MLP Market Update
Commentary on Master Limited Partnerships

Glossary of MLP Terms

Glossary of MLP Terms

  • Available cash flow – cash flow available to common unit holders and the GP.  Usually cash flow from operations less maintenance capex.
  • Cash or adjusted yield – an MLP’s current yield adjusted for its GP share of cash flow. For example, if the GP is receiving 10% of an MLP’s total distributions and the partnership’s units trade at a 7% yield, the cash yield would be 7.8% (current yield / [1 - % of cash distributions paid to GP]).
  • Current yield – current declared quarterly distribution annualized divided by current stock price.
  • Distributable cash flow (DCF) – the cash flow available to be paid to common unit holders after payments to the general partner.  Some people do not distinguish DCF from Available Cash Flow, so it’s important to pay attention to whether the GP payment have been taken out.
  • Distribution – In a typical partnership agreement, the MLP is required to distribute all of its “available cash.” MLPs typically distribute all available cash flow (i.e., cash flow from operations less maintenance capex) to unit holders in the form of distributions. However, management typically has some discretion in how much cash flow it chooses to pay out.  Usually quarterly distribution increases must be approved by the board.
  • Distribution coverage ratio – the “cushion” a partnership has in paying its cash distribution. The higher the ratio is, the greater the safety of the distribution.  Is calculated either as (1) available cash flow (before taking out GP payments) divided by total cash distributed or (2) distributable cash flow divided by distributions to LPs, usually calculated on a per unit basis.  I prefer the method that takes out the GP payments, as that’s a better indication of coverage of the current quarterly or annual distribution to LPs, which is what investors should care about.
  • Distribution tiers – percentage allocations (and the associated thresholds) of available cash flow between common unitholders and the general partner based on specified target distribution levels. Also referred to as “splits”.
  • Dropdown – the sale of an asset from a parent company (or sponsor company) to the underlying partnership.  Drop downs are tricky from a board perspective and usually require a fairness opinion issued by an investment bank indicating that the valuation paid is fair, given that this is a transaction between related parties.
  • Earnings per unit (EPU) – synonymous with a corporation’s earnings per share (EPS). 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.
  • Forward yield – an MLP’s estimated next four quarterly distributions divided by an MLP’s current unit price.
  • General partner (GP) – (1) manages the day-to-day operations of the partnership, (2) generally has a 2% ownership stake in the partnership, and (3) is eligible to receive an incentive distribution (through the ownership of the MLPs’ IDRs).
  • Incentive distribution rights (IDRs) – IDRs allow the holder (typically the GP) to receive an increasing percentage of quarterly distributions after the MQD and target distribution thresholds have been achieved. In most partnerships, IDRs can reach a tier wherein the GP is receiving 50% of every incremental dollar paid to the LP unit holders. This is known as the 50/50, or “high splits” tier.
  • I-Shares – equivalent to MLP units in most aspects, except the payment of distributions is in stock instead of cash. Investors in i-shares receive a 1099 statement (not K-1). I-shares do not generate UBTI.
  • K-1 statement – the statement that an MLP investor receives each year from the partnership that shows his or her share of the partnership’s income, gain, loss, deductions, and credits. A K-1 is similar to Form 1099 received by shareholders of a corporation.
  • Limited partners – (1) provide capital, (2) have no role in the MLPs’ operations or management, and (3) receive cash distributions.
  • Maintenance capital expenditure – the investment required to maintain the partnership’s existing assets.
  • Master limited partnerships (MLPs) – limited partnership investment vehicles consisting of units (rather than shares) that are traded on public exchanges. MLPs consist of a general partner and limited partners. Also known as “publicly traded partnerships”.
  • Minimum quarterly distribution (MQD) – the minimum distribution the partnership plans to pay to its common and subordinated unit holders upon initial public offering (assuming the company is able to generate sufficient cash flow from its operations after the payment of fees, expenses, maintenance capex, and cash flow to the GP). The partnership does not guarantee its ability to pay out the MQD during any quarter.
  • Subordinated units – subordinate in the capital structure to common units. For a period of time, the subordinated units will not be entitled to receive distributions until the common units have received the MQD plus any arrearages from prior quarters. Subordinated units increase the likelihood that (during the subordinated period) there will be sufficient available cash to be distributed to the common units. In addition, subordinated units are not entitled to distribution arrearages.
  • Subordination period – the period of time that subordinated units will not be entitled to receive any distributions until the common units have received the MQD plus any arrearages from prior quarters. The subordination period typically last for three years from the date of the partnership’s initial public offering. However, the subordination period could be terminated at an earlier date if the partnership achieves certain criteria. Upon expiration of the subordinated period, the units convert to common units on a one-for-one basis.
  • Tax deferral rate – percentage of the cash distribution to the unitholder that is tax deferred until the security is sold. The tax deferral rate on distributions ranges from 40-90%. The tax deferral rate is an approximation provided by the partnership and is only effective for a certain period of time.
  • Units – synonymous with a corporation’s shares.
  • Unrelated taxable business income – MLP income received by a tax-exempt entity (e.g., pension accounts, 401-K, and endowment funds) is considered “income earned from business activities unrelated to the entity’s tax-exempt purpose” or UBTI. A tax-exempt entity that receives more than $1,000 per year of UBTI may be held liable for the tax on the UBTI.
  • Weighted average cost of capital – represents the cost to the entity of financing and should be the hurdle rate for new investments. As it relates to MLPs, it is the proportional weight of equity and debt in a partnership’s capital structure. Unlike corporations, MLPs do not realize a tax benefit on their debt (since they do not pay corporate taxes).

