MLPprimer

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rian Capital Management LLC

Master LimitedPartnership PrimerUnderstanding an Emerging Asset Class

Alerian is a registered investment advisor that manages portfoliosfocused on midstream energy Master Limited Partnerships (MLPs)for a variety of institutional and individual clients in both onshore andoffshore structures.

The company focuses on fundamental analysis in this emergingasset class, combining a detailed, bottoms-up private equityphilosophy with risk management programs designed to preserve

capital and mitigate portfolio volatility. Alerian believes that thissector of the midstream energy space will continue to growdramatically over the next decade and offers one of the mostattractive risk-reward investment profiles available to investors.

Alerian positions its portfolios with a long-term investment horizonby focusing on those companies with the strongest managementteams and most attractive investment opportunity sets in themidstream energy sector to maximize the potential for predictabledistribution growth.

This document does not constitute an offering of any security, product or service, including any Funds for which an offer can be made onlyby each Funds confidential offering memorandum (the Offering Memorandum) or information memorandum. This presentation is forinformational purposes only, is confidential and may not be reproduced or distributed. The purchase of shares of a Fund is suitable only forsophisticated investors for whom an investment in such a Fund does not constitute a complete investment program and who fully understandand are willing to assume the risks involved in such Funds investment program. An investment in the Funds involves a number of risks. Fora description of the risk factors associated with an investment in a Fund, please refer to the section discussing risk factors in the FundsOffering Memorandum. Past performance is not a guarantee of future returns. References to future returns are not promises or evenestimates of actual returns a client portfolio may achieve. 2006-2008 Alerian Capital Management LLC, All rights reserved.

2100 McKinney AvenueDallas, TX 75201

45 Rockefeller PlazaNew York, NY 10111

www.alerian.com

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Master Limited Partnership Primer

Table of Contents

Executive Summary....................................................................................................................3

Why own Master Limited Partnerships? .....................................................................................5Thematic Investment in US Energy Infrastructure Growth...................................................6

Hard Asset Play Provides Tangible Value in a Potentially Inflationary Environment...........8Better Business Models.......................................................................................................8MLPs Exhibit Insignificant Correlation with the Broader Equities Market.............................9

An Emerging Asset Class .........................................................................................................10

Substantial Investment Required to Meet US Infrastructure Demands..............................11The Future of MLPs is Here Today.....12Structural Valuation Issues Create Substantial Long-Term Upside...................................13Flying Under the Radar Limited Institutional Ownership of MLPs...................................13The Emergence of Pure-Play Publicly Traded GPs...........................................................15

The Alerian MLP Index Series ..................................................................................................17Energy MLP Universe........................................................................................................18

What is a Midstream Asset? .....................................................................................................19

Crude Oil/Refined Products Transportation.......................................................................19Marine Transportation .......................................................................................................21Crude Oil/Refined Products Terminals ..............................................................................21Midstream Natural Gas Industry........................................................................................22

Transportation............................................................................................................22Gathering....................................................................................................................23Dehydration................................................................................................................23Treating......................................................................................................................24Processing..................................................................................................................24Fractionation...............................................................................................................24Storage.......................................................................................................................25LNG Transportation....................................................................................................25

Valuing Midstream Energy Businesses ....................................................................................28Popular Misconception: Relative Yield..............................................................................28Stable, Growing Distributions The Defining Characteristic of the MLP Model ................28Distribution Discount Model...............................................................................................29Investment/Acquisition Optionality.....................................................................................29Other Relative Price Metrics..............................................................................................30

The Re-Birth of the E&P MLP...31

Fundamental Risks...................................................................................................................33Regulatory Risk .................................................................................................................33Demand-Side Throughput Risks........................................................................................33Supply Asset-Specific Risks ..............................................................................................34Macro Supply Disruptions..................................................................................................34Environmental Accidents ...................................................................................................34Terrorism...........................................................................................................................35

Tax Law Changes..............................................................................................................35

Financial Risks .........................................................................................................................36Interest Rates....................................................................................................................36Equity Volatility and Correlation.........................................................................................37Equity Crises .....................................................................................................................37

Appendix...................................................................................................................................38A History of the Creation of MLPs .....................................................................................39General/Limited Partner Structure.....................................................................................40Income Tax Treatment......................................................................................................42

Disclaimers...............................................................................................................................44

2 Alerian Capital Management LLC

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Executive Summary

Master Limited Partnerships, or MLPs, are engaged in the transportation, storage,processing, refining, marketing, exploration, production, or mining, of any mineral or

natural resource. By confining their operations to these specific activities, their interests,or units, are able to trade on public securities exchanges exactly like the shares of acorporation, without entity level taxation. Of the 70 partnerships that Alerian followsclosely, two-thirds trade on the New York Stock Exchange with nearly all of thoseremaining on the NASDAQ and two on the American Stock Exchange. These companiesare regulated by the Securities Exchange Commission and must file 10-Ks, 10-Qs, andnotices of material changes like any publicly traded corporation. MLPs must also complywith the recordkeeping and disclosure requirements of the Sarbanes-Oxley Act.

Since 1995, the Alerian MLP Index (NYSE: AMZ) has generated compound annual totalreturns exceeding 18%, under the radar of the professional investment community. Thesestrong returns were generated through a combination of current yield and consistentdistribution growth of 8% per year over the last decade driven by the uniquely attractivebusiness models afforded by these companies regional franchise monopolies.

These partnerships generate predictable and growing cash flows (and thereforedistributions) predicated on the following:

Long-lived, high-value physical assets

Producer Price Index (PPI) revenue indexing, which provides predictable growthand a built-in inflation hedge in the portfolio

Substantial barriers to entry, which generate attractive organic investmentopportunities

Strong operating leverage through hard assets that magnify inelastic demand

The midstream sector, which includes infrastructure companies that own and operatelong-lived, high-value physical assets that engage in the transportation and storage ofnatural resources such as refined petroleum products and natural gas, today represents

$120 billion of public market capitalization out of a total $150 billion in MLP marketcapitalization, and has traditionally been owned by United States retail investors(institutional MLP ownership is less than 20%). The market capitalization of the MLPsector is growing exponentially, driven by assets migrating from integrated energy majorsinto MLPs and by demand for new energy infrastructure. In 2000, the sector marketcapitalization was a mere $20 billion; this had doubled by 2003 to $40 billion and yetagain by 2006 as a result of asset rationalization into MLPs, which have the operatingexpertise and structure to optimize their use. Alerian expects MLP market capitalization tonear $200 billion in public market capitalization by 2010.

Thematically, an investment in midstream MLPs is an investment in the build-out of USenergy infrastructure over the next decade. An MLP investment is a hard asset play.Unlike US or Canadian royalty trusts, which own depleting resource pools, these are toll-road business models. There are many natural gas pipelines that were in the ground prior

to the Second World War, and, if properly maintained, will still be in service 75 years fromtoday when they have been converted to hydrogen transportation and other alternativeenergy sources. There is much speculation today about the future trajectory of oil prices,the appropriate levels of necessary storage, and the sufficiency of refining capacity. Onething that most experts agree on, however, regardless of whether they are calling for$50, $100, or $150 per barrel of oil, is predictable, 1% annualized energy demand growthin the US over the next two decades, as current demographic shifts and populationgrowth trends increase the demand for energy goods, even at todays high prices. As aresult, most MLPs are agnostic to these commodity price forecasts, and benefit fromsimple throughput gains in a fixed-cost pipeline system.


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Industry estimates indicate that the US needs $100 billion of new natural gasinfrastructure over the next decade and a nearly equivalent amount in crude oil andrefined petroleum products processing, storage, and transportation. Additionally, there areover $300 billion of US midstream assets currently owned in both private and publiccorporate structures that are being rationalized into the asset class at a rate of $10 billionper year through acquisition and the creation of new MLPs. The MLP structure is also ripe

for billions more in new technology infrastructure once these assets are built andgenerating cash, including liquefied natural gas (LNG) terminals, gas-to-liquidstechnology, and coal gasification. Alerian believes that this emerging asset classrepresents an attractive value proposition given the low-risk business profiles of mostMLPs.

