Canadian Trusts    Master Limited Partnerships

MIDSTREAM ENERGY COMPANIES

Pipeline Companies

Companies that are generally considered to be in the pipeline segment of the marketplace typically have a majority of their capital invested in long haul pipelines, terminals, gathering system, and other related assets.  For the most part, these systems receive crude oil and/or natural gas (and occasionally refined products) from producers and other pipelines or shippers through   system   interconnects   and   redeliver their product to processing facilities, local gas distribution companies, industrial customers or to other onshore pipelines.   Generally, revenue is generated on these systems based on a fee per unit of volume (typically in millions of Btus) gathered or transported. Natural gas pipelines may also gather and purchase natural gas from producers and suppliers and resell such natural gas to customers such as electric utility companies, local natural gas distribution companies and industrial customers.  As a result, these pipelines are exposed to commodity price risk to the extent they take title to natural gas volumes through certain of their contracts. Additionally, some pipeline systems provide aggregating and bundling services, in which they purchase and resell natural gas for certain small producers. Also, several gathering systems, while not providing marketing services, have some exposure to risks related to commodity prices through transportation arrangements with shippers.

Propane Companies

Commonly, a company involved in the propane business engages in the sale, distribution, marketing, trade, processing, and fractionation of propane and other natural gas liquids (NGLs).  As a result, propane companies are only modestly exposed to commodity price risk to the extent they take title to and hold volumes of propane prior to its sale to their customers.  Additionally, these companies are often in the business of selling and/or leasing propane supplies and equipment for residential, commercial, Industrial,    and    agricultural    purposes.    Propane companies also sell, install, and service equipment related to the propane distribution business, including heating and cooking appliances. Primarily the delivery of propane is made on a wholesale basis to independent dealers, multi-state marketers, petrochemical companies, refineries, and natural gas processors, along with various other NGL marketing and distribution companies.

Natural Gas Processing Companies

The natural gas processing segment of the midstream energy business engages in the processing, conditioning, and treating of natural gas; and the fractionation and transportation of natural gas liquids (NGLs).  Processing facilities can be categorized as either straddle plants, located on mainline natural gas pipelines, or field plants that process natural gas through associated gathering systems.  Natural gas processing plants remove the NGLs from the natural gas stream, since on an energy equivalent basis, NGLs normally have a greater economic value as a raw material for petrochemicals and motor gasoline than their value as components of the natural gas stream. In general, natural gas produced at the wellhead contains varying amounts of NGLs. This “rich” natural gas in its raw form is usually not acceptable for transportation in the nation’s major natural gas pipeline systems or for commercial use as a fuel.  Natural gas production from the deepwater Gulf of Mexico and the Rocky Mountains, thus far, has generally been rich in NGLs and typically must be processed to remove these liquids in order to meet pipeline quality specifications.  Deepwater natural gas production can contain in excess of 4 gallons of NGLs per thousand standard cubic feet (Mscf) of natural gas as compared to 1 to 1.5 gallons of NGLs per Mscf of natural gas produced from the continental shelf areas of the Gulf of Mexico.  Gas produced along the Texas Gulf coast typically contains 2 to 3 gallons of NGLs per Mscf.  Most companies engaged in natural gas processing have structured their contract portfolio so that the producer assumes, all or substantially all, of the commodity price risk between NGLs and natural gas.

Marine Transportation Companies

Marine transportation companies own and operate tugboats, barges and tankers providing marine transportation, distribution, and logistics services for refined petroleum products to oil companies, oil traders, and refiners.  Typically, these services can include shipping, barging, towing, storage, and bunkering.  Revenues are derived from the chartering of transportation and logistics services on single point-to-point voyages, long-term charters, and from demurrage charges and storage fees. The earnings potential of water borne transportation companies is almost solely based upon the capacity utilization of their fleets.  Marine transportation companies do not take title or ownership of their cargos, and as such have no exposure to commodity price fluctuations.

Coal Royalty & Leasing Companies

Partnerships in this category typically earn most of their revenues from royalties received under long-term leases of coal reserves that generally require the lessees, to make royalty payments based on either a percentage of the gross sales price or as a fixed price per ton of coal sold.  A typical lease either expires upon exhaustion of the leased reserves, or has a five to ten-year base term, with the lessee having an option to extend the lease for at least five years after the expiration of the base term.  Generally, these leases require the lessee to pay minimum rental payments in monthly or annual installments, even if no mining activities are ongoing. These minimum rentals are recoupable, usually over a period from one to three years from the time of payment, against the production royalties owed once coal production commences.

Oil & Gas Production Companies

While not considered to be a midstream business, crude oil and natural gas production companies do qualify for both Master Limited Partnership and Canadian Royalty Trust corporate structures.  Traditionally, these companies own and operate portfolios of oil and gas producing properties, usually generating cash flows from the sale of product at the wellhead.  As a consequence, the revenues of production companies are exposed to fluctuations in the crude oil and natural gas commodity prices.  The management of this exposure varies over a wide range on a company by company basis, with philosophies ranging from being nearly fully hedged using forward sales, to complete exposure to market price volatility. Production companies maintain their asset base through low risk development, acquisitions of properties near existing assets, and farm outs of higher risk opportunities to third parties. Oil and gas reserves are added primarily through corporate and property acquisitions.  The primary economic goal for these businesses is their focus on the efficient production and exploitation of their existing asset base and leveraging undeveloped land to help maintain production levels.