Case Studies March 2014

Listed Infrastructure:

A Case for
Midstream Energy
Case Studies is a Cohen & Steers series that evaluates compelling investment themes in our various
sectors of expertise. This infrastructure study is focused on the real assets characteristics of the
“midstream” energy sector, which is engaged in the gathering, processing and transportation of crude
oil, natural gas and other energy commodities. Often, the business models of these companies are
characterized by predictable revenue streams and cash flows. The delivery of this income can be
enhanced through the tax-efficient structures of master limited partnerships (MLPs); however, many
midstream energy companies are structured as corporations (typically offering lower current income
but with generally higher dividend growth potential). Regardless of the structure, we believe these
infrastructure companies lie in the “sweet spot” of shifting trends in supply and demand, as new areas
of North American production are developed and the drivers of rising global consumption evolve.

Midstream Energy Services

Natural Gas
Natural Gas

Natural Gas Natural Gas Pipelines Natural Gas Pipelines

Gathering Pipelines Storage Vehicles

Mixed Ethane
Gas Processing NGLs
Propane
Butane
Iso-Butane
Nat. Gasoline
Mixed NGLs Pipelines NGL Fractionation Storage NGL Pipelines
Utilities
Crude Oil

Trucks Barges Industry

Storage Storage

Barges
Refined Products Pipelines
Residential Use

Crude Oil Crude Oil Refining

Gathering Pipelines
Source: Cohen & Steers.

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Listed Infrastructure: A Case for Midstream Energy

A Case for Midstream Energy

Introduction
Midstream energy companies gather, process and transport natural gas, crude oil
and related energy commodities. The U.S. energy transportation network, which
transports crude oil, natural gas and natural gas liquids (NGLs), is the largest in the
world and spans over 2.5 million miles of pipelines.

Like other businesses in the infrastructure universe, pipelines are long-lived assets
with high barriers to entry and relatively inelastic demand. Pipeline businesses tend
to have low direct commodity price exposure. Their revenue streams are typically
fee-based, and either regulated or tied to long-term contracts that support stable
and predictable cash flows. In some cases, such as petroleum product pipelines,
the tariffs charged are adjusted annually at a rate linked to inflation.

Although there are opportunities globally, much of the listed universe is concentrated
in North America, where fast-growing energy production and secular shifts in supply
and demand are creating compelling long-term investment opportunities. Many
are associated with the growing need to upgrade outdated systems and build new
energy transmission networks. According to a study prepared for the American
Petroleum Institute by IHS Global, Inc., about $85–$90 billion of direct capital will
be allocated toward oil and gas infrastructure in 2014.(1) The study further projected
that annual spending should rise until the end of this decade, and then moderate to
about $60 billion per year through 2025.

“The Supply Push”

The North American energy renaissance is in
full swing.
The U.S. Energy Information Administration (EIA) expects the United States to
achieve energy independence over the next three decades as it boosts production
of crude oil, natural gas, natural gas liquids and renewable energy. But, it’s
important to point out that energy independence means different things to different
people. In our view, it is the point at which total energy produced exceeds total
energy consumed. This does not imply that America will be energy self-sufficient;
rather, the U.S. will likely have an even greater presence in global energy trade
under this scenario as it continues to import commodities that local markets
demand (such as heavy crude oil) and export those items which are over-supplied
domestically (such as natural gas, propane and butane).

Understanding the Risks: Although energy pipeline companies are not subject to direct commodity price
exposure, a significant decrease in the production of natural gas, oil, or other energy commodities, due to a
decline in production from existing facilities, import supply disruption, or otherwise, could negatively affect the
performance of pipeline companies. Factors that could lead to a decrease in market demand include a recession
or other adverse economic conditions, an increase in the market price of the underlying commodity, higher taxes
or other regulatory actions that increase costs, or a shift in consumer demand for such products. Demand may
also be adversely impacted by consumer sentiment with respect to global warming and/or by any state or federal
legislation intended to promote the use of alternative energy sources, such as bio-fuels.
(1) At December 31, 2013.

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 Much of the production increase over the next decade is happening in previously undeveloped shale
formations that have been made more economical by advanced drilling techniques. For instance, natural
gas produced from shale resources is expected to increase from just 22% of supply in 2012 to 50% of
production by 2040. From a capital investment perspective, these shale basins are often in locations
that have not been historical supply centers, such as North Dakota, which means that the required
infrastructure demands are even greater.(1)

Exhibit 1: Change in Forecasts For Energy Production Actual Current Forecast

2010 Forecast
60

55
Energy commodity
50
production forecasts
Production (Quadrillion BTUs)

have been revised upward 45

each year since 2010. 40

35

2007 2011 2015 2019 2023 2027 2031 2035

At December 31, 2013. Source: EIA. Chart refers to crude oil, natural gas and natural gas liquids. Since economic and market
conditions change frequently, there can be no assurance that any market forecast set forth in this brochure will be realized.
There is no assurance that any historical trend illustrated above will be repeated in the future or any way to know in
advance when such a trend might begin.