Glossary of Broader Energy Terms

  • 1P reserves (proved) – Estimated quantities of crude oil, natural gas, and natural gas liquids that geological and engineering data demonstrate with certainty to be commercially recoverable, from a given date forward, from known reservoirs, and under current economic conditions, operating methods, and government regulations. Proved reserves indicate there is at least a 90% probability or “reasonable certainty” that the reserves will be producing in the future.
  • 2P reserves (proved + probable) – 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.
  • 3P reserves (proved + probable + possible) – Possible reserves indicate there is at least a 10 % probability or “less likely than probable” chance that the reserves will be producing.
  • Amine – a chemical used to remove impurities from natural gas in order to make the natural gas suitable for pipeline transport.
  • American Petroleum Institute (API) – national trade association that represents all aspects of America’s oil and natural gas industry.
  • Base load plant – efficient, low-cost hydro, nuclear or coal –fired generating plants that generally run around the clock, serving the minimum load requirements of a region.
  • Base gas (or cushion gas) the volume of gas that is needed as permanent inventory in a storage reservoir (i.e., aquifer, depleted natural gas or oil field, and/or salt cavern) to maintain adequate pressure and deliverability rates throughout the withdrawal season.
  • Basis differential – The difference between the Henry Hub spot price and the corresponding cash spot price for natural gas in a given location. Often relates to factors like product quality, location and takeaway capacity.
  • Backwardation A market condition in which future commodity prices are lower than spot prices. A backwardated market usually occurs when demand exceeds supply.
  • Blendstocks a liquid compound that is mixed with petroleum products to improve the petroleum’s characteristics. For example, blendstocks are mixed with motor gasoline to increase the gasoline’s octane or oxygen content.
  • Bureau of Land Management – approves permits for companies to produce oil and gas resources on Federal and Indian lands.
  • British Thermal Unit (Btu) – a measure of the amount of energy required to raise the temperature of one pound of water by one degree Fahrenheit. 1 mmbtu = 1,000,000 btu.
  • Cap-and-trade – Regulation that places a cap on the amount of greenhouse gas emissions allowable from certain sources (i.e. power plants). Cap for each year is set as a reduction from total emissions of previous year until targeted overall reduction is reached. Allowances (credits) for emissions equal to the cap are auctioned to companies, who can then transfer/trade these credits amongst themselves.
  • Capex – Capital Expenditures. Funds used by a company to acquire or upgrade assets such as property, buildings or equipment with the purpose of creating future benefits.
  • CAGR – Compound Annual Growth Rate. Year-over-year growth rate of an investment over a specified period of time.
  • Capacity factor – the ratio of the actual electrical energy produced by a generating unit divided by the potential output over a given period of time.
  • Capacity payment – a fee paid to a generator to ensure the availability of that facility for a given period of time, generally expressed as $/kW-month or $/kW-year. Separate from and incremental to an Energy payment.
  • Coalbed methane (CBM) methane found in coal seams.
  • Combined Cycle Gas Turbine (CCGT) – A power plant that, while generating electricity via a gas turbine, uses waste heat to make steam to generate additional electricity via a steam turbine. Enhances the efficiency of the plant.
  • Cooling Degree Days (CDD) – a measure used to assess weather’s impact on natural gas usage. Each degree (°F) by which the average temperature rises above 65°F represents one CDD (i.e. a day with average temperature of 80°F would have 15 CDDs).
  • Cogeneration (cogen) – Uses surplus steam produced during the power generating process to supply a customer with steam for use in that customer’s operations.
  • Compression – natural gas is compressed to a higher pressure to facilitate delivery of gas from one point to another.
  • Contango – a market condition in which future commodity prices are greater than spot prices. The higher future price is often due to the cost associated with storing and insuring the underlying commodity.
  • Cycling – storage process in which the same quantity of natural gas is injected into and withdrawn from storage within a certain period of time.
  • Dark spread – the difference between the cost of coal in generating electricity and the market price of electricity.
  • Deliverability – 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, withdrawal rate, or withdrawal capacity). Deliverability is usually expressed in terms of millions of cubic feet per day (MMcf/day) or dekatherms per day. In general, the deliverability rate it is at its highest when the reservoir is most full and declines as working gas is withdrawn.
  • Development well – A well drilled into a known producing formation in a previously discovered area.
  • Dirty hedge – the use of crude oil derivatives to hedge natural gas liquids (NGL) exposure.
  • Department of Energy (DOE) – department of the United States government responsible for energy policy and nuclear safety.
  • Downspacing – An increase in the number of available drilling locations as a result of a regulatory commission order.
  • Downstream – the refining and marketing sectors of the energy industry. It is also associated with the sale of products after they are refined or processed.
  • Dry hole – a well found to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well.
  • Dual-fuel unit – A generating unit that can produce electricity using two or more input fuels; most often natural gas and fuel oil.
  • Economic (or Mineral) Interest – The rights that a company will seek to explore, develop, produce, and share in proceeds from the sale of any minerals that might exist beneath the property (unless it already holds that right).
