Definitions

Glossary of MLP and Energy Related Terms

1P Reserves (Proved): 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.

Adjusted Yield: A MLP’s current yield adjusted for the percent of cash flow going to the general partner (GP). For example, if the GP is receiving 15% of the underlying MLP’s total distributions and the underlying MLP’s unit trades at a 6.0% yield, the adjusted yield is approximately 7.1% (i.e. the current yield ÷ [1 – % of cash flow to GP]).

Amine: Amine is a type of chemical used to remove impurities from natural gas in order to make the natural gas suitable for pipeline transport.

Aquifers: Natural gas can be stored underneath the ground in depleted reservoirs, salt caverns, or aquifers. Aquifers are underground rock formations that act as natural water reservoirs, which can be used to store natural gas.

Associated Gas: Associated or casinghead gas is raw natural gas that has become dissolved in oil accumulations and is produced as a by-product along with crude oil. If the gas is in contact, but not in solution with crude oil, it called associated free gas. Associated gas is typically rich with heavier NGLs.

Available Cash Flow: Available cash flow is the cash flow available to the common unit holders and the general partner.

Backwardation: A market condition in which future commodity prices are lower than spot prices. A backwardated market usually occurs when demand exceeds supply.

Base Gas: All underground gas storage must contain a certain amount of “base gas,” or “cushion gas.” This base gas is the amount of gas that the storage facility must hold to provide the desired pressurization to extract natural gas.

Basis differential: The difference between the Henry Hub spot natural gas price and the corresponding cash natural gas spot price in another location (e.g. Carthage, Katy, Waha, etc.). The differential relates to factors like product quality, location, and available takeaway capacity (options).

Benzene (C4H6): Benzene is an intermediary product used in the synthesis of styrene/polystyrene. Polystyrene has many uses including disposable cutlery, CD and DVD cases, and Styrofoam (a trademark of Dow Chemical), which is used to create disposable cups, plates, packaging, etc. To note, benzene is a natural constituent of crude oil, and hence natural gas-based steam cracker feeds such as ethane and propane do not produce benzene as a byproduct.

Blendstocks: A blendstock is 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.

British Thermal Unit (Btu): A Btu is a unit of energy used to describe the energy (heat) content of a fuel (natural gas).

Butadiene (C4H6): Butadiene is an important building block of synthetic rubber. Butadiene is produced primarily as a by-product of stream cracking.

Compound Annual Growth Rate (CAGR). CAGR is the measure of the average annual growth rate of a financial metric (e.g. distributions) over a certain time period.

Capital Asset Pricing Model (CAPM): The CAPM maps the relationship between risk and expected return, and provides an alternate definition of the required rate of return (or cost of equity) of a given asset. 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), minus the risk-free rate.

Casinghead Gas: See definition for associated gas.

Cash Yield: We define cash yield as 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]).

Compression: Midstream companies utilize compression equipment to compact or compress natural gas to a higher pressure in order to increase the delivery capacity of a pipeline.

Condensate: Condensate or “lease condensate” refers to a specific portion of the NGL stream. Some of the heavier NGL components (i.e., iso-butane and natural gasoline) exist as a gaseous state only at underground pressures. These molecules will immediately “condense” to a liquid state when brought to atmospheric conditions, hence the name condensate.

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.

Conventional Natural Gas Production: Conventional production typically relates to natural gas that is produced from underground formations composed of sandstone or carbonate rock. Conventional deposits are easier to produce from relative to unconventional deposits.

Corporation: A corporation (C Corp.) is a distinct legal entity, separate from its shareholders and employees. As a separate legal standing entity, a corporation protects its owners from being personally liable in the event that the company is sued (i.e. limited liability). The shareholders contribute capital, but have no liability to business creditors, tax authorities, or any other parties, which may have a claim on corporate earnings and assets.