The core thesis that Alerian was founded on in 2004 maintains that MLPs are on the cuspof a very similar trajectory as compared to Real Estate Investment Trusts (REITs) in thelate 1980s. On average, the firm expects 15-20 initial public offerings each year for theforeseeable future. High-returning organic investment projects and acquisitions willcontinue to create tremendous value and demand additional capital inflows. The 2004J obs Creation Act contained a codicil that largely failed in its attempt to broaden mutualfund investment in MLPs. Although private hedge fund participation has increased,reaching a short-term peak in 2007, we do not expect to see a wholesale increase in

institutional (mutual fund, tax-exempt) participation in the asset class, as structuralbarriers to entry that effectively preclude widespread mutual fund ownership are unlikelyto be removed without a legislative rewrite. Until this event occurs, the space will likelyremain inefficient with a high dispersion of returns. Liquidity and market capitalizationhave reached the point where MLPs could comprise a meaningful portion of a utility- orenergy- focused mutual fund and within the next decade, we believe that these capitalinflows will cause a dramatic revaluation in the sector relative to other yield-oriented andenergy equities.

MLPs are attractive, not because of their tax treatment or structure, but because of thetype of assets that have migrated into the asset class over the last decade. Midstreamenergy is a better business model regional monopolies with transparent federalregulation that transport commodities with inelastic demand. An investment managercannot take this type of pure-play exposure into his or her portfolio through any other form

of public equities. If office buildings are to be considered a stable investment in real value,the pipelines which transport the natural gas to run the air-conditioning in the summer andheat the property in the winter ought to have that same permanent value.

Many will note, however, that the asset class is not what it used to be, and is movingaway from the type of assets we have described above. This is partly true. With morethan 30 initial public offerings in the last two years, many new types of assets haveentered the structure, and many of them do not have the same monopoly footprints orsupply diversity as their predecessors. There has been a very strong trend closer to thewellhead, as commodity-price sensitive businesses have dominated the IPO space as oflate. Still, earnings volatility is not synonymous with lower quality; the buyer must simplybe aware of the risks assumed and discount future cash flows by a commensurateamount. That being said, Alerian has always been and will remain focused, as a firm, ontraditional long-haul midstream energy infrastructure assets.

The fundamentals are in place for MLPs to generate attractive risk-adjusted returns,without a revaluation from institutional capital inflows. Combining a 6.75% group-averageyield with high single-digit distribution growth, we continue to expect low-to-mid-teensannualized total returns for the sector over the next five years.


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Why own Master Limited Partnerships?

Over the past ten years, midstream MLPs have outperformed the S&P 500 with acumulative gain of 437% versus 148% for the broader market, and 15.7% versus 3.7% ona compound annualized basis. The fundamentals remain unchanged from decades past.

Valuation remains structurally inexpensive relative to other yield-oriented equity classes.Demand for investment in new energy infrastructure has never been greater. Thestructural encumbrances that restrict wholesale institutional investment are still in place,creating exploitable inefficiencies in the market. Many institutional investors look at thehistorical returns wistfully believing they have missed out and that it must be too late. Butthe fundamental and structural underpinnings that have led to decades of outperformanceremain solidly in place. This asset class is still in its infancy and the opportunity forsuperior returns over the next decade still exists.

Midstream energy businesses have generated superior historical returns:(Total Returns January 1996- April 2008)

AnnualizedReturn

StandardDeviation

LargestDrawdown

%PositiveMonths

Valueof

$1,000SharpeRatio

Correlationto MLPs

AMZ 16.6% 13.5% -15% 66% $6.750 0.80S&P 500 8.5% 14.6% -47% 63% $2,765 0.23 0.25Russell 2000 8.2% 19.1% -31% 60% $2,653 0.16 0.30Hedge Funds 10.5% 6.4% -12% 70% $3,404 0.83 0.28

REITS 13.3% 14.3% -19% 63% $4.733 0.56 0.31NASDAQ 6.9% 26.8% -78% 54% $2,293 0.07 0.18

EAFE World 5.2% 14.3% -47% 61% $1,884 0.02 0.22DJIA 9.8% 14.8% -31% 61% $3,204 0.32 0.26

Source: ACM, Bloomberg, Hennessee. Past performance is not a guarantee of future returns.

We expect the internal and acquisition growth of the past decade to continue. We believethat these opportunities will significantly add to annual returns and boost future valuation,as investors will likely begin to more appropriately discount the strong and predictablegrowth rates. Alerian feels more comfortable forecasting market-beating total returns for

the long term than for any particular year. There has only been one period in which MLPperformance significantly lagged the S&P 500, and this occurred during the tech boom of1998-99, when investors became excited about growth and were willing to payextraordinary multiples for high-growth companies. The same phenomena dragged downthe performance of other higher-yielding equities such as REITs and utilities.

The AMZ vs the S&P 500:(Total Return s December 1995- May 2008)

0

100

200

300

400

500

600

700

800

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

IndexLevel(Base=

$100)

AMZ S PX

Source: ACM, Bloomberg, ACM. Past performance is not a guarantee of future returns.


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Thematic Investment in US Energy Infrastruc ture Growth

There are many perspectives on the future direction of commodity prices. Every CEO,commodities analyst, and portfolio manager has his two cents on where he thinks oil andnatural gas prices will trend over the next decade. Some believe that we have entered arepricing of the planet, a new paradigm, and that as India and China continue to consume

greater amounts of fuel, commodity prices will continue to rise. There are others that aremore sanguine on supply and point towards record storage levels as an indicator thatcommodities and energy equities speculation has entered its own dot-com era.Regardless of their side of the debate, theres something that just about everyopinionated oil executive, analyst, and portfolio manager can usually agree on petroleum products and natural gas energy demand growth will continue to increase overthe next decade, just as it has for the previous two.

Historical and Forecast US Petroleum Products Consumption

0

5

10

15

20

25

30

1985 1990 1995 2000 2005 2010E 2015E 2020E

MillionsofBarrelsPerDay

1.0% CAGR 1985 through 2020

Source: Energy Information Administration

It is this predictable trend that has driven the outsized returns of the last two decades inMLPs. In todays high-price commodity world, what gives Alerian the confidence that thistrend will continue? What of conservation and demand destruction? There are several keypoints to make. One is regarding our certainty level and the potential magnitude of error inour estimate. How likely is our 1.00% energy demand growth estimate to be correct?Could it be 2%? Could it be negative? We believe that given current demographic

population growth trends, even with significant advances in the fuel efficiency of a vehiclefleet with a fourteen year turnover, it is highly unlikely that petroleum products demandwould not remain flat with today, five years, ten years, twenty years hence. The firm has atremendous degree of confidence in this floor. In any given quarter or even potentiallyperiod of years, negative growth is certainly possible, but over the longer term, as theU.S. population continues to grow, spreading south and west, and the suburban sprawlcontinues to increase the number of drivers traveling longer distances to reach their placeof work, the firm believes there is a very strong floor under todays demand levels. Webelieve more likely than not however, that as consumers become psychologicallyanchored to higher gasoline prices, and population growth and immigration continue toincrease, that overall demand will continue to grow, even if per capita growth is moremuted. It is this creeping growth that necessitates new investment in energy infrastructure


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as North Americas traditional supply sources change. Institutional investors have notmissed the boat on MLP performance because the fundamental macro factors that havedriven the asset class remain unchanged.

The one trend that does keep changing is the supply side of our energy commodities.Natural gas is no longer primarily developed by wildcatters in Texas. The Rockies and

LNG hold our natural gas future. Approximately 75% of our petroleum products usage isforeign sourced; international gasoline arbitrage and coal-liquefaction technology nowhold our petroleum products future. As transportation dynamics change and these trendscontinue to play out over the next decade, they will demand hundreds of billions of dollarsof greenfield investment. MLPs have been and will continue to be at the forefront of thisvalue creation, and the need for investment in US energy infrastructure has never beengreater.

Historical and Forecast US Natural Gas Consumpt ion

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

1985 1990 1995 2000 2005 2010E 2015E 2020E

MillionCubicFeet

0.9% CAGR 1985 through 2020


US natural gas consumption has stagnated over the last three years as supplybottlenecks, LNG permitting difficulties, and declining production have overwhelmed thesupply side, putting certain industrial producers (namely ammonia fertilizer companies)out of business. Despite rapidly growing production in the Rocky Mountains, this supplyhas been unable to reach consumption areas because takeaway capacity in thoseregions has been insufficient. As capacity additions are made in the Rockies, permitted

LNG terminals are constructed, and technology trends increase production from olderregions such as the Texas Panhandle, we expect natural gas consumption to trendupwards predictably.