  • Energy Information Administration (EIA) – within the U.S. Department of Energy. Provides policy-neutral data, forecasts, and analyses to promote sound policy making, efficient markets, and public understanding regarding energy.
  • Emission allowances – a regulatory “right to pollute”; generally a certificate that allows the holder to emit one ton of a controlled pollutant.
  • Energy payment – The revenue earned by a generator for the actual production of a MWh of power; can be incremental to a Capacity payment.
  • US Environmental Protection Agency – Leads the Nation’s environmental science, research, education and assessment efforts. The mission of the Environmental Protection Agency is to protect human health and the environment.
  • Exploratory well – A well drilled into a previously untested geologic prospect to determine the presence of gas or oil.
  • F&D Cost – Finding and Development Cost. Incurred when a company purchases, researches, and develops properties in an effort to establish commodity reserves.
  • Federal Energy Regulatory Commission (FERC) – an independent agency that regulates the interstate transmission of electricity, natural gas, and oil. The FERC also reviews proposals to build liquefied natural gas terminals and interstate natural gas pipelines, as well as licensing hydropower projects.
  • Fee-based – under a fee-based arrangement, the processor receives a fee for processing. The producer retains ownership of both the dry gas and the NGLs.
  • Forced Outage Rate – the amount of time that a generating facility is unavailable to produce power due to an unexpected mechanical problem, expressed as a percentage of the total potential generation
  • Fracturing – 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. The crack in the rock exposes an increased surface area that allows a greater amount of natural gas to be produced.
  • Fractionation the process that involves the separation of the NGLs into discrete NGL purity products (i.e., ethane, propane, normal butane, iso-butane, and natural gasoline).
  • Frac Spread – A measure of profitability for processing plants. It’s the difference between the sales price of natural gas liquids (the processing output) and the cost of natural gas (the processing input).
  • Generator capacity – the maximum output, commonly expressed in megawatts (MW), that generating equipment can supply.
  • Heating Degree Days (HDD) – A measure used to assess weather’s impact on natural gas usage. Each degree (°F) by which the average temperature falls below 65°F represents one HDD (i.e. a day with average temperature of 45°F would have 20 HDDs).
  • Heat rate – A measure of the amount of fuel required to produce a unit of power (for example, 10mmbtu of natural gas per megawatt hour of electricity).
  • Hydrocarbon – an organic compound made of carbon and hydrogen atoms used as sources of energy, including natural gas, coal, and crude oil.
  • Independent Power Producer (IPP) – produces and sells power to wholesale markets. IPPs are unregulated, so they are not guaranteed a return on capital like utilities. The market determines the
  • Independent System Operator (ISO) – Organization formed at the direction or recommendation of the FERC that coordinates, controls, and monitors the operation of the electrical power system, usually within a single state, but sometimes encompassing multiple states.
  • Injection capacity (or rate) – the amount of gas that can be injected into a storage facility on a daily basis. As with deliverability, injection capacity is usually expressed in MMcf/day or dekatherms/day. The injection capacity of a storage facility is also variable, and is dependent on factors comparable to those that determine deliverability. In contrast to the deliverability rate, the injection rate is at its lowest when the reservoir is most full and increases as working gas is withdrawn.
  • Injection season – the period of time (i.e., April 1 to October 31) during which producers and pipelines inject natural gas into storage for use during the winter months.
  • Interstate pipelines – a pipeline that transports product across state lines. Interstate pipelines are regulated by the FERC.
  • Intrastate pipelines – a pipeline that operates within one state. Intrastate pipelines are regulated by state, provincial, or local jurisdictions.
  • Keep-whole – in a keep-whole arrangement, the processor retains title to the NGLs produced from the natural gas stream to sell at market prices. By extracting the NGLs, the volume and BTU content of the dry gas is reduced. This is referred to as “shrinkage.” 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. A holder of a keepwhole contract would be long NGL prices and short natural gas prices.
  • Liquefaction – the process that changes natural gas from a gaseous state to a liquid state.
  • Liquefied Natural Gas (LNG) – Natural gas that is liquefied by reducing the temperature to -260°F. Usually used to supplement traditional natural gas supplies during periods of peak demand.
  • Liquid petroleum gas (LPG) – created (as a by-product) during the refining of crude oil or from natural gas production. LPGs are typically a mixed form of propane and butane.
  • Local distribution company (LDC) – 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.
  • Looping – involves the installation of additional pipeline next to an existing pipeline to increase the system’s capacity.
  • Lease Operating Expense (LOE) – Cost of maintaining and operating property and equipment on a producing oil and gas lease.
  • Market heat rate – market price of power stated in terms of gas price. For example, a $70/MWh power price, given a $ 7/mmbtu gas price has a market heat rate of 10,000 btu/kWh.
  • Methane – also known as natural gas. It is the most commonly found hydrocarbon gas.
  • Midstream – gathering, treating, processing, transportation, or storage of a product after it is produced from the wellhead, but before it is distributed to the end use market for consumption.
  • Natural gas liquids (NGLs) NGLs are extracted from the raw natural gas stream into a liquid mix (consisting of ethane, propane, butane, iso-butane, and natural gasoline). The NGLs are then typically transported via pipelines to fractionation facilities.