Exhibit 2: Shifting Trends for U.S. Natural Gas Supply

History 2012 Projections 2040
35
30 Energy commodity production
Trillion Cubic Feet of Gas (TCF)

forecasts have been revised upward

Total Natural Gas Production

25 each year since 2010.

50% Shale Gas
20 22%
15
Tight Gas
10 Alaska
Non-associated Offshore
5 Coalbed Methane
Associated with Oil
Non-associated Onshore
1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040

At December 31, 2013. Source: U.S. EIA Annual Energy Outlook, 2013.
There is no assurance that any historical trend illustrated above will be repeated in the future or any way to know in advance when such a trend might begin.

(1) U.S. EIA, Annual Energy Outlook 2014, Early Release, December 2013.

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Listed Infrastructure: A Case for Midstream Energy

“The Demand Pull”

A New Leg of Energy Infrastructure Development
1. Rising Natural Gas Utilization in Electric Power Generation
The most significant natural gas demand growth is expected from the power generation sector, as
environmental regulations are driving higher utilization of cleaner-burning, cheaper-to-build and more
flexible gas plants.

Exhibit 3: Electricity Generation by Fuel Natural Gas Coal

1990–2040 Renewables Oil and Other
Liquids
Nuclear

History 2012 Projections 2040

6
Trillion Kilowatt Hours Per Year

4 35%
30%
3 16%
12%
2 16%
19%

1 37% 32%
1% 1%
1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040

Source: U.S. EIA Annual Energy Outlook, 2013.

2. Increasing Industrial Usage

One byproduct of rising North American crude oil and natural gas production is the higher production of
associated natural gas liquids (NGLs), such as ethane, propane and butane. This has led to significant
declines in the price of these commodities (particularly ethane), which are feed stocks in many industrial
processes, such as petrochemical production. Exhibit 4 below illustrates the evolving production cost
advantage of ethylene in North America, which is derived from relatively low-cost ethane. According
to the American Chemistry Council, this type of growing access to petrochemical feed stocks at lower
prices is expected to spur substantial capital investment in the U.S. chemical industry, as highlighted in
Exhibit 5 below.

Exhibit 4: Global Ethylene Capacity Cost Curve 2012 Exhibit 5: Capital Investment in the U.S. Chemical Industry
2005 2012
$1.20
Other $16
Northeast Asia
$1.00 $14
Production Cost ($/pound)

China
$0.80 Western $12
Europe
$10
Western
$0.60 Europe
China United $8
Other States
$0.40 $6
Middle Northeast Asia
US$ Billions

East $4
$0.20 United
Middle States
East $2
$0.00
0 73 136 172 247 307
Global Supply (cumulative in billions of pounds) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

As of February 28, 2014 for both Exhibit 4 and Exhibit 5. Source: American Chemistry Council.

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 3. The Coming Age of Exports
Based on Government estimates, the U.S. will be transformed from a natural gas importer to a net exporter
over the next three years, as shale gas supply mounts and demand outside North America rises.(1) In our
view, the North American midstream energy industry is becoming a primary beneficiary of these trends,
given the significant pricing disparities in global prices for liquefied natural gas, or LNG, as shown in
Exhibit 6. Similar dynamics are expected to drive opportunities in the export of propane, butane and
condensates.
To put these trends in perspective, today’s modest level of
LNG export capacity could increase to 2 trillion cubic feet of
Exhibit 6: Select Global LNG Prices
gas per day by 2020 and 3.5 trillion cubic feet of gas by 2029.
But to make meaningful LNG exports a reality, significant
Japan infrastructure expansion will be required. The 11 existing LNG
United Kingdom $15.16 import terminals located along the Atlantic and Gulf coasts
$10.66
were originally built to re-gasify imported liquefied natural gas;
United States(a) however, plans are underway to convert many of these facilities
$3.15 to include liquefaction sites. As of January 2014, six approved
facilities were in various stages of planning and construction in
the U.S., and an additional 27 facilities had been proposed.(2)