MLPs are typically toll-road business models. They (1) receive a specified tariff for haulinga product over a certain distance; (2) do not take title to the commodity; (3) do not havebalance sheet exposure; (4) are largely agnostic to the level of commodity prices becausethese prices do not enter the revenue equation; and (5) do not have significant credit riskas commodity prices balloon. So as the energy and investment communities continue toargue over whether oil will trade at $50 per barrel or $150 per barrel in 2010, the morecertain bet is on the growth trajectory of US energy demand and the high-return capitalspending projects that will have to take place to support it.


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Hard Asset Play Provides Tangible Value in a Potentially Inflationary Environ ment

There are many long-haul natural gas pipelines that have been in the ground since beforethe start of the Second World War. Properly maintained, these pipelines have a practicallyinfinite useful life. These pipes have been in the ground for more than 75 years and they

will still be in the ground in another 75 years, after we have exhausted this planets supplyof gaseous and liquid hydrocarbon energy resources and have converted these pipelinesto alternative fuels such as hydrogen and ethanol. We see a real and permanent value inthe cash flows that these assets provide.

Better Business Models

MLPs generated 16% annualized returns over the past decade, not because of any one-time events or changes in relative valuation, but by consistently growing their cashdistributions over that period by 8%-9% per annum. Their ability to continue to do thisrests with their unique and superior business models. Midstream assets are typicallyentrenched regional franchises that in turn support consistent growth. These dominant,and in some instances, monopoly franchises possess innate competitive advantagesaided by regulation, as most MLP pipeline assets are governed by a federal agency that

protects their rights of way and provides for attractive rates of return to investors. Initialtariffs are generally predicated on a cost basis and then indexed to a measure of inflation,providing a built-in inflation hedge in the portfolio. Volumes have historically been andshould continue to be highly predictable over the long run, as they are a function ofpopulation growth and demographic trends.

MLPs offer far more secure and predictable earnings than the broader market, since S&P500 earnings volatility is more than three times that of our MLPs under coverage. MLPsown assets with useful lives of 30-40 years or longer that provide consistent cash flowswithout the need for substantial maintenance capital expenditures. Consistency is aidedby fairly inelastic demand, as residential and commercial consumers heat and cool theirhomes and businesses and drive to work even in the worst of times. Industrial customerscan only take advantage of fuel-switching alternatives and capabilities to a certain extent,and product throughput has risen over the past year despite fallout from September 11th

and the ensuing 2002 recession. High barriers to entry exist because initial capital costsare prohibitive and the ability to create new rights of way is very limited.

In summary, we expect midstream MLPs to generate superior risk-adjusted returns foryears to come, driven by the three factors embedded in their business model that havegenerated their returns in the past:

Top-line growth driven by energy demand growth and PPI indexed transportationtariffs leveraged through a fixed-cost business model with minimal andpredictable capex, generating mid single-digit annual cash flow growth from anexisting asset base, which implies low double-digit expected returns when addedto current yield

Attractive organic investment opportunities resulting from their franchise-

protected footprint, generating additional and often near-term accretion to thedistribution

Opportunities for additional asset acquisitions driven by the macro trendsdescribed in detail below, creating additional immediate accretion to thedistribution. Although the increasingly acquisitive nature of MLPs introduces newrisks, MLPs have a built-in capital market discipline since they pay out most oftheir cash flow and therefore need to come back to the capital markets regularlyto finance this growth.


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Importantly, nothing has changed in the macro environment that would suggest that thesesame factors will not drive returns in the future.

MLPs Exhibit Insignificant Correlation wi th the Broader Equities Market

The majority of equity asset classes and sectors tend to be strongly positively correlated

with the broader market. MLP returns have exhibited statistically insignificant correlationwith the market over nearly two decades. This makes fundamental sense given that thedemand for petroleum products and natural gas is highly inelastic in the near term and islargely unaffected by the vicissitudes of the economy. For example, during 2002, one ofthe sharpest recessions in U.S. history, petroleum products consumption remained flat.Swings in economic indicators and interest rates, which can roil the broader marketsbecause they can both significantly and rapidly affect corporate Americas cash flows, donot materially impact the demographic trends that support the long-term cash flowtrajectory of MLPs.

Furthermore, withoutphysical product shortages such as those experienced in the 1970s,there will be very little consumption impact even over a period of years during times ofhighly elevated prices. This long-term track record and the companies fundamentalsimply that regardless of the direction of performance of the broader equity markets and

the cyclical state of the economy, MLPs are likely to deliver strong returns that areindependent of these broader indicators. By adding an MLP allocation to a portfolio, risk issignificantly reduced even as MLPs increase portfolio returns.


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An Emerging Asset Class

MLPs were created by Congress in their current form in 1986. Structured as partnerships,all income, losses, gains, and deductions are passed on to limited partners and are onlytaxed at that level (i.e. no entity-level taxation), meaning that investors in MLPs avoid the

double taxation of investing in corporations. Congress created this structure to encourageinvestment in US natural resources and energy infrastructure. Since then, as the MLPstructure has gained more widespread adoption, there has been a gradual yet quicklyaccelerating transition of MLP-qualifying assets from corporations to MLPs given theeffective tax arbitrage of holding these assets in the partnership structure and the valuethat highly specialized management teams can provide.

Pipeline assets held by oil majors, refiners, and utilities are often underutilized becausethey are not run for profit. In some cases, direct competitors would prefer not to riskdivulging competitive information. MLPs holding these same assets will truly operate themas common carrier pipelines while still providing capacity reservations for the entity thathad previously held them. Exxons investors measure the companys performance basedon exploratory success, production growth, reserve replacement, and other ratios that donot reward the companys stock price for maintaining pipeline assets. The potential

pipeline earnings are dwarfed by their exploration and production (E&P) cash flows andwill not be rewarded in share price. Consequently, larger energy companies continue toignore their midstream assets and many remain undermanaged and underutilized.

Total Energy MLP Market Capitalization

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E

(Billions)

Source: SEC, ACM estimates

Corporations with MLP-qualifying assets will often create MLPs in which they retaingeneral partner (GP) ownership interests while still allowing these assets to be droppeddown into a more tax-efficient structure where stable cash flows will be far more highlyvalued outside of the volatility of the parent companys earnings stream. It makes littlesense for highly cyclical, low-P/E energy corporations to hold these high-multiple assetson their balance sheets, and E&P companies in particular are motivated to sell thesebusinesses given the premium that is placed by their investors on making commodityprice-sensitive investments that involve both greater risk and greater potential reward.


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mechanisms that could exhort this critical investment. MLPs have become an increasingportion of such expansion projects and we expect organic growth capital investment tocontinue to increase over the next decade.

Number of Publicl y Traded Energy MLPs

0

20

40

60

80

100

120

140

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E

Source: SEC, ACM estimates

The Future of MLPs is Here Today

Cheniere Energy (NYSE: LNG) completed an initial public offering of subsidiary CheniereEnergy Partners (NYSE: CQP) on March 20, 2007, forming an MLP which will own thecorporate parents Sabine Pass LNG regasification terminal. All contracts are take-or-pay where the customers pay for the capacity whether it is used or not. While take-or-paycontracts are considered to have a lower risk profile assuming creditworthycounterparties, the risk in this transaction is that Chenieres own marketing arm iscontracting for half of the terminals capacity--and Cheniere Marketing is still in its nascentstages. Part of Chenieres strategy is to become a significant marketer of LNG byobtaining long-term LNG supply through index-based contracts and then selling the re-gassed product to customers in North America. Alerian believes there is significant riskthat an LNG spot market will not develop in the United States given substantially highernatural gas prices in parts of Europe and Asia during the majority of the calendar year[Note: the preceding sentence was originally written in March of 2007- since its writing,

Cheniere Energy, as a result of lack of visibility to receiving any LNG cargos, has hired aninvestment bank to search for strategic alternatives; the stock has traded from $40 to $5].The firm still stands by its prediction regarding the likelihood of near term LNG cargos andbelieves that misperceptions regarding the contribution of LNG are a major part of the50% increase in natural gas prices in the past year. The mispricing of risk in this specifictransaction, which Alerian attempted to point out politically in a past edition of this primer,does not mean that these assets will not play an important part in the North Americanenergy supply chain over the long term, or that they will not be a significant part of theMLP asset class.

We have been speaking to this theme since the spring of 2004: the types of midstreamlogistics assets in the MLP asset class is only going to continue to expand. We believe


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that in addition to the $200 billion-plus stable of midstream assets currently housed inpublic corporate structures and $150 billion of traditional midstream newbuild necessaryto expand and maintain the United States energy infrastructure over the next decade,alternative energy sources such as LNG, coal gasification, gas-to-liquids technology, arevery real and present hundreds of billions more in fixed cost, hard asset, long-termcontract energy logistics assets.