Cryogenic Expander Process: The cryogenic expansion process is one of the primary techniques (the other being lean oil absorption) used for methane separation, that is, the actual separation of methane (i.e., natural gas) from NGL components, which is the last step in natural gas processing. Cryogenic expansion involves the rapid cooling of natural gas via expansion to approximately negative 120 degrees Fahrenheit. At this temperature, ethane and the other NGL components condense out of the natural gas stream, while methane remains in its gaseous form. Most modern processing plants use the cryogenic expander process to extract NGLs.

Current Yield: The annualized quarterly distribution divided by the MLP’s current unit price.

Cycle: This refers to the complete withdrawal and injection of a storage facility’s working gas capacity.

Dehydration: Dehydration is the process of removing water found in saturated natural gas. If left in the natural gas stream during long-haul transportation, water can form ice and corrosion inside pipelines. To meet transportation standards, natural gas is dehydrated to remove any water from the natural gas stream.

Depleted Reservoir: Natural gas can be stored underneath the ground in depleted reservoirs, salt caverns, or aquifers. Depleted reservoirs are naturally occurring formations wherein all recoverable natural gas or oil has been produced, leaving a void capable of holding natural gas.

Dirty Hedge: A company can use crude oil derivatives to hedge its natural gas liquids’ (NGL) exposure.

Distributable Cash Flow (DCF): DCF is the cash flow available to the common unit holders after the cash flow is paid to the GP.

Distribution: MLPs typically distribute all available cash flow (i.e. cash flow from operations less maintenance CAPEX) to unit holders in the form of distributions (similar to dividends).

Distribution Coverage Ratio: The coverage ratio indicates the cash available for distribution for every dollar to be distributed. The ratio is calculated by dividing available cash flow by distributions paid. Investors typically associate as the “cushion” a partnership has in paying its cash distribution. In this context, the higher the ratio, the greater the safety of the distribution.

Distribution Tiers: Distribution tiers indicate the percentage allocations (and the associated thresholds) of available cash flow between common unit holders and the general partner based on specified target distribution levels.

Distribution Yield: The distribution yield is synonymous to a dividend yield.

Downstream: This refers to the refining and marketing sectors of the energy industry. It is also associated with the distribution (i.e. post refining/processing) of products to the end-user market for consumption.

Dropdown: A dropdown is the sale of an asset from the parent company (or sponsor company) to the underlying partnership. Dropdowns can also be defined as a transaction between to affiliated companies.

Dry Natural Gas: Natural gas is classified as “dry” or “wet” depending on the amount of NGLs present. Dry or lean natural gas contains less than 1 gallon of recoverable NGLs per Mcf of gas (GPM) and is composed primarily of methane. The amount of NGLs contained in the natural gas stream can vary depending upon the region, depth of wells, proximity to crude oil, and other factors.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA): EBITDA is a non-GAAP measure used to provide an approximation of a company’s profitability. This measure excludes the potential distortion that accounting and financing rules may have on a company’s earnings; therefore, EBITDA is a useful tool when comparing companies that incur large amounts of depreciation expense because it excludes these non-cash items which could understate the company’s true performance.

Earnings Per Unit (EPU): An MLPs’ EPU is synonymous with a C corp.’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.

EBITDA Multiple: An EBITDA multiple is the expected return an acquisition or organic growth project is estimated to generate. For example, a $100 million investment at an 8x EBITDA multiple, would be expected to generate approximately $12.5 million on an annual basis (or a 12.5% return).

Energy Information Administration (EIA): The EIA is an independent statistical agency of the U.S. Department of Energy (DOE). The EIA provides energy data (e.g. pricing, supply, and reserves), short and long-term forecasts (e.g. supply and demand), and analyses that can be used to understand energy usage in the U.S. Its publications cover petroleum, natural gas, electricity, coal, renewable and alternative fuels, and nuclear energy.

Ethane: Ethane is typically the second-largest component of natural gas (methane is the largest). It is primarily used as a feedstock for ethylene production by the petrochemical industry. Thus, the demand for ethane is tied closely to ethylene production, which, in turn, is tied to demand for plastics, or more broadly speaking, the health of the overall economy.

