to process a natural gas stream, returning to the producer all of the Btus in the raw gas stream ( keeping whole the Btus) in exchange for keeping all of the liquids extracted from the gas. These have significant commodity exposure since the processor makes or loses money depending on the Btu margin between natural gas (methane) and the NGLs (the frac spread). Current NGL oversupply means the US is in a period of ethane rejection which means ethane is left in the natural gas stream instead of being removed along with propanes and heavier NGL components. Over 50% of the US NGL market is petrochemicals with blending, heating/fuel and exports being the remainder CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 25

26 3. Break-out of Fee vs. Commodity Exposure? Reliance on derivatives/hedges to generate DCF/CAD means you are relying on MLP s ability to continue hedging correctly and/or the MLP getting the opportunity to do so and the market does not always cooperate. In-the-money put option realized derivative gains are concerning in the quarter in which they are first transacted. LINE has had 7 in-the-money put option transactions but has not disclosed the impact in quarter initially purchased. LINE Derivative Gains/Losses Trends 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q12 10 Quarters Realized Commodity Gains/Losses Cancelled Derivatives Recovery of Bankruptcy Realized Commodity Gains/Losses Unrealized (425) (278) (53) 304 (520) (8) (189) 271 (2) Total Commodity Derivative Impact (369) (210) (411) 94 (108) DCF ,723 Realized Derivative Gains % DCF 45% 25% 48% 41% 34% 84% 54% 56% 53% 17% 43% 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 26

27 4. How is Sustaining/Maintenance Capex determined? What is good for a midstream assets... KMP Maintenance Capex Trends 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Maintenance Capex PP&E, net 14,696 14,824 15,344 15,596 14,916 15,130 19,326 22,330 22,584 15,130 Depreciation (281) (294) (301) (304) (321) (337) (367) (387) (401) (337) Total Capex Maintenance Capex % net PP&E 0.24% 0.33% 0.36% 0.46% 0.29% 0.34% 0.40% 0.50% 0.21% 0.34% Maintenance Capex % Depreciation 12.8% 16.7% 18.3% 23.7% 13.7% 15.4% 21.3% 28.7% 12.0% 15.4% Maintenance Capex % Total Capex 13.6% 18.1% 18.2% 19.9% 12.5% 12.3% 15.7% 20.8% 8.7% 12.3% Rolling 4 Quarter Maintenance Capex % net PP&E 1.14% 1.24% 1.29% 1.36% 1.47% 1.47% 1.27% 1.28% 1.28% 1.47% Maintenance Capex % Depreciation 15.6% 16.4% 17.2% 18.0% 18.0% 17.7% 18.5% 20.2% 19.4% 17.7% Maintenance Capex % Total Capex 15.9% 16.9% 18.5% 17.7% 17.1% 15.5% 15.1% 15.8% 14.4% 15.5% Depreciation % net PP&E 1.91% 1.98% 1.96% 1.95% 2.15% 2.23% 1.90% 1.73% 1.78% 2.23% 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 27

28 4. How is Sustaining/Maintenance Capex determined?... is not what is good for E&P assets. LINE Maintenance Capex Trends Adjusted for Price Revisions yr Avg Drill-bit F&D/BOE $8.31 $15.43 $8.68 $26.48 $9.45 $12.99 $41.52 $16.78 Acquisition F&D/BOE $10.34 $14.09 $9.64 $11.27 $12.13 $15.72 $9.21 $10.96 Total F&D/BOE $10.04 $14.21 $9.27 $16.44 $11.63 $14.80 $11.81 $12.13 Adjusted for Price Revisions 2010* E 5-YR F&D - Hist Used for Maint Capex $11.15 $11.15 $11.96 $16.78 Annual Production CFRA Estimated Maintenance Capex LINE Reported/Proj Maint. Capex Total Shortfall (93) (82) (128) (399) Quarterly Shortfall (23) (21) (32) (100) Why should we compare E&P maintenance capex to EBITDA? 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 28

29 5. How many distributions do current cash balances cover? Variable distribution MLPs should have higher coverage than traditional MLPs. When reviewing cash position of variable distribution MLPs also review the reserving needed to get to that cash position. KMP Cash Balances 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Cash and Cash Equivalents Quarterly Distribution Cash Balance Distribution Coverage NTI Cash Balances 3Q12 4Q12 1Q13 2Q13 Cash and Cash Equivalents Quarterly Distribution Cash Balance Distribution Coverage Reserves & Adjustments (51.7) 16.6 (10.0) 0.0 % of Quarterly Distribution -38% 14% -9% 0% 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 29

30 6. What is the ownership structure? Make sure you know what they own and who owns them. Few traditional midstream companies left that are not or do not have an MLP CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 30

31 6. What is the ownership structure? Sponsoring Corporation 100% Interest Subsidiary Holding Company 10% LP Interest 100% Interest General Partner 2% GP Interest 88% External LP Unit Holders MLP 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 31

32 6. What is the ownership structure? Source: Energy Transfer Partners 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 32