Structural Valuation Issues Create Substantial Long-Term Upside

We believe that because of the lack of institutional participation in the asset class givensignificant barriers to entry including restrictions on mutual fund ownership and UnrelatedBusiness Taxable Income (UBTI) generation for tax-exempt institutions, there is astructural mispricing of MLPs relative to other asset classes. There is a valuationarbitrage that should logically play out as the spread between MLPs (with distributionyields of ~7% and per annum distribution growth of 5%-10%) and other yield-orientedasset classes such as utilities (with yields of ~3% and low, single-digit growth) and REITs(~4% yields with mid single-digit growth) unwinds from additional institutional attention toand capital in the asset class. If MLPs traded flat on a yield basis to REITS, that wouldimply a 30% revaluation of the group.

During the first 20 years of their existence after Congress created the structure in 1960,REITs traded at an average 250 basis-point premium to the 10-year Treasury. Followingthe REIT IPO boom of the late 1980s and early 1990s and the migration of institutionalreal estate allocation dollars from the private to public markets, REITs have traded onaverage at par with the 10-year Treasury as investors have been willing to trade off thebusiness risk for the inflationary growth component of REIT rents. Since the creation ofthe modern MLP structure in 1986, MLPs have traded at an average 220 basis pointspread to the 10-year Treasury. Today, over 20 years after Congress created thestructure, we believe that institutional focus will result in a similar substantial revaluationof MLP yields versus the risk-free rate as well as other asset classes. Given thesubstantially similar asset risk profiles of REITS and MLPs (we would argue MLPs have asubstantially lower business risk profile given their lower cash flow volatility, high degreeof financial transparency given real time federal reporting requirements, and aconstructive federal regulatory schemed ), there is no compelling reason for this spread

to exist. We believe the disparity has been a function of the restrictions that have beenplaced on institutional ownership of MLPs, and that as more sophisticated investors enterthe space, this spread will disappear over time.

The current growth trajectory of MLPs appears to strongly resemble that of REITs duringthe 1990s. Similar to MLPs, REITs were created as a tax-advantaged structure toencourage investment in that particular sector. We strongly believe there is a similarparallel between the emergence of REITs as a distinct asset class and the growth that wehave seen and expect to continue seeing in MLPs. In 1985, there were approximately30 equity REITs with a combined market capitalization of $30 billion. Today, there areapproximately 300 equity REITs representing $400 billion in market capitalization(excluding hybrid and mortgage REITs). MLPs, while still in the early stages ofdevelopment, have started to emerge, growing as follows:

Flying Under the Radar Limited Instituti onal Ownership of MLPs

Given the attractive historical performance track record in the MLP sector, many investorswonder: How is it that there is so little institutional participation? What am I missing? Isntthis too good to be true if it hasnt caught on?

To begin with, philosophically, hindsight is always 20/20. Well of course REITs makesense! (Not a phrase that was said very often in the mid-1980s when there were 30publicly traded vehicles with an unimpressive $30 billion of market capitalization.) Nowconsidered a staple of every institutional or individual investors well-diversified portfolio,


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REITs were not on anybodys radar screen until the early 1990s. REITs were created in1960, but it took some time before they were accepted.

In this case, however, there are very particular structural reasons why MLPs have notbecome more popular with the institutional investor set. MLP distributions and incomeallocations have historically been considered non-qualifying sources of income, which

impedes regulated investment companies (RICs) such as mutual funds from investing. IfFidelity and Putnam cannot invest, there is no incentive for a Goldman Sachs or MorganStanley salesperson to educate or pitch the investor on the asset class because there isno commission to be generated. There has never been a widespread educational processor focus on Wall Street on educating the institutional customer on MLPs, because thecustomer was restricted from purchasing. For this same reason, the universe of expertanalysts and portfolio managers who understand the many nuances of the midstreamspace is also limited. This product has always been sold directly to retail through theprivate wealth management offices of the bulge-bracket investment banking firms.

Pursuant to Section 331 of the American Jobs Creation Act of 2004, MLP distributionsand income allocations are now considered qualifying sources as it relates to the specialtax status of RICs. However, at least 75% of an RICs assets must be invested ininvestment vehicles that are not MLPs, and an RIC may not own more than 10% of any

single MLP. Mutual funds, and not their investors, will continue to receive K-1s, and willbe required to file tax returns in the states in which the MLP operates.

MLP Sector Median Daily Dollar Trading Volume

$0

$50

$100

$150

$200

$250

$300

$350

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

DollarTradingVolume($millions)

Source: Bloomberg, ACM

However, as well meaning in spirit as the J obs Act was, there are still substantial practicalhurdles to full-scale mutual fund investment in MLPs. First, the timing discrepancybetween the calculation of the RICs distributions and their 1099s (typically Novemberthrough J anuary) and the issuance of K-1s by MLPs (March) creates an administrativeburden for RICs, which are forced to estimate their investors share of MLP income,losses, credits, and deductions without sufficient information. A mistake could result insubstantial excise taxes to the mutual fund as well as a misstatement of the 1099s. Whenthe K-1s are ultimately issued, the fund could then be forced to adjust their 1099s toaccount for the changes. Because a 1099 restatement is such a rare event for a mutual


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fund, they are wary of taking on such a risk. Another administrative burden relates to statefiling requirements. With some MLPs operating in multiple states, the mutual fund itselfmay consequently have to file tax returns in each of those states. Furthermore, not allstates (e.g. Massachusetts) recognize federal statutes concerning qualifying income,further complicating the problem. Retirement accounts and other tax-exempt investmentvehicles are also restricted in their ability to invest in the sector because MLPs generate

UBTI. If UBTI exceeds $1,000 for a tax-exempt entity, investors may be liable to paytaxes on that income.

Liquidity has also historically been a concern in the sector, although this continues toimprove as well. The median market capitalization in the space has doubled to $1.5 billionin the last three years. A typical fear for the institutional investing community is that thesector does not possess sufficient liquidity for investment. However, compared to gasutilities, which attract substantial institutional attention, MLPs have virtually zero mutualfund ownership. For example, Washington Gas and Light (NYSE: WGL), a $1.7 billiongas utility, counts Barclays, Allianz Global, American Century, Vanguard, and StateStreet, among others in its top 10 holders list. None of these names are present in theMLP space, which has companies with significantly larger market capitalization andgreater economic importance. Because institutional investors are familiar with gas utilitieshistorical correlations, earnings trends, price behavior, and they are eligible for inclusion

in mutual fund and tax exempt portfolios, these institutions continue to devote substantialresources and capital investment towards the gas utility sector while generally ignoringMLPs. However, as trading liquidity continues to increase, we believe that institutionalinterest will continue to grow in the sector as MLPs become more difficult to ignore.

Trading liquidity has grown dramatically even over the last few months in the sector, asincremental institutional participation drives market flow. The most recent monthlyaverage daily tick has reached nearly $320 million dollars, implying that an institutioncould purchase $30 million of MLP securities without comprising more than 10% of thevolume weighted average price on any given day, providing fairly significant liquidity foreven larger institutions to begin to make meaningful allocations over time.

Although it may appear irrational or unbelievable that the sector has not generatedgreater institutional interest, consider the decision not through the eyes of a portfolio

manager, but a General Counsel or CEO of a mutual fund company: your investmentteam approaches you to obtain clearance to invest a portion of its portfolio (perhaps anenergy or yield oriented portfolio or value fund) into MLPs. In order to increase returns ona maximum 25% portion of its portfolio, the executive must retrofit the back office, ensurestate compliance in an untested area, and take the risk of underreporting income even ifall of the primary steps are properly executed. From a business perspective, to theexecutive, the decision making criteria are very different from the portfolio managerseeking to boost his returns, and may even be net present value negative to the businesson a risk adjusted basis.

The Emergence of Pure-Play Public ly Traded GPs

MLPs are governed by their GPs, which are in turn also subject to Sarbanes-Oxley withrespect to director independence. Some GPs are comprised of members of the executive

management team, some are nationally recognized private equity groups, and still othersare multinational energy companies. For many years, there have been publicly tradedGPs, and these have typically been corporations whose cash flows were substantiallyderived from other energy assets. Recently, there has been a trend towards the pure-playpublic GP entity, and these have been making their initial public offerings in an MLPstructure themselves.