Ethane Extraction: Natural gas processors will choose to extract (i.e. separate) ethane from the natural gas stream when processing economics are favorable (i.e. when ethane is worth more as a distinct product than as part of the natural gas stream).

Ethane Rejection: A natural gas processor will likely choose, if given the option, to reject ethane (i.e., leave it in the natural gas stream) rather than extract it, when the processing margin (specifically the ethane margin) turns negative or uneconomic (i.e., below a plant’s fixed operating costs). If the processor is unable to reject ethane under this scenario, the company would likely incur a loss. To note, the remainder of the NGL stream (i.e., propane+) is still processed. Most modern processing plants have the ability to extract heavier NGL components, but leave ethane in the natural gas stream when processing economics are unfavorable.

Ethylene: Ethylene is a building block for polyethylene, which is the most popular plastic in the world. Ethylene is the simplest olefin produced by the petrochemical industry.

Excess Cash Flow: 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): See definition for Organic CAPEX.

Fee-Based: An example of a fee-based processing contract is when a MLP receives a fee for the volume of natural gas that flows through its processing plant. Gross margin is directly related to the volume, not the price, of the commodity flowing through the system and the contracted fixed rate.

Federal Energy Regulatory Commission (FERC): The FERC is an independent agency that regulates the interstate transmission of electricity, natural gas, and oil. FERC also reviews proposals to build liquefied natural gas (LNG) terminals and interstate natural gas pipelines as well as licensing hydropower projects. (Definition source – http://www.ferc.gov)

Feedstock: This is the raw material used by steam cracker plants in the production of ethylene, propylene, and butadiene (also known as olefins). Feedstock is also commonly referred to as “feedslate.”

Firm Storage: Type of service offered by storage operators in which contracts consist primarily of take-or-pay agreements, with minimal price or volumetric risk.

Forward Yield: We define forward yield as a MLP’s next four quarterly distributions (i.e., total distributions received over the next 12 months) divided by an MLP’s current yield.

Frac Spread: See definition for Processing Margin.

Fractionation: Fractionation is 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).

Fracturing: Fracturing is a process 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.

Fuel Oil: Fuel oil refers to the heaviest commercial fuel that can be obtained from crude oil. Its weight exceeds that of natural gasoline or naphtha. For example, diesel is a type of fuel oil.

Full Recovery: Full recovery refers to normal operating conditions when a processing plant is extracting both ethane and the heavier NGL components.

Gallons of Recoverable NGLs per Mcf (GPM): GPM refers to the amount of NGLs contained in the natural gas stream and is dependent upon the region, depth of wells, proximity to crude oil, and other factors.

Gas Oil: Gas oil is considered a heavy feedstock used in ethylene production. Gas oils include diesel fuel, heating fuel, and light fuel oils.

General Partner (GP): The 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’ incentive distribution rights).

Header System: A header system is the primary pipeline in a natural gas storage facility that transports gas from the storage caverns to and from each interconnecting pipeline.

Heavy Feedstock: Heavy feedstock consists primarily of hydrocarbons derived from crude oil sources such as heavy naphtha and gas oil. If a heavy feedstock is used in the production of ethylene, the byproducts (excluding ethylene) include propylene and butadiene as well as heavier hydrocarbons known as aromatics (i.e., C5+) suitable for gasoline blending.

Heavy Naphtha: Heavy naphtha, which is composed of heavier hydrocarbons found at the bottom of the naphtha splitter, is classified as heavy feedstock.

Held by Production (HBP): If an oil or gas well successfully produces during the primary term of the lease, the lease is automatically extended and considered held by production. The lease will remain valid as long as the property keeps producing a minimum quantity of oil or gas as previously negotiated in the lease.

Incentive Distribution Agreement: At inception, 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.

Incentive Distribution Rights (IDRs): 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. 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.

