J a n n e y Corporat e Credit J u ly 9, 2013

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1 MLP Monitor: June-July J a n n e y Corporat e Credit J u ly 9, 2013 Growth capex plans remain high, but rates and energy price volatility may cause firms to cut guidance during earnings season this month. This is the year of capex, or so firms thought. We expect that the volatility in energy prices over the past year and a half, along with the change in attitude of the capital markets, will cause firms more exposed to natural gas and natural gas liquids (NGLs) to reassess their short-term investment strategies. Already firms have started to prepare for alternate financing methods, and we anticipate that these announcements are only the beginning, as nat gas and NGL prices are not at attractive levels currently. At halfway through the year, we are anticipating that those MLPs most heavily exposed to natural gas and natural gas liquids (NGLs) will likely revise downwards their growth capex plans for the year, as margins stay under pressure from the sustained low NGL prices and volatility in nat gas prices. Additionally, the uncertainty of the rates market, as seen over the past few weeks, has made raising capital more expensive for many of these firms versus most of the first half of the year. We have performed a targeted look at firms based on their leverage, liquidity, cash generation, and near-term expansionary capex plans to discuss which firms are likely to weaken through the remainder of the year. Growth capex is a major component for every MLP s strategy: it increases depreciation, thereby decreasing and/or deferring taxes that unitholders must pay. The tax benefits for MLPs over corporations incentivize companies to take on large capex projects. In 2010, the Interstate Natural Gas Association of America guided for $205B in natural gas investment from 2011 to 2035, or an annual run-rate of $8.2B. Among the ten companies in our group, the 2013 guided growth capex is $19.1B, or more than double that annual run-rate figure. Part of this sizable increase is the influx of companies into nontraditional shale plays. Nevertheless, technological advancements coupled with macro factors have led to volatility in nat gas and NGL pricing, thereby challenging companies short-term plans to build out energy pipeline, storage, and processing networks. This trend has affected those companies that have the largest exposure to nat gas and NGLs in particular. Jody Lurie Corporate Credit Analyst jlurie@janney.com See page 6 for important information regarding certifications, our ratings system as well as other disclaimers. MLP Monitor Page 1 Spreads Tightened for Only BPL, KMP, EPD, and PAA this Month Security Ratings MR Spread 1-Month 3-Month 6-Month (a/o 8-Jul) Change Change Change BPL /01/23 Baa3/BBB/NR N/A N/A ETP /01/23 Baa3/BBB-/BBB N/A BWP 3 3/8 02/01/23 Baa2/BBB-/BBB WPZ /15/22 Baa2/BBB/BBB OKS 3 3/8 10/01/22 Baa2/BBB/NR KMP 3 1/2 09/01/23 Baa2/BBB/BBB N/A EEP /15/21 Baa2/BBB/NR EPD /15/23 Baa1/BBB+/BBB N/A PAA /31/23 Baa2/BBB/NR MMP 4 1/4 02/01/21 Baa2/BBB/NR Source: Janney FISR; Company Reports; TRACE

2 Several Firms Have Ramped up Capex Plans Since 2010 $5,000MM $4,500MM $4,000MM $3,500MM $3,000MM 2010 Capex 2011 Capex 2012 Capex 2013E Capex $2,500MM $2,000MM $1,500MM $1,000MM $500MM Although these MLPs could use the capital markets to bolster distributions and capex financing, some of the firms are using more creative ways to finance plans. - BWP BPL EEP ETP EPD KMP MMP OKS PAA WPZ Source: Janney FISR; Company Reports; SNL Financial; Capital IQ What is more intriguing is that those companies that have high exposure to nat gas and NGLs also happen to have elevated capex plans for this year, coming off of elevated plans from last year. In turn, distribution coverage is either trending below or near the 1.0x level as these companies devote their cash towards expansion. Leverage at these firms is weaker than peers. Although these MLPs could use the capital markets to bolster distributions and capex financing, some of the firms are using more creative ways to finance plans. Enbridge Energy Partners (Baa2/BBB/BBB), for example, is utilizing its parent Enbridge, Inc. (Baa1/A-/NR) in a joint venture, along with announcing an IPO of sub in order to improve short-term liquidity. Six of the 10 firms we cover had negative figures for LTM cash flow from operations (as a proxy for projected cash generation) less 2013E maintenance and expansionary capex, pointing to potential alternate financing needs. Enterprise Products (Baa1/BBB+/BBB) already raised debt in March 2013 and equity in February 2013, bolstering liquidity levels above potential capex