These structures offer investors a leveraged play on MLP growth. We believe that themajority of these entities are overpriced relative to the risk that investors are assuming;there are very few GPs whose valuation stands up to a dividend discount model (DDM)with an appropriate cost of capital. The investment community continues to accord GPs a


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7%-8% cost of equity capital. With such a high degree of innate leverage, we believe thatGps inherently demand a higher required rate of return. The impacts of structural andfinancial leverage, and trading liquidity demand adjustments to the CAPM or any othermodel used to determine the cost of capital. For the leverage risk that the investor istaking in owning those GP units, the required rate of return, which is the cost of capital,should be greater than holding the limited partner units substantially greater. With GPs

pricing debt at nearly 7.0% for 10-year notes, how can the cost of equity for such a highlyleveraged structure not be substantially higher? We would estimate somewhere between12%-14%, not the 7.0% current average yields associated with LP units. If, for whateverreason, an MLP never grew its distribution again, the GP distribution would have to bevalued precisely the same (average) 6.8% yield as the LP units because it wouldgenerate the exact same stream of cash flows.

These GPs currently trade at 4% yields in the public markets, and although there istremendous potential for distribution growth at the GP level, we generally do not believe itis worth the risk at current price levels.We view purchasing GP units in conjunction withLP units as creating a synthetic position in the whole company; we are creating asecurity without a general partner by balancing the risk/reward and cash flowcharacteristics of the two publicly traded securities. However, at current price levels, wedo not believe this position can be efficiently created.

There is a myth that if an investor likes the LP units, they must love the GP investment,because of the leverage it provides. Not so. Want leveraged exposure to a certain MLPscash flows? Do just that, by borrowing with debt and levering your position- this providesa much better risk adjusted return that purchasing the general partners at todaysvaluations. In fact, over the past year, LPs such as EPD, ETP, and MMP have providedmuch stronger absolute returns than their GP counterparts (EPE, ETE, MGG); applyingappriate leverage would have led to even greater outperformance for a better level of riskcompared to owning the GP units.


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The Alerian MLP Index Series

The Alerian MLP Index Series measures the composite performance of energy masterlimited partnerships and is calculated by Standard & Poors using a float-adjusted,

capitalization-weighted methodology.

The Alerian MLP Index (NYSE: AMZ) measures the composite performance of the 50most prominent energy master limited partnerships, and is calculated by Standard &Poors using a float-adjusted, capitalization-weighted methodology. This index is theindustry standard benchmark for the energy Master Limited Partnership asset class usedby the companies themselves in their internal corporate finance comparisons and outsideinvestor presentations, and by the equity research analyst community to track theperformance of the asset class. The corresponding total return index is calculated on anend-of-day basis and will be disseminated daily through its ticker symbol, AMZX.

The objective of the Alerian MLP Index is to provide investors with an unbiased,comprehensive benchmark for the performance of the energy master limited partnershipuniverse. Using Standard & Poors proprietary calculation methodology, the Alerian MLP

Index was created to fill the need for a reliable, transparent index to track this emergingasset class.

The Alerian MLP Select Index provides an enhanced liquid subset of the Alerian MLPIndex (NYSE: AMZ) that conforms with the New York Stock Exchanges criteria forunderlying constituent inclusion in exchange traded index products. The index iscalculated and maintained by Standard & Poors based on Standard & Poorsstandardized proprietary methodology. The Alerian MLP Select Index is disseminatedreal-time on a price return basis under the ticker symbol AMZS; the corresponding totalreturn index is calculated on an end-of-day basis and will be disseminated daily throughits ticker symbol, AMZSTR.

New index constituents will be subject to the following conditions:

1. Market capitalization. Each constituent security must have a market capitalization of atleast $500 million. This minimum requirement is reviewed from time to time to ensureconsistency with market conditions.

2. Adequate trading liquidity. Each constituent security must maintain a ratio of annualdollar value traded to market capitalization of 0.30 or greater. Trading volume of eachcomponent security is required to have been in excess of 500,000 units per month foreach of the last six months.

3. Public float. Each constituent security must have a public float of at least 50% of thetotal outstanding units.

4. Financial viability. Each constituent security must maintain trailing twelve months

distributable cash flow that exceeds cash distributions paid to unitholders

Constituents of the Alerian MLP Index are float-adjusted to reflect the number of unitsavailable to investors according to Standard & Poors proprietary methodology. The float-adjusted number of units for each stock is determined by assigning each stock anavailability factor. That factor represents the percentage of units deemed available (i.e.,tradable) on the open market, and is developed by excluding certain types of holdingsincluding: corporate cross-holdings, private control block holdings, or governmentholdings. Subordinated limited partner units and any other holdings not readily availableto the public for investment are also excluded.


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Industry Ticker Price Mkt Cap Yield Avg Vol AMZ

Coal ARLP $44.50 1,629 5.26% 100,801 1.01%

Propane APU $34.61 1,973 7.05% 81,838 1.34%

Exploration & Production ATN $43.15 2,620 5.28% 550,019 1.53%

Gathering & Processing APL $43.30 1,680 8.59% 183,117 1.77%

Natural Gas Pipelines BWP $26.75 3,310 6.88% 272,947 1.17%

Exploration & Production BBEP $19.08 1,279 9.49% 128,330 0.37%

Refined Products BPL $49.05 2,372 6.83% 107,601 2.85%

Other - Refining CLMT $11.94 385 21.11% 203,347 0.34%Shipping CPLP $20.21 502 7.82% 32,024 0.00%

Other - Liquefied Natural Gas CQP $9.01 1,458 18.87% 344,008 0.00%

Exploration & Production CEP $19.54 428 11.51% 186,824 0.00%

Gathering & Processing CPNO $37.00 2,393 5.51% 92,739 1.98%

Gathering & Processing XTEX $32.38 1,465 7.54% 58,917 0.98%

Gathering & Processing DPM $31.10 878 7.33% 160,105 0.75%

Exploration & Production DMLP $26.94 761 8.50% 101,496 0.74%

Natural Gas Pipelines DEP $19.68 400 8.33% 88,261 0.38%

Gathering & Processing EROC $16.98 1,235 9.25% 142,810 0.77%

Natural Gas Pipelines EPB $23.16 1,967 4.97% 97,653 0.00%

Crude Oil EEP $49.81 4,093 7.63% 215,089 3.67%

Exploration & Production ENP $24.40 772 6.35% 60,635 0.00%

Natural Gas Pipelines ETP $50.52 7,177 6.68% 285,678 4.80%

Natural Gas Pipelines EPD $31.61 13,760 6.42% 617,572 10.62%

Exploration & Production EVEP $29.72 445 8.08% 74,014 0.00%

Other - Compression EXLP $29.75 496 5.71% 14,936 0.30%

Propane FGP $21.40 1,347 9.35% 58,420 1.01%

Crude Oil GEL $18.76 718 6.08% 48,508 0.57%

Other - Wholesale Distribution GLP $19.04 249 10.24% 25,937 0.00%Gathering & Processing HLND $49.78 463 6.39% 5,584 0.00%