Injection Rate: “Injection rate,” or “injection capacity,” refers to the amount of gas that can be injected into the facility. Both of these measurements are usually expressed in billion or million cubic feet per day.

Injection Season: This refers to the time period (usually from April to October) when producers and pipelines inject natural gas into storage for use during the winter months (November to March).

Interruptible Service: The customer contracts for storage capacity on a spot market basis at prevailing rates. Capacity is not guaranteed and is offered only if available.

Interstate Pipelines: An interstate pipeline is a pipeline that transports product across state lines. Interstate pipelines are regulated by the FERC.

Intrastate Pipelines: An intrastate pipeline is a pipeline that operates within one state. Intrastate pipelines are regulated by state, provincial or local jurisdictions.

Isobutane: Isobutane has the same molecular formula as normal butane, but a different structural formula (i.e., atoms are rearranged). Isobutane is used in refinery alkylation to enhance the octane content of motor gasoline.

I-Shares: I-shares are equivalent to MLP units in most aspects, except the payment of distributions is in stock instead of cash. I-shares are not required to file K-1 statements and do not generate UBTI.

K-1 Statement: The K-1 form is the statement that an MLP investor receives each year from the partnership that shows his/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.

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 on NGL prices and short on natural gas prices.

Lean Natural Gas: Dry or lean natural gas contains less than 1 gallon of recoverable NGLs per Mcf of gas (GPM) and is composed primarily of methane.

Lean Oil Absorption Method: The lean oil absorption method is one of the primary techniques (the other being cryogenic expander process) used for methane separation, that is, the actual separation of methane (i.e., natural gas) from NGL components, which is the last step in natural gas processing. The absorption method uses specially formulated oils to “absorb” heavier NGL components from the incoming gas stream. As natural gas passes through the absorption tower, NGLs are captured by the absorption oil, which has an affinity to NGLs. The absorption oil is then fed into oil stills where the mixture is heated above the boiling point of NGLs but below that of oil, thereby separating the NGLs from the absorption oil.

Light Feedstock: Light feedstock is commonly defined as hydrocarbon feeds derived from natural gas sources (i.e., ethane, propane, and butane); however, it can also refer to light naphtha. Light feedstock produces lighter olefins including ethylene, propylene, and butadiene.

Light Naphtha: Light naphtha, which is composed primarily of C5 hydrocarbons (i.e., natural gasoline) is generally classified as a light feedstock.

Limited Partner (LP): The LP (1) provides capital, (2) has no role in the MLPs’ operations or management, and (3) receives cash distributions.

Liquefaction: This is the process that changes natural gas from a gaseous state to a liquid state.

Liquefied Natural Gas (LNG): LNG is natural gas that has been condensed into liquid form (via either pressure or refrigeration).

Liquid Petroleum Gases (LPGs): LPGs are created (as a byproduct) during the refining of crude oil or from natural gas production. LPGs are typically in some form of mix of propane and butane.

Long: If a holder is “long” natural gas, they expect the price of natural gas price to increase.

Looping: This refers to the installation of additional pipeline next to an existing pipeline system in order to increase the system’s capacity.

Marketed Natural Gas Production: Marketed natural gas production refers to gross natural gas withdrawals from reservoirs less the natural gas used for re-pressuring, quantities vented and flared, and nonhydrocarbon gases removed in treating or processing operations.

Maintenance Capital Expenditures (CAPEX): Maintenance CAPEX is the investment required to maintain the partnership’s existing operating capacity and operating income over the long-term.

Maximum Potential Distribution (MPD): MPD represents the maximum distribution a partnership could, in theory, pay if it distributed all of its sustainable cash flow. Alternatively, it is the distribution that could be paid such that he distribution coverage ratio equals 1.0x (no excess cash flow).

Master Limited Partnership (MLP): MLPs are limited partnership investment vehicles consisting of units (rather than shares) that are traded on public exchanges. MLPs consist of a general partner (GP) and limited partners (LPs). MLPs are also commonly referred to as “partnerships.”