India The LNG industry also needs to work through a number of

$13.75 environmental, safety and jurisdiction issues, as it navigates
a complex regulatory framework. For example, most plants
seeking approvals are limited to transporting LNG to the 20
countries holding free-trade agreements with the U.S., and
none is a major importer of gas. Only five facilities (Lake
Charles, LA; Sabine Pass, LA; Freeport, TX, Cove Point, MD
and Cameron, LA) have final or conditional State Department
approval to trade with a non-free trade agreement country,
Estimated at December 2013. Source: Federal Energy Regulatory Commission (FERC).
Data in U.S. dollars/mmbtu (million metric British thermal units). however, another 25 applications are under review.(3) The top
(a) Lake Charles, Louisiana. ten importers, which represent 87% of global LNG imports,
are highlighted in Exhibit 7.

Exhibit 7: Global LNG Consumption by Country

2013
40%
The North American 35%
36.2

energy renaissance is
Percent of Global Consumption

30%

transforming global 25%

20%
liquefied natural gas 15%
15.2

dynamics. 10%
6.5 6.2 6.1 5.2 4.2
5% 3.1 2.4 2.2

Japan South Spain India China Taiwan United France Turkey Italy
Korea Kingdom
At September 2013. Source: BP Statistical Review of World Energy, 2013.

(1) Source: U.S. EIA Energy Outlook, 2014.

(2) Source: Federal Energy Regulatory Commission as of January 2014.
(3) Source: Office of the United States Trade Representative as of January 2014.

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Listed Infrastructure: A Case for Midstream Energy

Midstream Energy Themes in Action:

How changing energy flow dynamics have given rise to innovative
debottlenecking solutions.
Historically, Cushing, Oklahoma has served as the mid-continent hub for the distribution of both crude oil imported
to the U.S. Gulf Coast and West Texas crude oil production. Most of the pipelines were originally constructed and
configured to move imported crude oil north to Cushing, and then on to refineries throughout the Midwest. However,
the substantial growth in domestic production over the past decade led
to severe oversupply at the Cushing hub. In May 2012, an innovative Exhibit 8: Seaway Pipeline
solution designed to alleviate this bottleneck was implemented on the Tulsa
Seaway Crude Pipeline, a 500-mile system originally opened in 1995 to Cushing
carry crude oil northward to Cushing from the Gulf Coast. Joint owners OKLAHOMA

Enterprise and Enbridge embarked on a project to reverse the flow that

enabled southbound energy transportation. The pipeline opened in
mid-2012 with capacity of about 150,000 bpd, which was increased to
400,000 bpd in January 2013 when further modifications were completed. TEXAS Dallas
Now under construction is a parallel, 512-mile pipeline along the same
Proposed Seaway Pipeline Project
route that could again double capacity by mid-2014.
Seaway Pipeline Reversal
Seaway Pipeline Twin/Loop
Further capacity was added in January 2014, when the southern leg of Jones Creek Terminal to
Port Arthur
ECHO Terminal
TransCanada Corp.’s Keystone XL pipeline started commercial service to ECHO to Port Arthur Extension
Houston

transport crude oil from Cushing to the Gulf Coast. It is anticipated by the ECHO Terminal
Freeport
company that this new pipeline leg can transport 520,000 barrels a day
this year, on average. Source: Enterprise Products Partners.

Our Closing Perspective:

Investing in the Midstream Energy Sector
Companies in the midstream portion of the energy sector tend to generate predictable revenue streams,
cash flows and distributions, derived from the gathering, processing and transportation of crude oil,
natural gas and other energy commodities. At the same time, they offer the “real asset” characteristics
typically found in other infrastructure categories­: long-lived assets, typically with high barriers to entry
and monopolistic structures supported by the resilient demand for essential services.

As highlighted in this case study, the dynamics of the North American energy industry are shifting, with
unconventional drilling techniques opening up new areas of production once deemed too uneconomic
to tap (e.g., the Canadian oil sands). At the same time, global consumption is on the rise. Over the next
decade and beyond, an unprecedented infrastructure build out will likely be required to accommodate
this growing supply and shifting demand. Through this process, the U.S. could evolve over time into a
net exporter of natural gas, and with far less dependence on foreign oil imports.

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Securities in the midstream energy sector can be structured as corporations or MLPs, which can enhance
the delivery of income through their tax-efficient pass-through structures. Compared with the dividend
payouts of corporations, MLP distributions tend to be higher (often in the range of 4–6% annually) and
their cost of equity capital is generally lower (since they are not taxable entities).(1) Over time, we expect
more assets to move into this structure, which provides efficient income delivery and facilitates capital
formation.