Refined Products HEP $45.62 735 6.36% 35,695 0.00%

Propane NRGY $27.23 1,357 8.89% 129,131 1.14%

Refined Products KMP $59.93 10,929 6.14% 423,187 11.73%

Shipping KSP $36.69 503 8.07% 23,471 0.00%

Exploration & Production LGCY $23.08 685 7.80% 74,270 0.00%

Exploration & P roduction LINE $22.55 2,585 11.18% 1,040,764 3.16%

Refined Products MMP $41.03 2,730 6.41% 147,439 3.57%

Gathering & Processing MWE $36.29 2,055 6.28% 360,835 1.87%

Other - Diversified Midstream MMLP $35.35 514 7.92% 14,475 0.00%

Coal NRP $37.15 2,411 5.22% 113,286 1.38%

Shipping NMM $14.82 269 9.45% 86,708 0.00%

Refined Products NS $51.43 2,801 7.66% 240,984 2.72%

Natural Gas Pipelines OKS $62.64 5,687 6.64% 105,195 3.52%

Shipping OSP $13.25 398 11.32% 28,701 0.00%

Coal PVR $28.00 1,291 6.29% 93,982 0.86%

Crude Oil PAA $46.44 5,393 7.32% 411,050 5.69%

Exploration & Production QELP $15.01 318 10.66% 39,858 0.00%

Gathering & Processing KGS $23.99 571 5.00% 37,780 0.00%

Gathering & Processing RGNC $26.75 1,920 5.98% 109,007 1.08%

Refined Products RVEP $11.82 30 8.46% 2,269 0.00%

Crude Oil SGLP $26.29 890 5.14% 75,065 0.65%

Natural Gas Pipelines SEP $24.70 1,741 5.18% 35,775 0.35%

Propane SGU $3.00 227 0.00% 130,977 0.24%

Propane SPH $40.66 1,331 7.50% 92,040 1.61%

Refined Products SXL $51.00 1,462 6.82% 37,706 1.05%

Gathering & Processing NGLS $24.42 1,128 6.51% 181,406 1.05%

Natural Gas Pipelines TCLP $35.72 1,245 7.45% 45,451 1.03%

Shipping TGP $28.28 1,054 7.50% 234,632 0.66%

Shipping TOO $20.79 407 7.70% 18,150 0.22%

Refined Products TPP $34.75 3,296 8.17% 267,127 3.27%

Refined Products TLP $29.69 369 7.01% 10,423 0.00%

Shipping USS $8.20 150 21.95% 89,077 0.00%

Exploration & Production VNR $16.89 189 10.54% 27,079 0.00%

Gathering & Processing WPZ $34.53 1,822 6.66% 167,815 1.82%

Natural Gas Pipelines WMZ $17.75 422 6.48% 92,730 0.00%

Coal AHGP $27.14 1,625 4.24% 43,741 0.37%

Gathering & Processing AHD $29.13 797 4.67% 31,181 0.00%

Refined Products BGH $25.13 711 4.54% 34,823 0.33%

Gathering & Processing XTXI $34.86 1,604 2.98% 194,637 1.20%

Natural Gas Pipelines ETE $33.44 7,451 4.90% 219,858 4.11%

Natural Gas Pipelines EPE $30.73 4,277 5.53% 166,135 1.22%

Gathering & Processing HPGP $26.52 573 3.85% 17,693 0.00%

Propane NRGP $38.87 786 5.76% 10,818 0.00%

Refined Products MGG $25.40 1,591 4.83% 182,855 1.59%

Refined Products NSH $26.43 1,123 5.45% 160,106 1.19%

Coal PVG $30.38 1,187 4.21% 38,063 0.00%

Crude Oil EEQ $51.70 701 7.35% 33,593 0.00%

Refined Products KMR $56.11 4,064 6.56% 203,923 4.32%

TC Pipelines LP

Vanguard Natural Resources LLC

Teekay Offshore Partners LP

Williams Pipeline Partners LP

TEPP CO Partners LP

TransMontaigne Partners LP

Crosstex Energy Inc

Buckeye GP Holdings LP

Atlas Pipeline Holdings LP

NuStar GP Holdings LLC

Penn Virginia GP Holdings LP

Energy Transfer Equity LP

Enterprise GP Holdings LP

Inergy Holdings LP

Hiland Holdings GP LP

Enbridge Energy Management LLC

Kinder Morgan Management LLC

Name

Institutional Shares

Buckeye Partners LP

Enterprise Products Partners LP

Magellan Midstream Holdings LP

MarkWest Energy Partners LP

Natural Resource Partners LP

Enbridge Energy Partners LP

Crosstex Energy LP

DCP Midstream Partners LP

Alliance Holdings GP LP

Martin Midstream Partners LP

Sunoco Logistics Partners LP

NuStar Energy LP

Regency Energy Partners LP

Publicly Traded MLP GPs

US Shipping Partners LP

Williams Partners LP

Teekay LNG Partners LP

Inergy LP

Exterran Partners LP

Linn Energy LLC

Global Partners LP

Holly Energy Partners LP

Hiland Partners LP

BreitBurn Energy Partners LP

Calumet Specialty Products Partners LP

Constellation Energy Partners LLC

Ferrellgas Partners LP

El Paso Pipeline Partners LP

Copano Energy LLC

Capital Product Partners LP

Cheniere Energy Partners LP

Dorchester Minerals LP

Eagle Rock Energy Partners LP

Alliance Resource Partners LP

AmeriGas Partners LP

Atlas Pipeline Partners LP

Boardwalk Pipeline Partners LP

Atlas Energy Resources LLC

Duncan Energy Partners LP

Rio Vista Energy Partners LP

Suburban Propane Partners LP

Encore Energy Partners LP

Energy Transfer Partners LP

Legacy Reserves LP

K-Sea Transportation Partners LP

Genesis Energy LP

EV Energy Partners LP

Kinder Morgan Energy Partners LP

Star Gas Partners LP

Spectra Energy Partners LP

Magellan Midstream Partners LP

Targa Resources Partners LP

Quicksilver Gas Services LP

OSG America LP

ONEOK Partners LP

Quest Energy Partners LP

SemGroup Energy Partners LP

Penn Virginia Resource Partners LP

Plains All American Pipeline LP

Navios Maritime Partners LP


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What is a Midstream Asset?

Traditional MLP operations can be broadly grouped into four categories pipelines,terminals/storage, marine transportation and midstream services. These categories canfurther be subdivided by product types, including ammonia, bulk products, carbon dioxide,

coal, crude oil, heating oil, refined petroleum products, natural gas and natural gasliquids, and propane.

Crude Oil/Refined Products Transportation

Crude oil and refined petroleum products are transported by pipelines, marinetransportation, railroads and trucks. Pipelines are the most efficient mode oftransportation for long-haul movement (accounting for roughly 60% of transportation),followed by tankers/barges (approximately 30% of transportation). Rail and truck usage iscost-effective only over short distances and, therefore, accounts for only a smallpercentage of petroleum transportation.

Petroleum Products Shipment Content and Consumption

Gasoline

44%

Distillate Fuel

20%

Residual Fuel

4%

Other

24%

J et Fuel

8%

Transportation

68%

Electric Power

2%

Residential

6%

Industrial

24%


The US crude oil and petroleum products transportation system links oil wells and importterminals to refineries, which in turn are linked to end users of petroleum products. Thissystem is comprised of networks of pipelines, terminals, storage facilities, tankers,barges, rail cars, and trucks. Generally speaking, pipelines are the lowest-cost alternativefor transportation across long distances. Throughout the distribution system, terminalsexist to provide storage, distribution, blending, and other ancillary services. Crude oil thatis pumped to the surface from reservoir deposits is collected on gathering pipelines andbrought to longer-haul trunk pipelines to be transported to refineries, which then separatethe feedstock into products. Product then originates on pipeline systems from direct


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connections with refineries and interconnections with other interstate pipelines fortransportation and ultimate distribution.

Petroleum products transported, stored, and distributed through petroleum productspipelines and terminals include:

refined petroleum products, which are the output from refineries and are primarilyused as fuels by consumers (gasoline, diesel, jet fuel, kerosene, and heating oil)

liquefied petroleum gases (LPGs), which are produced as byproducts of crude oilrefining and as part of natural gas production (these include butane and propane)

blendstocks, which are blended with petroleum products to enhance variousspecifications, such as raising a gasolines octane or oxygen content

heavy oils and feedstock for further processing by refineries and petrochemicalfacilities

crude oil and condensate, which are used as feedstock by refineries

Fungible products shipped on such systems are typically generic products. Theseproducts meet published standard specifications; shippers will receive equivalent productbut may not get back the actual product shipped. Segregated products are brandedproducts or specific blendstock materials. On segregated shipments, shippers will receive

the same product that they had injected into the system.

With pipeline transportation, crude oil and refined petroleum products travel at roughlythree to five miles per hour in long-haul trunkline pipelines. The greater the volume beingtransported on a given day, the faster the product generally moves. It can take anywherefrom two to three weeks for a batch of petroleum products to move from a refinery tailgatein Houston, Texas to the New York harbor.

Interstate pipelines carry crude oil and refined products across state boundaries and aresubject to FERC regulation on the rates charged for their services, on the terms andconditions of the services they offer, and on the location, construction, and abandonmentof their facilities. Intrastate pipelines transport within a particular state and are not subjectto regulation by the FERC, but rather individual state agencies responsible for suchoversight.

Petroleum pipelines benefit from a benign overarching federal regulatory framework,which provides management teams with a strong incentive to innovate and cut costs.Unlike traditional cost-of-service, authorized rate of return utility rate-making, petroleumproducts pipelines do not have to share cost improvements with their customers. After aninitial rate is set, as per the 1992 Congressional Energy Policy Act, the tariff rate structureon the pipeline is increased by the PPI for Finished Goods plus a 1.3% margin every J uly1st.

