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Continental Gas Storage

Sun, 15 May 2011 18:37:50 GMT

Investment Entity: Continental Gas Storage, GmbH
Geography: Northern Germany
Sector: Natural Gas Storage
Investment Fund: Fund IV

Initial Investment: December 2010

As Haddington looked to uncover opportunities to develop natural gas storage, the management team developing Continental Gas Storage in Epe, Germany approached Haddington about a potential investment. After extensive study, Haddington determined that the regulatory changes in Europe, directed by the European Union, provide opportunities for independent development of new natural gas storage assets there. Northwestern Europe is significantly short storage, with only 13% of annual gas consumption in gas storage capacity, versus 19% in the United States.

Haddington is currently conducting additional due diligence on the investment and expects to close an investment by mid-year 2011.

More information is available at www.continentalgasstorage.com

Proven Track Record

Sun, 15 May 2011 18:35:31 GMT

In total, the Haddington team has over 160 years of combined experience in the midstream energy sector. The Principals believe their experience represents a significant competitive advantage relative to many of their competitors and enables them to pursue a much broader set of opportunities within the midstream sector.

Managing Directors J. Chris Jones, and M. Scott Jones, and John A. Strom, completed over $175 million of midstream acquisitions and developed another $226 million of midstream assets while at TPC Corporation, the predecessor to Haddington Ventures. They then took that experience and successfully applied it to investing private capital in midstream.

Key Strengths

Sun, 15 May 2011 18:33:30 GMT

Haddington believes that its key strengths will allow the Fund to capitalize on the attractive investment opportunities that currently exist to acquire or develop midstream energy assets. Some strengths that Haddington brings to its portfolio companies are:

Strategic Vision – Demonstrated ability to identify attractive opportunities within the midstream energy sector based on over 140 years of combined sector experience.

Management Focus – Hands-on approach offering portfolio company management teams a wealth of experience in all aspects of the midstream energy sector.

Regulatory Knowledge – Deep understanding of regulated businesses, competitive markets and the dynamics of transitioning from a highly regulated market to a more competitive market.

Technical Expertise – Extensive experience in the application of technology within the energy industry and access to a vast network of technologists at the U.S. National Laboratories, universities and the European natural gas research community.

Energy Industry Relationships – Network of relationships throughout all areas of the energy sector, including energy merchants, oil and gas producers, pipeline operators, utilities, independent project developers and federal and state regulators.

Financing Capabilities – Experience in arranging financing for portfolio companies and individual projects from a variety of sources, including public and private equity markets, public and private debt markets, and bank debt markets, as well as non-recourse project financings.

In addition, the Haddington Advisory Board will assist in identifying macroeconomic trends in the industry, conducting due diligence on specific opportunities, recruiting management for portfolio companies and sourcing transactions.

Core Principles

Sun, 15 May 2011 18:24:16 GMT

Investment success starts and stops with people.

Thorough evaluation of management team is required, both individually and as a team.
Poorly constructed teams can jeopardize an otherwise potentially successful investment.
Personal investment, “skin the game,” is required for alignment of incentives, including Haddington team and management teams.

Different stages of acquisition and development have different risks and costs of capital, plan investment and exit accordingly.

When entering a deal, contemplate “off ramps” at each stage where a lower cost of capital investor might enter and Haddington might partially or fully exit.
For each type of transaction assess the amount of capital required for each task and the risk associated with each task.
Initially, and then throughout the investment stages, systematically stage capital investment to reduce investment risk.

Haddington’s Principals’ and Management Teams' operating experience drives success.

Haddington looks where others don’t, in both acquisition and development, because of the team's operating experience in development.
Frequent and in-depth interaction with management allows transfer of the Haddington’s over 140 years of experience in both successful operating and marketing strategies and decision making “pitfalls.”
Management teams, banks and equity partners recognize Haddington’s operational expertise, allowing Haddington control in otherwise equal equity positions, leverage in difficult markets, and superior deal sourcing and closing opportunities.

