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How Different Contracts Affect Master Limited Partnerships

Victor Cheng - Author

May 7 2015, Updated 6:32 p.m. ET

Overview of contracts

There are various types of contracts in energy MLPs that each have their own advantages and disadvantages.

Broadly speaking, transportation and storage MLPs have fixed-fee contracts, whereas MLPs that are involved in natural resource processing have a combination of fee-based and non-fee-based contracts. Fee-based and percentage of proceeds contracts are the most favorable contracts for MLPs, while margin sharing and keep whole contracts are the least favorable types of contracts.

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Types of contracts

  • Fee-based contract: Under this type of contract, the MLP gets a fixed fee per unit of natural gas gathering or processing. Short-term volatility of energy prices doesn’t affect the contract. If the energy prices remain low for an extended period of time then it may affect the contract.
  • Percentage of proceeds: Under this type of contract, the processor receives a percentage of natural gas or NGLs as a processing fee. Under this contract, volatility in commodity prices may affect the actual cash that a processor receives when it sells its share of the natural resource.
  • Margin sharing: Both the producer and processor share the value difference between natural gas and NGLs.
  • Keep whole: Under this type of contract, the processor retains extracted NGLs as a processing fee and returns the value of the natural gas or processed natural gas to the producer.

Some of the MLPs that have a mix of the above contracts are Spectra Energy (SEP), Magellan Midstream (MMP), Enbridge Energy Partners (EEP), and Targa Resources (NGLS). These MLPs are part of the Global X MLP & Energy Infrastructure ETF (MLPX) and have a combined weight of 23.62% in the ETF.


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