needs, so another offering is unlikely on the horizon. Similarly, Magellan s (Baa2/BBB/NR) cash gap is minimal and can be addressed through short-term financing. Energy Transfer Partners (Baa3/BBB-/BBB-), while likely lead to a slight uptick in leverage, is utilizing proceeds from asset sales and its various public entities under the corporate family to finance capex. Similarly, ETP is planning a secondary equity offering of the 6MM AmeriGas (Baa3/BBB-/BBB-) shares it received as part of a recent transaction, thereby avoiding primary offerings. We, therefore, anticipate ONEOK (Baa2/BBB/NR) and Williams (Baa2/BBB/BBB-) potentially using the debt or equity markets to fund expansion. Both firms have parent companies that are highly dependent on their MLPs to generate a sizable portion of cash flows. Both have high exposure to Firms More Likely to Borrow for Capex also Have Lower Distribution Coverage Ratios $1,500MM $1,000MM $500MM LTM CFO less 2013E maintenance and growth capex MRQ Distribution Coverage 2012 Distribution Coverage 2.50x 2.00x 1.50x x ($500MM) 0.50x ($1,000MM) 0.00x MLP Monitor Page 2 ($1,500MM) ($2,000MM) BWP BPL EEP ETP EPD KMP MMP OKS PAA WPZ Source: Janney FISR; Company Reports; SNL Financial; Capital IQ -0.50x -1.00x

3 nat gas and NGLs, and both have sizable capex plans for the year, above their likely cash generation. For ONEOK, leverage could increase to roughly 6.0x from its current 4.4x, while for Williams, leverage would only tick up to about 4.5x from 3.7x. ONEOK has a gap of $1.7B, matched by minimal cash and a potential for $1.7B in credit lines (using an accordion feature). An alternative to offering debt or equity is utilizing general partner ONEOK, Inc. s (Baa2/BBB/NR) untapped credit lines. Williams is less likely to come to market, as its cash gap of $1.7B can be covered, in theory, by the $1.8B remaining on its revolving credit line. All-in-all, we see these credits as likely issuers of debt and equity during 2H 2013 to supplement investment plans, leading to an increase in leverage, or opting to pare back capex plans in light of market pressures. Highlights of Firm Actions in the Face of External Pressures We see OKS and WPZ as likely issuers of debt and equity during 2H 2013 to supplement investment plans, leading to an increase in leverage, or opting to pare back capex plans in light of market pressures. Enbridge Energy Partners LP (Baa2/BBB/NR; Janney Credit stable outlook) Enbridge has been using its corporate family structure to prevent additional new issuance and deterioration of leverage, which is already elevated well above 6.0x. Most recently, MLP sub Midcoast Energy Partners (NR), which operates and develops natural gas and NGL midstream assets in the US (Texas and Oklahoma), filed for an IPO, allowing EEP to raise $ MM in capital without a dilution factor. EEP has fairly aggressive capex plans for the year, and has been working with its general partner Enbridge, Inc. to defray project costs and provide support (e.g. $1.2B preferred issuance from Enbridge, Inc.). This IPO, once completed, will provide extra cash for EEP, but long-term will remove certain assets away from bondholders and create a more complex company structure. At the start, Midcoast will own 40% of EEP s existing nat gas and NGL midstream business, while EEP will serve as the general partner. EEP has intentions to drop down the remaining 60% ownership of these assets over a 4-5 year time period. In turn, EEP will become predominantly a crude oil midstream MLP, with the opportunity to more easily receive dropdowns from Enbridge, Inc. than pre-ipo of Midcoast. For bondholders, this step is a mixed positive. Recent Debt & Equity Issues Ann Close Issuer Issue Amt ($MM) Use of Proceeds 3-Jun 3-Jun Buckeye Ptnrs BPL 4.15% '23 $500 Refi debt 11-Mar 11-Mar Enterprise Products Operating EPD 3.35% '23 1,250 CP payment, refi debt 11-Mar 11-Mar Enterprise Products Operating EPD 4.85% '44 1,000 CP payment, refi debt 21-Feb 21-Feb Kinder Morgan Energy Ptnrs KMP 3.50% ' CP payment 21-Feb 21-Feb Kinder Morgan Energy Ptnrs KMP 5.00% ' CP payment 14-Jan 14-Jan Energy Transfer Ptnrs ETP 3.60% ' Loan payment 14-Jan 14-Jan Energy Transfer Ptnrs ETP 5.15% ' Loan payment 7-Jan 7-Jan Sunoco Logistics Ptnrs SXL 3.45% ' Loan payment 7-Jan 7-Jan Sunoco Logistics Ptnrs SXL 4.95% ' Loan payment MLP Monitor Page 3 Ann Close Issuer Amt ($MM) Source: Janney FISR; Company Reports; Capital IQ; SNL Financial Security Type Offering Type Use of Proceeds 29-May 30-May Boardwalk Pipeline Ptnrs $381 Common Stock Follow-on Repay loan 4-Apr 5-Apr Energy Transfer Ptnrs 663 Common Stock Follow-on Repay loan 4-Mar 5-Mar Williams Ptnrs 636 Common Stock Follow-on Repay loan 20-Feb 21-Feb Kinder Morgan Energy Ptnrs M&A financing, repay 397 Common Stock Follow-on debt 4-Feb 5-Feb Enterprise Products Ptnrs M&A financing, repay 502 Common Stock Follow-on debt/loan 23-Jan 24-Jan Buckeye Ptnrs 363 Common Stock Follow-on Repay loan