Transportation tariffs vary depending on where the product originates, where ultimatedelivery occurs, and any applicable discounts. All interstate transportation rates anddiscounts are in published tariffs filed with the FERC. Tariffs are designed to ensureappropriate rates of return for pipeline owners, with annual tariff increases of PPI +1.3%functioning as an embedded cost recovery mechanism thus providing a built-in inflation

hedge for partnerships that own crude oil and refined product interstate pipelines.Published tariffs serve as contracts, and shippers nominate the volume to be shipped upto a month in advance. In addition, supplemental agreements are entered into withshippers that typically result in volume and/or term commitments by shippers in exchangefor reduced tariff rates. These agreements have terms of 1-10 years. Product servicessuch as ethanol loading, additive injection, and custom blending are performed as neededunder monthly or long-term agreements. Pipeline operators generally do not take title tothe product they are shipping, leaving little direct commodity exposure (inelastic demandcharacteristics for refined petroleum products further supports this).


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Competition with other pipeline systems is based mainly on transportation charges,quality of customer service, proximity to end users, and history of individual customerrelationships. However, given the different supply sources on each pipeline, pricing ateither the origin or terminal point on a pipeline may outweigh transportation costs whencustomers choose which line to use.

Marine Transportation

Although pipelines are a key component in the distribution chain, they do not reach allmarkets and are not capable of transporting all refined petroleum products oreconomically transporting most chemical products. Marine transportation primarilyconducted by tankers and tug barges fills this gap. Tankers and barges transportrefined petroleum products from refineries to terminals and facilities engaged in furtherprocessing. Customer contracts generally have initial terms of one to three years. Similarto pipeline transportation, marine transportation providers do not assume ownership ofany of the products that are transported on their vessels.

The US flag coastwise marine transportation industry is guided by the Merchant MarineAct of 1920 (commonly referred to as the J ones Act), a set of federal statutes thatmandates that vessels engaged in trade between US ports must operate under the US

flag, be built in the US, be at least 75% owned and operated by US citizens, and bestaffed by a US crew. One of the principle reasons for the J ones Act is to maintain a fleetof vessels available for charter to the US government to meet national defense needs, butit also serves to insulate the market from direct foreign competition.

In 2004, we saw the first J ones Act marine transportation IPOs in the MLP sector: K-SeaTransportation Partners LP and US Shipping Partners LP. The coastwise vessel fleet ishighly fragmented and predominantly family owned. We believe there will be additionalIPOs and substantial opportunity for consolidation in the sector as capital requirementsrise due to increasingly stringent environmental requirements. In many cases, we viewthese vessels as floating pipelines; these ships often carry products that cannot becarried in a competing pipeline, or they service areas that are not currently serviced bypipelines and are unlikely to be so in the future.

The domestic supply of vessels is decreasing due to the J ones Act and the Oil PollutionAct of 1990 (OPA 90), which mandates the phase-out of certain non-double-hulledvessels by a series of deadlines through 2015. Given the expected decline in availablevessels due to these requirements, oil and chemical companies are increasinglyinterested in entering into long-term charter agreements in order to ensure shippingcapacity for their products. Further, major oil and chemical companies have becomeprogressively more selective in their choice of tanker and barge operators. Thesecompanies place particular emphasis on strong environmental and safety records as wellas operating performance. This preference will likely accelerate the scrapping of older,lower-quality vessels. Additionally, these companies continue to concentrate more ontheir core operations by divesting vessels and securing third-party transportation.

Crude Oil/Refined Products Terminals

Terminals are large storage and distribution facilities that handle crude oil and refinedpetroleum products. Terminals are typically located in close proximity to refineries andcan be classified as either inland or marine. Inland terminals generally consist of multiplestorage tanks that are connected to a pipeline system. Products are loaded and unloadedfrom the common carrier pipeline to storage tanks and directly from storage tanks to atruck or rail car loading rack. Marine terminals primarily receive petroleum products byship and barge, short-haul pipeline connections from neighboring refineries, and commoncarrier pipelines.

Terminals generate fees primarily by providing short- and long-term storage of crude oiland refined petroleum products, as well as ancillary services. Revenue is generated bycharging customers a fee based on the amount of product that is delivered through


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terminals. In addition to throughput fees, revenue is generated by charging customers afee for providing services such as blending and additive injection. Terminals areunregulated and rates are market-based as a result. Terminal contracts, which typicallyprovide for storage for anywhere from a few days to several months, generally last for oneyear with annual renewal provisions. Most of these contracts contain a minimumthroughput provision that obligates the customer to move a minimum amount of product

through a terminal or pay for terminal capacity reserved but not used. In general, similarto pipeline operators, terminal operators do not take title to the products that are stored inor distributed from their terminals.

Terminal demand is greatest in a contango market, in which future petroleum pricesrepresented by the forward curve are higher than prevailing spot prices. In thesecircumstances, customers tend to store more product to arbitrage the higher pricesexpected in the future. When backwardation (the opposite of contango, i.e. future pricesare lower than spot prices) exists, customers tend to transport more product to endmarkets to take advance of current higher prices in lieu of storing product.

Refiners and chemical companies will use third-party terminals when their facilities areinsufficient due to size constraints, specialized product handling requirements, orgeographic considerations.

Midstream Natural Gas Indust ry

Natural gas is rapidly growing as a global energy source, accounting for approximately25% of world energy consumption today. This growth has been driven by plentifulreserves, the environmental benefits of its clean-burning nature, and the broad range ofits applications.

Once natural gas is produced from wells in areas such as the Gulf of Mexico, producersthen seek to deliver the natural gas and its components to final markets. The midstreamnatural gas industry is the link between upstream E&P and downstream end markets. Themidstream natural gas industry generally consists of natural gas gathering, transportation,storage, and processing/fractionation activities. The midstream segment typically involveslocal competition based on the proximity of gathering systems and processing plants to

natural gas producing wells.

Given the May 2007 DC Circuit Court ruling that upheld the Federal Energy RegulatoryCommissions policy regarding an implied tax component in the cost of service fordetermining allowed pipeline rates of return, we have seen the beginning of a significantshift of interstate natural gas assets into the MLP structure with multiple initial publicofferings in the second half of 2007 of pure play interstate natural gas pipelinecompanies, and continuing in what could amount to the divestiture of over $200 billion ofassets.

Transportation

The US natural gas pipeline system transports natural gas from producing regions tocustomers such as local distribution companies (LDCs), industrial users, and electric

generation facilities. Similar to crude oil and refined product pipelines, interstate pipelinescarry natural gas across state boundaries and are subject to FERC regulation on therates charged for their services, terms and conditions of the services they offer, andlocation, construction, and abandonment of their facilities. Intrastate pipelines, likewise,provide transportation within a particular state and are not subject to FERC regulation, butrather governance at the state agency level.

The US Gulf Coast is the most prolific domestic natural gas producing region. Total USproduction is insufficient to meet US demand, however. The majority of this supplyshortfall is likely to be met through natural gas imports from Canada as well as throughLNG imports, which are expected to be delivered predominately through Gulf Coastterminals. According to the Energy Information Administration (EIA), LNGs share of total


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US gas supply could be as high as 20% by 2025, compared to less than 3% today. Giventhe extensive pipeline infrastructure and available gas processing capability in and aroundthe region, the Gulf Coast is the target for most of the proposed onshore LNG terminals.

Gathering

The natural gas gathering process involves the connection of producing wells to pipelines,called gathering systems, that provide short-haul takeaway capacity. Gathering systemsgenerally consist of a network of small-diameter pipelines that collect natural gas fromproducing wells and transport it to trunkline pipelines for further transmission. Gatheringsystems operate at design pressures that maximize the throughput from all connectedwells. Some systems are supported by a reserve dedication, which commits the producerto utilize the midstream service providers system for all current and future production fora specified period, often for the life of the producers reservoir lease.

Since wells produce at progressively lower field pressures as they age, it becomesincreasingly difficult to deliver the remaining production in the ground against a higherpressure that exists in the connecting gathering system. Natural gas compression is aprocess in which a volume of gas at an existing pressure is compressed to a desiredhigher pressure, allowing gas that no longer naturally flows into a higher pressure

downstream pipeline to be brought to market. Field compression is typically used to allowa gathering system to operate at a lower pressure or provide sufficient pressure to delivergas into a higher-pressure downstream pipeline. If field compression is not installed, thenthe remaining natural gas in the ground will not be produced because it cannot overcomethe higher gathering system pressure. In contrast, if field compression is installed, a wellcan continue delivering natural gas that otherwise would likely not be produced.