33 6. What is the ownership structure? GPs may also have Incentive Distribution Rights as part of their ownership interest which could pressure it to raise overall distributions more quickly than what can be supported by the underlying assets. Distribution Schedule LP% GP% LP Distrib Up To Distribution by Tier LP Share Total Distribution Total GP Share GP Regular GP IDR Tier 1 98% 2% $0-$1 $1.00 $98.00 $ $2.00 $2.00 $0.00 Tier 2 85% 15% $1-$2 $1.00 $98.00 $ $17.29 $2.00 $15.29 Tier 3 75% 25% $2-$3 $1.00 $98.00 $ $32.67 $2.00 $30.67 Tier 4 50% 50% Over $3 $1.00 $98.00 $ $98.00 $2.00 $96.00 Total 72% 28% $4.00 $ $ $ $8.00 $ ) 100 shares total with 98 LP units and the remainder GP units 2) Current distribution is $4.00/unit 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 33

34 6. What is the ownership structure? GPs can also relinquish IDRs for a period of time this should only happen if growth was not as expected and should send the same type of signal as a LP distribution cut. 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 ETE's Cash Distributions from ETP GP Interest IDR LP Interest Total IDR Reliquishment Citrus & Sunoco (13.8) (31.3) (31.0) (31.0) (55.0) Total Cash Distribution from ETP ETE's Cash Distributions from RGP GP Interest IDR IDR Reliquishment (1.0) LP Interest Total Cash Distribution from RGP Total Distribution from ETP and RGP SUG CF/Regency Adjustment (45.7) SG&A ex non-cash comp (1.8) (12.0) (11.6) (4.3) (31.0) (10.3) (6.3) (4.0) (6.0) (24.0) Interest net of adjustments (40.1) (40.1) (40.0) (40.5) (42.4) (65.7) (63.9) (60.0) (58.0) (48.0) Bridge Financing/Other (62.2) DCF (14.5) Acquisition expenses/other DCF Adjusted Source: Energy Transfer Partners 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 34

35 7. How are service costs and reimbursements allocated between related parties? Limited disclosure Particularly concerning if there are numerous MLP related parties. 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Total Service Fee RGP to ETE -- RGP Qs Total Service Fee ETE to ETP -- ETE Qs NA NA Total Service Fee SUG to ETP -- ETP Qs NA NA NA Employee Reimb RGC to ETP -- RGP Qs NA NA NA Opex reim RGP to ETP -- RGP Qs NA NA NA Reimb G&A RGC to ETP-- ETP Qs NA NA NA NA NA NA Source: Energy Transfer Partners. Energy Transfer Equity, Regency Energy Partners 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 35

36 8. How has the MLP grown? Organic vs. Acquisitions Dropdowns vs. Third Party Acquisitions Funding: Debt vs. Equity E&P MLPs largely grow by acquisitions 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 36

37 9. How as the growth been funded and is there a target level of debt? Creditors still look at GAAP items Higher commodity exposure means less willing to accept high leverage As balance sheet leverage bumps up against target debt increased likelihood of equity offering which will pressure unit performance. NTI Balance Sheet Items 3Q12 4Q12 1Q13 2Q13 Cash and Cash Equivalents Current Assets Total Assets 1,177 1,137 1,123 1,085 Cash % Current Assets 50.3% 45.5% 30.3% 19.8% Cash % Total Assets 27.5% 24.0% 15.3% 9.1% Debt Total Partners' Capital Total Capital Debt-to-Total Capital Ratio 33.3% 36.9% 36.5% 38.9% Net Debt (55) Total Net Capital Net Debt to Total Capital Ratio -11.4% 1.9% 18.3% 29.3% 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 37

38 10. What are the governance policies? Conflicts Committees Cross-Board Relationships Cannot Contract Away Good Faith Understand Management Compensation Understand IDR Status 2013 CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 38

39 Questions? New York City September 9-10 Julie Hilt Hannink, CFA Energy Sector Lead CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 39

40 About Julie Hilt Hannink Julie Hilt Hannink is the head of energy sector research for CFRA and has 28 years of experience in financial and fundamental research and analysis. Before joining CFRA seven years ago, Julie was Director-Oil and Gas Equity Research at Medley Global Advisors. Prior to that, she spent nearly 15 years on the asset management side of the investment business, most recently at J.P. Morgan Asset Management where she was a Managing Director and senior North American oil & gas analyst. Julie holds a BS in Commerce (concentration in Accounting) from the University of Virginia CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 40

41 Client Services + 1 (212) cservices@cfraresearch.com The content of this report and the opinions expressed within are those of CFRA. This analysis has not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. While CFRA exercised due care in compiling this analysis, CFRA AND ALL RELATED ENTITIES SPECIFICALLY DISCLAIM ALL WARRANTIES, EXPRESS OR IMPLIED, regarding the accuracy, completeness or usefulness of this information. and assumes no liability with respect to the consequences of relying on this information for investment or other purposes. In particular, the research provided is not intended to constitute an offer, solicitation or advice to buy or sell securities. CFRA s financial data provider for financial companies is SNL FINANCIAL LC. CONTAINS COPYRIGHTED AND TRADE SECRET MATERIAL DISTRIBUTED UNDER LICENSE FROM SNL. FOR RECIPIENT S INTERNAL USE ONLY CFRA, CFRA Accounting Lens, CFRA Legal Edge, CFRA Score, and all other CFRA product names are the trademarks, registered trademarks, or service marks of CFRA or its affiliates in the United States and other jurisdictions. CFRA Score may be protected by U.S. Patent No. 7,974,894 and/or other patents. If you have any comments or questions, please contact cservices@cfraresearch.com CFRA. All rights reserved. This document may not be reproduced or redisseminated in whole or in part without prior written permission from CFRA. 41