Midstream Overview

Sun, 15 May 2011 18:20:56 GMT

The U.S. Energy Information Administration is predicting that U.S. energy consumption will continue to increase. As energy consumption increases, it is expected that natural gas will be an increasingly important component of U.S. energy consumption, for both environmental and operational reasons. This growth in demand for natural gas is driving the need for additional investment in the midstream sector, specifically:

the need for new midstream assets because of demand, and
the continuing development of new energy resources.

Utilization of renewable energy is expected to further increase the need for midstream investment:

Renewable energy generation (especially wind) is volatile and difficult to predict.
The timing of peak demand for energy differs from the timing of peak production.

Increasing penetration of such renewable energy sources is increasing fluctuation in demand for gas-fired electricity. To utilize more of this renewable generation, and to manage these fluctuations in demand for gas-fired power, we see:

increased natural gas storage and transport capacity is necessary, and
opportunity for development of bulk electricity storage infrastructure using compressed air energy storage (“CAES”).

Our Strategy - Overview

Sun, 15 May 2011 18:18:02 GMT

Haddington’s objective is to generate attractive long-term returns for its limited partners. Those limited partners include corporate and teachers' pension plans, educational and health care endowments, insurance companies and other investors seeking private investments in midstream energy companies. In particular, we seek to generate an internal rate of return for the limited partners of between 20-25% (net of management fees and the general partner’s carried interest).

Haddington concentrates its investment efforts on areas that will benefit from the Principals midstream expertise:

Gathering and separation
Processing, treating and compression
Storage
Pipelines

Haddington generally will target control investments and pursue transactions that require equity investments of $20-$50 million with an enterprise value of up to $150 million.

Environmental Impact

Sun, 15 May 2011 18:17:11 GMT

Haddington takes pride in the environmental performance of the midstream energy assets developed and built by its portfolio companies. Apex CAES is developing compressed air energy storage solutions to support the integration of variable renewable resources at high penetration rates. Endicott Biofuels is building world-class biorefineries with the goal of adding to the domestic supply of economically renewable transportation fuel. Endicott expects its products to be cost competitive with petroleum based fuels. Eureka Resources is providing distillation services to Marcellus Shale natural gas producers, allowing 75-80% recovery of drinking quality, distilled water from produced frac water for re-use. IACX's innovative mobile nitrogen rejection unit allows natural gas drillers using nitrogen fracs to treat the initial flows of natural gas and send that gas to pipelines, rather than release the methane to the atmosphere or flare...

Investment Funds

Sun, 15 May 2011 18:10:20 GMT

Fund I
Haddington has invested the total capital committed to Fund I of $77 million across seven portfolio companies. Fund I is fully realized.

Fund II
Fund II initially had total capital commitments of $147 million. However, one significant partner, due to strategic reasons, exercised its right to pass on $75 million of its $100 million of commitments early in the life of Fund II. Haddington has invested the $72 million of total remaining capital committed to Fund II across five portfolio companies. Fund II currently has one remaining investment yet to be monetized.

Fund III
Haddington closed Fund III in May 2006 with total capital commitments of $182 million. Fund III is fully invested with four active portfolio companies and one realized investment.

Fund IV

Haddington is currently investing Haddington Energy Partners IV, with a targeted fund size of $250 million. As such, Haddington is actively searching for midstream investment opportunities with strong experienced management teams. Areas of focus include natural gas and liquids pipelines, gathering, processing, and treating facilities, and gas storage.

Haddington Ventures Team

Sun, 15 May 2011 17:55:34 GMT

Haddington is unique in that it is the only midstream energy fund in which all principals have substantial direct operating experience. The Haddington principals have over 160 years of combined experience in the midstream energy sector. The Principals bring complementary disciplines to the Fund, including engineering, managerial, marketing, corporate finance, accounting and legal expertise, and collectively possess a comprehensive understanding of the landscape of U.S. midstream assets, as well as sector trends, key technologies and regulatory issues.