4 Historically, EPD has used the revolver to finance growth capex plans, and waited until the market was more attractive to issue equity or debt. MLP Monitor Page 4 Recent Acquisitions & Divestitures Ann Close Buyer Target Seller Value ($MM) Source: Janney FISR; Company Reports; Capital IQ; SNL Financial % Stake Financing Sunoco Logistics May-2013 Apr-2013 Marcus Hook Facility Sunoco $60 100% Cash Ptnrs Mar-2013 Pending Energy Transfer Ptnrs Kinder Morgan Mar-2013 Mar-2013 Energy Ptnrs Feb-2013 Pending Regency Energy Ptnrs Feb-2013 Pending Magellan Midstream Ptnrs Feb-2013 Pending Marubeni Corp. Jan-2013 Pending Kinder Morgan Energy Ptnrs ETP Holdco 50% El Paso Natural Gas Co; 50% El Paso Midstream Ivmt Co Southern Union Gathering Co Refined pipelines in Rocky Mtns/New Mexico Floating production project for Tubular Bells field in Gulf of Mexico Energy Transfer Equity Kinder Morgan, Inc. Southern Union Plains All American 3,750 60% Combo 1, % Combo 1, % Combo % Cash Williams Ptnrs N/A 49% Unknown Copano Energy - 4, % Stock ONEOK Partners (Baa2/BBB/NR; Janney Credit stable outlook) General partner ONEOK, Inc. announced plans to discontinue its energy services segment. This step follows the challenges the ONEOK family has faced since winter 2012: first by having too much exposure to natural gas; second by aggressively expanding into NGLs to offset this exposure; third through added commodity exposure from both products; and finally having a heavily commoditybased business outside of the MLP. First quarter results had been weak due to unfavorable NGL price differentials and ethane rejection. The energy services segment manages third-party transport and storage contracts. Per management, The energy services segment continues to face challenging industry conditions that show no signs of improving. Increased natural gas supply and infrastructure, coupled with lower natural gas price volatility, have narrowed seasonal and location natural gas price differentials, resulting in limited opportunities to generate revenues to cover our fixed costs on this contracted storage and transportation capacity. As a result, the firm revised down its FY2013 net income guidance to $ MM from $ MM previously. This revision downward follows ONEOK Partner s lowered net income guidance to $ MM in February due to the lower expected NGL volumes because of widespread ethane rejection. The firm also guided for about a 1x coverage ratio for the year, below its long-term target of x. The combination of challenging corporate family pressures and high capex requirements points to a reliance on the capital markets or a paring back of capex for the year. Williams Partners LP (Baa2/BBB/BBB-; Janney Credit stable outlook) At a recent conference, management guided for $22B in capex over the next five years, or about $4B a year. Next to Enterprise Products, Williams has the largest expansionary capex plans for the year at $3.4B within our group. The firm s recent purchases in the Marcellus/Utica and Texas regions have spurred management to become more aggressive in targeted regions to garner potential first-mover advantage. We see some execution risk in these plans, as the firm s nat gas and NGL exposure may hinder efforts. Additionally, the firm recently dealt with headline risk related to an explosion at a ethylene cracking plant in Louisiana. Management commented that insurance is likely to cover most of the damages. Still, Williams Cos. has sizable long-term expansion goals in the region to address processing of energy products into by-products in the US, competing with Exxon,

5 Shell, and others for market share, and this event could counteract other efforts. The facility s closure is likely to affect profit generation modestly through year-end, as management had anticipated EBITDA generation from the plant of $190MM for the remaining 6.5 months of Enterprise Products Partners LP (Baa1/BBB+/BBB; Janney Credit positive outlook) The firm added a $1B revolving credit facility maturing in June 2014 to its capital structure. The firm also has a $3.5B revolving credit facility maturing in June 2018, on which it had the full amount available as of 1Q end. Historically, EPD has used the revolver to finance growth capex plans, and waited until the market was more attractive to issue equity or debt. Given its capex plans exceed LTM cash flows, we anticipate the firm will partially utilize these facilities near-term. Among