  • Outage – the removal of a generating unit from service to perform maintenance or repair work.
  • Parking the temporary storage of natural gas for a pipeline customer. Pipeline customers may park natural gas to avoid selling the gas at a low price.
  • Peaker plant – A power plant that runs only in times of short supply or high demand (normally during peak demand), when prices are high.
  • Percent of proceeds or liquids – in a percentage of proceeds (POP) arrangement, the processor gathers and processes the natural gas and then sells the residue gas and produced NGLs at market prices. The processor receives a percent of the resulting dry gas and/or NGLs. Under percent of liquids (POL) contracts, the processor receives a percentage of the NGLs only. Holders of POP or POL contracts are effectively long on natural gas or NGL prices.
  • Pipeline quality gas – natural gas that has impurities removed. Pipeline quality gas is typically 95% methane.
  • Power purchase agreement (PPA) – a long-term contract between an electricity generator and a purchaser of energy or capacity.
  • Processing – the separation of raw natural gas into “pipeline quality” gas and natural gas liquids.
  • Production decline rate – a measure of the decline in production from crude oil and natural gas reserves.
  • Producer Price Index (PPI) adjustment – 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. The index system is based on the Producer Price Index for finished goods plus 2.65%. Companies are allowed to increase their rates on an annual basis on July 1. The current index is valid for a five-year period that began on July 1, 2011, and extends through July 1, 2016.
  • Proved Developed Reserves (PD) – the portion of proved reserves which can be expected to be recovered through existing wells with existing equipment and operating methods.
  • Proved developed producing reserves (PDPs) – reserves that can be recovered via existing wells and through the use of existing equipment and operations.
  • Proved Undeveloped Reserves (PUD) – The portion of proved reserves which can be expected to be recovered from new wells on undrilled, proved acreage or from existing wells where a relatively major expenditure is required for completion.
  • PV-10 (standardized measure) – the after tax present value of estimated future cash flow of proved reserves. The calculation is based on current commodity prices and is discounted at 10%.
  • Public Utility Commission (PUC) – a regulatory body in each state that governs public utilities within its jurisdiction, such as electricity, gas, and oil utilities.
  • Recompletion – the completion of an existing wellbore (i.e., had been previously completed) for production.
  • Refined petroleum products – Crude oil refineries process and refine oil into refined petroleum products. These products are primarily used as fuels by consumers (gasoline, diesel, jet fuel, kerosene, and heating oil).
  • Regasification – the process that changes natural gas from a liquid state to a gaseous state.
  • Regional Greenhouse Gas Initiative – A regional carbon emission reduction scheme in ten north eastern states.
  • Reserve margin – the amount of available plant reserve capacity above the system’s peak electricity requirements.
  • Reserves-to-Production ratio (R/P) – Measures years of supply (lifetime of oil/gas reserves) by dividing the remaining recoverable reserves at year-end by actual annual production volumes.
  • Residue gas – the natural gas that remains after processing and treating.
  • Royalty payment – a type of payment received based on either a percentage of sales revenue or a fixed price per unit sold. For example, 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.
  • Secondary recovery – Process of injecting water, gas, etc., into a formation in order to produce additional oil/gas otherwise unobtainable by initial recovery efforts.
  • Shale – a form of sedimentary rock that contains crude oil or natural gas.
  • Spark spread – A measure of profitability for power plants. It’s the difference between the sales price of power (per megawatt hour) and the cost of fuel to produce it.
  • Upstream – the production of oil and natural gas from the wellhead (also known as exploration and production).
  • Take-or-pay contract – under this type of agreement, the buyer is obligated to pay for a product (i.e., natural gas, NGLs, crude oil, etc.) regardless of whether the buyer takes delivery of the product.
  • Throughput – the amount of natural gas or NGLs transported through a pipeline system.
  • Total gas in storage – the volume of storage in the underground facility at a particular time.
  • Total gas storage capacity – the maximum volume of gas that can be stored in an underground storage facility based on the physical characteristics of the reservoir, installed equipment, and operating procedures at the site.
  • Treating – natural gas gathered with impurities higher than what is allowed by pipeline quality standards is treated with liquid chemicals (i.e., amine) to remove the impurities. The natural gas is treated at a separate facility before being processed.
  • Well bore – the hole created by a drill bit.
  • Wellhead – the equipment at the surface of a crude oil or natural gas well used to control the pressure of the well. The wellhead is also the point at which natural gas or crude oil emerges from the ground to the surface.
  • Withdrawal season – the period of time (i.e., November 1 to March 1) in which natural gas supplies are withdrawn from storage for use during the heating season.
  • Working gas capacity – total gas storage capacity minus base gas.
  • Working Interest – A company’s equity interest in a project before reduction for royalties or production share owed to others under applicable fiscal terms.
  • Working gas – the volume of natural gas in a storage reservoir above the level of base gas that can be extracted during the normal operation of the storage facility.
  • Workover – A major operation on a completed well to restore, maintain, or improve the well’s production (i.e. deepening the well).