Methane (CH4): Methane is equivalent to dry natural gas, it is the primary component of natural gas.

Methane Separation: Methane separation is the actual separation of the methane (i.e., natural gas) stream from NGL components. Approximately 90% of the natural gas processing plants in the United States use one of the following techniques for methane separation: (1) absorption method or (2) cryogenic expander process.

Midstream: This refers to gathering, treating, processing, transportation, or storage of a product after it has left the wellhead (i.e. upstream), but before it has been distributed to the end use market (i.e. downstream).

Minimum Quarterly Distribution (MQD): MQD is the minimum distribution the partnership plans to pay to its common and subordinated unit holders, 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.

Naphtha: Naphtha is considered a heavy feedstock used in ethylene production. Naphtha is also a highly flammable liquid hydrocarbon mixture that is produced through crude oil distillation (i.e., derived from crude oil).

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.

Natural Gasoline: Natural gasoline is extracted from natural gas and is a mixture of liquid hydrocarbons (i.e., primarily pentanes and heavier hydrocarbons). It is primarily used as a blendstock for motor gasoline.

NGL Yield: The NGL yield represents the amount of NGLs present in natural gas.

Non-Associated Gas: Non-associated gas is natural gas that is free from contact with crude oil (e.g., dry natural gas is non-associated gas).

Normal Butane: Normal butane is used as a petrochemical feedstock for the production of ethylene and butadiene (used to make synthetic rubber), as a blendstock for motor gasoline, and as a feedstock to create isobutane through isomerization. (The isomerization process is accomplished by heating normal butane in the presence of a catalyst to create isobutane.)

Oil Sands: Oil sands or bituminous sands are a type of unconventional petroleum deposit. It is usually comprised of a mixture of sand, clay, water, and bitumen. Bitumen is an extremely viscous oil, yet after treatment it can be used by refineries to produce fuels such as gasoline and diesel. While oil sands are found throughout the world, large amounts have been discovered in Canada’s Alberta providence as well as Venezuela.

Olefin: An olefin is any unsaturated chemical compound containing at least one carbon double bond. The petrochemical industry produces three primary olefins: ethylene, propylene, and butadiene.

Optimization and Marketing: A storage operator can keep a certain amount of storage capacity for its own account. The operator uses a marketing function to maximize the value of its storage by employing the same strategies as its customers, such as arbitraging seasonal spreads and cycling storage when market opportunities present themselves.

Organic Growth Capital Expenditures (CAPEX): Organic CAPEX is investments used to expand a company’s operating capacity or operating income over the long-term.

Park and Loan: The storage operator will either “loan” gas to a market participant on a temporary basis or will “park” gas in its facility on a temporary basis for a fee. Again, this service is opportunistic in nature and depends upon market demand and storage capacity availability.

Partnership: A partnership is not considered to be a separate entity, but rather is an aggregate of all the partners. All partners are liable for the obligations of the partnership; although limited partners enjoy limits on their liability, they are not fully shielded in the way shareholders are. 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. This right survives the termination of a partner’s interest. 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. As a practical matter, however, this is unlikely to happen to a PTP investor. (Source: NAPTP)

Percent of Proceeds (POP)/Liquids (POL): The processor gathers and processes natural gas on behalf of producers. The MLP sells the resulting residue gas (dry, 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. A typical contract would entitle the producer to 80% of the proceeds from the sale of natural gas and NGLs through the plant, while the remaining 20% would be assigned to the processing plant operator. Accordingly, POP contracts share price risk between the producer and processor. Gross margin increases as natural gas prices and NGL prices increase and decrease as natural gas prices and NGL prices decrease. A percentage-of-liquids (POL) contract is a type of POP contract where the processor receives a percentage of the NGLs only.