projects, EPD recently announced plans to build two refined product export facilities to bolster exporting capacity from the Gulf of Mexico. Conversely, Western Gas Partners (NR) acquired a 25% interest in its joint venture with Enterprise involving two fractionation trains in Texas, decreasing some of the $165MM project cost burden for EPD. Among our MLPs Despite North America having the infrastructure to handle increased rail transport, recent highprofile derailments and accidents bring to bear the question of which option is the better alternative for energy transport. Kinder Morgan Energy Partners LP (Baa2/BBB/BBB; Janney Credit cautious outlook) The volatility in pricing in addition to the expansion of crude production in the US and Canada is also shifting power away from midstream MLPs and towards refiners. Kinder Morgan opted not to work on a $2B Freedom oil pipeline that was scheduled to run from Texas to California, as large refiners in the California market looked instead at rail cars as the cheaper alternative. While longterm regional pricing differentials for crude may not be supportive of rail use over pipelines, refiners prefer rail transport to pipelines due to shipment contract flexibility (e.g. short-term contracts generally) and the like. Despite North America having the infrastructure to handle increased rail transport, recent high-profile derailments and accidents bring to bear the question of which option is the better alternative for energy transport. MLP Monitor Page 5

6 Analyst Certification I, Jody Lurie, the Primarily Responsible Analyst for this report, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject sectors, industries, securities, and issuers. No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Janney Montgomery Scott LLC ( Janney ) Debt Research Disclosure Legend Janney may seek compensation for investment banking services for the companies listed in this report in the next 3 months. The research analyst is compensated based on, in part, Janney s profitability, which includes its investment banking revenues. Additional information available upon request. Definition of Issuer/Company Outlooks Janney FIS employs a rating system which considers the company, but not any specific debt or equity securities of the company and is not making a recommendation with regard to any specific debt securities of the company. Outlooks reflect our opinion about how credit factors of the company may affect its credit rating(s). Positive: Janney FIS believes there are factors which point towards improving issuer or sector credit quality which may result in potential credit ratings upgrades Stable: Janney FIS believes there are factors which point towards stable issuer or sector credit quality which are unlikely to result in either potential credit ratings upgrades or downgrades. Cautious: Janney FIS believes there are factors which introduce the potential for declines in issuer or sector credit quality that may result in potential credit ratings downgrades. Negative: Janney FIS believes there are factors which point towards weakening in issuer credit quality that will likely result in credit ratings downgrades. Definition of Sector/Industry Ratings Overweight: Janney FIS expects the target asset class or sector to outperform the comparable benchmark (below) in its asset class in terms of total return. Marketweight: Janney FIS expects the target asset class or sector to perform in line with the comparable benchmark (below) in its asset class in terms of total return. Underweight: Janney FIS expects the target asset class or sector to underperform the comparable benchmark (below) in its asset class in terms of total return. Janney FIS Outlooks Distribution as of 07/09/2013 IB Serv./Past 12 Mos. Outlook Count Percent Count Percent Positive Stable Cautious Negative Benchmarks Asset Classes: Janney FIS ratings for domestic fixed income asset classes including Treasuries, Agencies, Mortgages, Investment Grade Credit, High Yield Credit, and Municipals employ the Barclay s U.S. Aggregate Bond Market Index as a benchmark. Treasuries: Janney FIS ratings employ the Barclay s U.S. Treasury Index as a benchmark. Agencies: Janney FIS ratings employ the Barclay s U.S. Agency Index as a benchmark. Mortgages: Janney FIS ratings employ the Barclay s U.S. MBS Index as a benchmark. Investment Grade Credit: Janney FIS ratings employ the Barclay s U.S. Credit Index as a benchmark. High Yield Credit: Janney FIS ratings for employ Barclay s U.S. Corporate High Yield Index as a benchmark. Municipals: Janney FIS ratings employ the Barclay s Municipal Bond Index as a benchmark. 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