Energy Abbreviations

  • Bbls: Barrels
  • Bcf/d: One billion cubic feet per day
  • MBtu: One thousand Btus
  • Mcf: One thousand cubic feet of natural gas
  • MBbls: One thousand barrels
  • MBbls/d: One thousand barrels per day
  • MM: In millions
  • MMBbls: One million barrels
  • MMBbls/d: One million barrels per day
  • MMBtu: One million Btus
  • MMBtu/d: One million Btus per day
  • MMcf: One million cubic feet of natural gas
  • MMcf/d: One million cubic feet of natural gas per day
  • Tcf: One trillion cubic feet of gas

Basic Energy Conversion Factors

  • 1 barrel = 42 gallons
  • 1 barrel of oil = 6 Mcf of natural gas
  • 1 barrel of oil = 5.8 MBtu of natural gas
  • 1 Mcf = 1,000 cf
  • 1 MMcf = 1,000,000 cf
  • 1 Bcf = 1,000,000,000 cf
  • 1 Tcf = 1,000,000,000,000 cf
  • 1,000 Btu (nominal) = 1,026.9 Btu (actual)
  • 1 Mcf of natural gas = 0.1667 barrels of oil
  • 1 MBtu of natural gas = 0.1724 barrels of oil

Source: Wachovia equity research, Tudor Pickering Holt & Co., and the EIA.

Print Friendly

Comments are closed.