Petrochemicals: Petrochemicals are chemical compounds that are made from raw materials, which are derived from petroleum or hydrocarbons. Some examples of petrochemicals include: ethylene, propylene, and benzene.

Pipeline Quality Gas: This is natural gas that has had all of the natural gas liquids (and impurities) removed from the natural gas stream and is considered “dry natural gas.” The natural gas liquids and impurities are removed from the natural gas stream because major natural gas transmission lines usually impose restrictions on the make-up of the natural gas that is allowed into the pipeline. Pipeline quality gas is typically composed of approximately 95% methane.

Play: A play is a proven geological formation that contains petroleum and/or natural gas.

Polyethylene: Polyethylene, which is the primary derivative of ethylene, is the most popular plastic in the world. Polyethylene comes in several different grades, depending on its density and molecular branching. The three most common grades are low density polyethylene, linear low density polyethylene, and high density polyethylene. Low density polyethylene is used to create thin film plastics such as plastic bags and film wrap.

High density polyethylene is used to create sturdier plastics such as detergent bottles, garbage containers, and water pipes. Since approximately 50% of ethylene is polymerized into polyethylene, polyethylene production is an important proxy for ethylene demand, and hence ethane/NGL demand.

Processing: Natural gas processing involves the separation of raw natural gas into “pipeline quality” gas and natural gas liquids.

Producer Price Index (PPI) Adjustment: 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. The index system is based on the Producer Price Index for Finished Goods plus 1.3%. Companies are allowed to increase their rates on an annual basis on July 1st. The current index is valid for a five-year period that began on July 1, 2006 and extends through July 1, 2011.

Processing Margin: The processing margin is the difference between the price of natural gas and a composite price for NGLs on a BTU-equivalent basis.

Propane: Propane (also known as C3) is the third largest component of the natural gas stream (preceded by methane and ethane). It is primarily used as a feedstock by the petrochemical industry to produce ethylene and propylene. The bulk of remaining propane consumption is related to its use as a heating fuel in the residential and commercial markets. Hence, demand for propane is closely tied to the overall health of the economy and fluctuations in weather patterns.

Propylene (C3H6): Like ethylene, propylene (also known as propene) is an important chemical used in the manufacture of plastics. It is the second simplest olefin behind ethylene.

Proved Developed Producing Reserves (PDP): PDPs are reserves that can be recovered via existing wells and through the use of existing equipment and operations.

Proved Undeveloped Reserves (PUDs): PUDs are reserves that are recovered through new wells (on undrilled acreage) or from existing wells that require significant capital expenditures (to be recompleted).

PV-10 (Standardized Measure): PV-10 is the after tax present value of estimated future cash flow of proved reserves. The calculation is based on current commodity prices and is discounted at 10%.

Raw NGL Mix: Raw NGL mix or “y” grade refers to the heavier NGL components that are extracted via natural gas processing. The resulting NGL mix is commingled product consisting of ethane (depending on whether ethane rejection took place), propane, butane, iso-butane, and natural gasoline. It is not until fractionation, the next step in the NGL value chain, that the raw NGL mix is further separated into individual NGL components.

Recompletion: A recompletion is 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).

Residue Natural Gas: Residue or dry natural gas refers to the resulting natural gas stream after heavier NGL components have been extracted through processing. Residue natural gas consists primarily of methane and ethane (depending on processing economics) and is suitable for transportation in natural gas pipelines.

Royalty Payment: A royalty is type of a 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.

Salt Caverns: Natural gas can be stored underneath the ground in depleted reservoirs, salt caverns, or aquifers. Salt caverns are formed out of underground salt deposits. Salt caverns are usually leached, or solution mined, by injecting fresh water via drills into the salt cavern.

Shale: Shale is a form of sedimentary rock, which could contain crude oil or natural gas.

Short: If a holder is “short” natural gas, they expect the price of natural gas price to decline.