Below we highlight key companies in the North American midstream sector. This list includes the largest
MLP, Enterprise Products Partners LP, as well as Enbridge, Inc. and The Williams Companies, Inc., which
are structured as traditional corporations.

Company Profiles—
Major North American Pipeline Companies Market Capitalization:
Enterprise Products Partners LP (EPD) $62.3 billion—Master Limited Partnership (MLP)
An integrated provider of natural gas pipeline and processing services and natural gas
liquids (NGL) fractionation, storage, transportation and terminalling services, primarily
in the Continental United States, Canada and the Gulf of Mexico.
Enbridge, Inc. (ENB CN) $36.7 billion
Operates one of the largest crude oil and liquids pipeline systems in North America, with
a significant and growing presence in natural gas pipeline and midstream businesses.
The Williams Companies, Inc. (WMB) $29.2 billion
An integrated provider of natural gas pipeline that produces, gathers, processes and
transports natural gas and natural gas liquids; broad exposure across the U.S. and
Canada, with a growing presence in the Marcellus shale region.
At February 28, 2014. Source: Bloomberg and Cohen & Steers.

In closing, we believe the operating characteristics of these businesses, combined with strong industry
fundamentals and the tailwinds of shifting global trends, make a strong investment case for broad
exposure across the midstream portion of the energy value chain.

The mention of specific securities is not a recommendation or solicitation for any person to buy, sell or hold any particular security
and should not be relied upon as investment advice.
(1) Risks: Investments in securities of MLPs involve risks that differ from an investment in common stock. Holders of units of MLPs have more
limited control rights and limited rights to vote on matters affecting the MLP as compared to holders of stock of a corporation. For example,
MLP unit holders may not elect the general partner or the directors of the general partner and the MLP unit holders have limited ability to
remove an MLP’s general partner. The amount of cash that each individual MLP can distribute to its partners will depend on the amount of
cash it generates from operations, which will vary from quarter to quarter depending on factors affecting the energy infrastructure market
generally and on factors affecting the particular business lines of the MLP. Available cash will also depend on the MLP’s level of operating costs
(including incentive distributions to the general partner), level of capital expenditures, debt service requirements, acquisition costs (if any),
fluctuations in working capital needs, and other factors.

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The views and opinions in the preceding commentary are as of the date of this publication and are subject to change without notice. This material
represents an assessment of the market environment as of March 2014, should not be relied upon as investment or tax advice, is not intended to predict
or depict performance of any investment and does not constitute a recommendation or an offer for a particular security. We consider the information in this
presentation to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of suitability for investment. Investors
should consult their own advisors with respect to their individual circumstances.
Performance data quoted represents past performance. Past performance does not guarantee future results. The information presented does not represent
the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of
performance listed in this commentary. There is no guarantee that any historical trend illustrated in this commentary will be repeated in the future, and there
is no way to predict precisely when such a trend will begin. There is no guarantee that a market forecast made in this commentary will be realized.
Risks of Investing in Global Infrastructure Securities:
Energy pipeline companies are not subject to direct commodity price exposure because they do not own the underlying energy commodity. However, a
significant decrease in the production of natural gas, oil, or other energy commodities, due to a decline in production from existing facilities, import supply
disruption, or otherwise, could negatively affect the performance of pipeline companies. Factors that could lead to a decrease in market demand include a
recession or other adverse economic conditions, an increase in the market price of the underlying commodity, higher taxes or other regulatory actions that
increase costs, or a shift in consumer demand for such products. Demand may also be adversely impacted by consumer sentiment with respect to global
warming and/or by any state or federal legislation intended to promote the use of alternative energy sources, such as bio-fuels.
Investments in securities of MLPs involve risks that differ from an investment in common stock. Holders of units of MLPs have more limited control rights
and limited rights to vote on matters affecting the MLP as compared to holders of stock of a corporation. For example, MLP unit holders may not elect the
general partner or the directors of the general partner and the MLP unit holders have limited ability to remove an MLP’s general partner. The amount of cash
that each individual MLP can distribute to its partners will depend on the amount of cash it generates from operations, which will vary from quarter to quarter
depending on factors affecting the energy infrastructure market generally and on factors affecting the particular business lines of the MLP. Available cash
will also depend on the MLP’s level of operating costs (including incentive distributions to the general partner), level of capital expenditures, debt service
requirements, acquisition costs (if any), fluctuations in working capital needs, and other factors.
This commentary must be accompanied by the most recent Cohen & Steers Fund fact sheet if used in connection with the sale of mutual fund shares.

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