Natural Gas Value Chain

Wellhead Fractionation

NGL Transportation & Storage

Natural Gas Transportation & Storage

Gathering Dehydration,

Treating,Processing

Natural GasEnd Users

End UsersNGL

Source: ACM

Dehydration

Natural gas collected at the wellhead has a variety of components that typically render itunsuitable for long-haul pipeline transportation. Produced natural gas can be saturatedwith water, which must be extracted given that natural gas and water can combine to formice that can block parts of the pipeline gathering and transportation system. Water canalso cause corrosion when combined with carbon dioxide (CO2) or hydrogen sulfide (H2S)in natural gas. In addition, condensed water in a pipeline can raise pipeline pressure. Tomeet downstream pipeline and end user gas quality standards, natural gas is dehydratedto remove the saturated water.


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Treating

In addition to water, natural gas collected through a gathering system may also containimpurities such as carbon dioxide and hydrogen sulfide depending on the reservoir fromwhich it is derived. Natural gas with elevated amounts of carbon dioxide or hydrogen

sulfide can be damaging to pipelines and fail to meet end user specifications. As a result,gas with impurities higher than what is permitted by pipeline quality standards is treatedwith liquid chemicals called amines at a separate plant prior to processing. The treatingprocess involves a continuous circulation of amine, which has a chemical affinity forcarbon dioxide and hydrogen sulfide that allows it to absorb the impurities from the gas.After mixing, gas and amine are separated and the impurities are removed from theamine by heating. Further, to alleviate the potentially adverse effects of thesecontaminants, many pipelines regularly inject corrosion inhibitors into the gas stream.

Processing

Once water and other impurities are removed from natural gas, the gas must then beseparated into its components. Natural gas processing involves the separation of naturalgas into pipeline quality natural gas and a mixed stream of natural gas liquids (NGLs).

The primary component of natural gas is methane (CH4), but most gas also containsvarying degrees of liquids including ethane (C2H6), propane (C3H8), normal butane(C4H10), isobutane (C4H10), and natural gasoline. NGLs are used as heating fuels and asfeedstock in the petrochemical and oil refining industries.

Natural gas pipelines have specifications as to the maximum NGL content of the gas tobe shipped. In order to meet quality standards for pipelines, natural gas that does notmeet these specifications must be processed to separate liquids that can have highervalues as distinct NGLs than they would by being kept in the natural gas stream. NGLsare typically recovered by cooling the natural gas until the mixed NGLs separate throughcondensation. Cryogenic recovery methods are processes where this is accomplished atvery low temperatures and provide higher NGL recovery yields. After being extracted fromnatural gas, the mixed NGLs are typically transported to a fractionator for separation ofthe NGLs into their component parts.

Processing contracts can take on a number of forms including, (1) fee-basedarrangements; (2) percentage of liquids/proceeds contracts, which effectively give theprocessor long exposure to natural gas and/or NGL prices; (3) percentage of indexcontracts, which effectively lock in a margin for the processor; and (4) keep-wholecontracts, which effectively creates a long NGL / short natural gas position for theprocessor and exposes the processor to what is referred to as the fractionation spread(the processor retains ownership of the NGLs and is required to reimburse the producerfor the value of the lost heat content from the NGLs having been stripped out, creating theshort gas position).

Fractionation

Fractionation is the method by which NGLs are further separated into individual

components. NGL fractionation facilities separate mixed NGL streams into discrete NGLproducts. Ethane is primarily used in the petrochemical industry to produce ethylene, akey building block for a wide range of plastics and other chemical products. Propane isused in the production of ethylene and propylene and as a heating fuel, an engine fuel,and an industrial fuel. Isobutane is commonly used to enhance the octane content ofmotor gasoline. Normal butane is used in the production of ethylene, butadiene (animportant component of synthetic rubber), motor gasoline, and isobutane. Naturalgasoline, a mixture of pentanes and heavier hydrocarbons, is used primarily to producemotor gasoline and petrochemicals. In the US, NGLs are produced primarily by gasprocessing plants but also by crude oil refineries.


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Fractionation isolates the different boiling points of the individual NGL products. NGLs arefractionated by heating mixed NGL streams and sending them through a series ofdistillation towers. As the temperature of the NGL stream is increased, the lightest (lowestboiling point) NGL product boils off the top of the tower, where it is condensed and movedto storage. The remaining stream is then sent to the next tower, where the process isrepeated and a different NGL product is separated and stored. This process continues

until the NGL stream has been separated into its components.

Natural gas processing facilities have some flexibility in the extent to which they separateNGLs from natural gas. The actual volume of NGLs produced is often determined by thedegree to which NGL prices exceed natural gas prices and the cost of separating themixed NGLs from the natural gas stream. When the value of extracting discrete NGLproducts is less than what would be achieved by allowing them to remain in the naturalgas stream, the recovery levels of certain NGL products, particularly ethane, can in someinstances be reduced. Ethane rejection and similar processes to reduce NGL recoveryare still limited by pipeline and end user specifications, although blending with low NGLcontent natural gas (referred to as dry gas as opposed to NGL-rich wet gas) cansometimes be used as an alternative to processing.

After NGLs are fractionated, the fractionated products are transported to customers or

stored for future delivery. NGL products must be pressurized or cooled to a liquid state forstorage or transportation. The mixed NGLs delivered to fractionation facilities fromdomestic gas processing plants and crude oil refineries are typically transported by NGLpipelines and, to a lesser extent, by rail car and truck. Both producers and end users willlook to store NGLs to ensure an adequate supply for their respective customers over thecourse of the year and, in particular, periods of heightened demand.

MLPs that own or operate natural gas processing and fractionation plants must manage aunique set of complex risks associated with the basis between natural gas and variousNGL products. With the benefit of developing hedging markets, most MLPs have becomequite sophisticated in their management of these risks, ensuring the ability to continueproviding their unitholders with dependable distributions.

Storage

Natural gas storage facilities are used by natural gas end users such as LDCs to ensure areliable supply for their customers and their marketing and trading businesses as part of apurchase and sale strategy. Natural gas is typically stored in underground facilities suchas salt dome caverns and depleted reservoirs. Natural gas demand is usually greaterduring the winter, because it is mainly used for heating by residential and commercialcustomers. Typically, excess natural gas delivered during summer months is stored tomeet the increased demand during winter months. However, as natural gas-fired electricgeneration continues as an emerging theme, demand for natural gas during the summermonths to meet cooling needs should rise accordingly.

Natural gas is typically stored underground in salt formations and depleted reservoirsbecause above-ground storage tends to be uneconomical. Salt formations are not alteredby the stored products and can contain large quantities of natural gas safely and in a

cost-effective manner. A salt cavern is formed by drilling and dissolving an undergroundcavern in a naturally existing salt formation and installing related surface facilities. Watermixed with salt, or brine, is used to displace the stored products and to maintain pressurein the well as product volumes change.

LNG Transportation

As the use of natural gas continues to rise internationally, the gap between the expecteddemand by consuming nations and their production levels is also increasing, requiring theshortfall to be met with imports. A majority of the global supply of natural gas hastraditionally been stranded given the dislocation in producing regions and end marketsand the difficulty in transporting gas between the two. Pipeline transportation is generally


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the most cost-effective means of transporting natural gas, although such transportation isnaturally limited by distance and terrain. When pipeline transportation is not possible ornatural gas demand sufficiently exceeds available supply, LNG provides a way to importnatural gas.

LNG provides an economical way to transport natural gas via ship by cooling it to a liquid

form. This significantly reduces the volume, enabling storage and transportation by shipover long distances, thereby helping regions with inadequate reserves or limited accessto long-distance transmission pipelines to meet their natural gas demand. LNG istransported overseas in specially built tanks on double-hulled ships to terminals where itis offloaded and stored in insulated tanks. The LNG is regasified and then shipped bypipeline for distribution to natural gas customers. LNG carriers are usually enlisted tocarry LNG on time charters, where a vessel is hired for a fixed period of time, typicallyaround 25 years. LNG shipping historically has been predicated on long-term, fixed-ratetime charter contracts owing to how expensive LNG carriers are to build, as well as theneed for natural gas customers to maintain a reliable supply of natural gas.

The two primary groups of LNG vessel operators are nationalized energy and utilitycompanies and independent ship owners. Given the complex, long-term nature of LNGprojects, major energy companies historically have transported LNG through their captive

fleets. However, independent ship owners are starting to gain a greater share of LNG shipcharters. Similar to other tanker and barge operations, the increasing ownership of theworld LNG fleet by independent owners is mainly attributable to (1) the desire of somemajor energy companies to reduce their commitment in the transportation business,which is non-

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