Steam Cracker: A steam cracker is a petrochemical plant that uses either light feedstock (i.e., ethane, propane, LPGs) or heavy feedstock (i.e., heavy naphtha, gas oil), depending on plant configuration and economics to create ethylene, propylene, and other petrochemicals. In order to create these petrochemicals (e.g., ethylene), saturated hydrocarbons need to be broken down (or cracked) into smaller, unsaturated hydrocarbons in a process known as stream cracking. Steam cracking is accomplished by heating the hydrocarbon feedstock diluted with steam in a furnace to approximately 650-850 degrees Celsius. Subsequently, the mixture is rapidly cooled to 400 degrees Celsius to stop the reaction. Water is then injected to further cool the mixture; thereby creating a condensate, rich in ethylene and various quantities of other byproducts (depending on the type of feedstock).

Subordinated Units: Subordinated units are secondary to common units because 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 subordination period is the period of time that subordinated units will not be entitled to receive any distributions until the common units have received the MQD plus any arrearages from prior quarters. The 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 will convert to common units on a one-for-one basis.

Take-or-Pay Contract: Under a take-or-pay agreement, the customer is obligated to pay for a product (e.g. natural gas, NGLs, crude oil, etc.) regardless of whether the customer takes delivery of the product.

Tax Deferral Rate: A percentage of the cash distribution to the unit holder 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.

Toluene (C7H8): Toluene is a type of petrochemical commonly used as a solvent used for paints, lacquers, printing ink, etc. The chemical is also used as an octane booster in gasoline.

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.

Unconventional Natural Gas Production: Unconventional production relates primarily to natural gas that is produced from tight formations (i.e., low porosity and permeability), gas shales, and coal bed methane.

Natural gas produced from unconventional sources is typically more difficult to extract and thus, is more expensive than conventional production.

Units: MLP units are synonymous with C Corp.’s shares.

Unrelated Taxable Business Income (UBTI): 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.

Upstream: This refers to the production of oil and natural gas from the wellhead (i.e. exploration and production).

Weighted Average Cost of Capital (WACC): WACC is 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 C Corps, MLPs do not realize a tax benefit on their debt (since they do not pay corporate taxes).

Well Bore: A well bore is 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 leaves the ground.

Wet Natural Gas: Natural gas is classified as “dry” or “wet” depending on the amount of NGLs present. Wet or rich natural gas contains at least 1 gallon of recoverable NGLs per Mcf of gas (GPM) and up to as much as 5-6 GPM. The amount of NGLs contained in the natural gas stream can vary depending upon the region, depth of wells, proximity to crude oil, and other factors.

Wheeling: A storage operator will move gas across its facilities from one pipeline interconnect or another, which enables customers to deliver their gas to the desired market. The storage operator collects a fee for this service; however, this service is performed on a spot basis and is driven by market factors.

Winter-To-Summer Spread: The winter-to-summer spread is simply the difference between the highest natural gas price on the NYMEX 12-month forward curve and lowest price, less the carrying costs of storage. The spread represents effectively the value of storage in any given year because a user of storage can buy natural gas in the summer (when prices are seasonally low due to less demand), inject it into storage and sell forward on the NYMEX at the higher winter price, locking in a margin.

Withdrawal Rate: “Withdrawal rate,” or “deliverability capacity,” is the amount of natural gas that can be extracted from the storage facility on a daily basis.

Withdrawal Season: This refers to the time period (usually from November through March), when natural gas supplies are withdrawn from storage for use during the heating season.

Working Gas: is the volume of natural gas that can be injected or withdrawn during normal storage operations and is what most facilities quote their storage capacity as.

Workover: A workover is the operations on a producing well to resume or increase production.

Energy Industry 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

Source: Wells Fargo Securities LLC Equity Research Department’s MLP – Primer, Fourth Edition which can be found at the National Association of Publicly Traded Partnerships Presentations and Primers link shown above. The MLP Primer is a great report and some of the definitions include charts that are not included above. Also there are additional definitions in the MLP Protocol Weekly Snapshot Reports.