Haddington believes our experience represents a significant competitive advantage relative to many of their competitors and enables them to pursue a much broader set of opportunities within the midstream sector.

Haddington Energy Partners Funds

Sun, 15 May 2011 17:50:53 GMT

Haddington Ventures, through its private equity funds, provides superior returns to its partners and investors by focusing on the midstream energy sector. Haddington Energy Partners funds represent over $400 million in assets under management since formation in 1998. Haddington will generally make control-oriented investments in companies focused on gathering, separation, processing, treating, compression, storage, and transmission.

Haddington is unique in that it is the only midstream energy fund manager in which all principals have substantial direct operating experience. As such, the Fund is capable of investing in both growth by acquisitions companies and greenfield development companies. This capability allows Haddington to capitalize on current market conditions in the midstream sector.

Investment Execution

Wed, 11 May 2011 00:20:38 GMT

Natural Gas Storage

In the gas storage industry, Haddington will focus on development of storage facilities from greenfield or previously developed sites. The development of storage assets can take between one and three years before a site is ready for construction. Construction can then take another one to two years before cashflow. Haddington will consider businesses either with fully formed management or requiring recruiting of management teams. Typically, debt capital and lower cost equity are available at start of construction of a storage facility. Haddington may exit or continue to invest at construction to lower cost equity, then exit one to two years after cashflow.

Natural Gas Gathering and Processing

Gas gathering and processing lends itself to acquisition more than development, but Haddington will assess both acquisitions with operational improvement and growth of greenfield development with committed throughput customers. Both acquisition and development of gathering and processing move more quickly to cashflow than gas storage, typically one to three years. Additionally, leverage is available earlier and at higher debt to total capitalization ratios. As with storage, Haddington will consider businesses with complete management teams or those requiring additional staffing.

Power Storage

Power storage opportunities, as evidenced by Haddington’s experience in prior funds, mirror the size, timeframe, management needs, and capital structure of greenfield gas storage development. The details of these areas are listed above.

Other Midstream Opportunities

Other midstream opportunities include water gathering and treatment, biofuels, compression services, CO2 gathering, and refining. These diverse industries have both acquisition and development opportunities and Haddington would consider either structure.

Portfolio

Wed, 11 May 2011 00:15:30 GMT

Portfolio Investments Funds I and II Bear Paw Energy CAES Development Company (Norton Energy Storage) Gulf Coast LNG Nations Energy Lodi Gas Storage Proton Energy Sago Energy Silicon Energy Fund III Bobcat Gas Storage Endicott Biofuels IACX Magnum Energy Tristream Energy Fund IV Apex CAES Continental Gas Storage Eureka Resources

Silicon Energy, LLC

Wed, 11 May 2011 00:11:03 GMT

Investment Entity: Silicon Energy, LLC
Geography: U.S.A.
Sector: Energy Technology (Energy Management Software)
Investment Fund: Fund I
Initial Investment: August 2000
Date of Disposition: March 2003

There has been a proliferation of “energy information” providers in response to the deregulation of the power industry and the perceived need for more real time monitoring and control functionality in the industry. These “energy information” providers include hardware and software companies offering solutions across different modes of communication. Silicon was a relatively early mover in the “gateway” software end with a “web interface,” focusing on the larger commercial and industrial client needs.

Based on an investment opportunity presented by a limited partner, Fund I invested in Silicon as part of what was expected to be a pre-IPO round for the company. The utility market was slow to adopt the Silicon product line. An IPO was never completed. Most of the capital raised was used to cover corporate overhead, resulting in additional capital requirements. Additional capital was raised in 2001. After reductions in overhead and the adoption of a more focused marketing plan, results eventually turned positive. In March 2003, Silicon was acquired by Itron.

Sago Energy, LLC

Wed, 11 May 2011 00:10:43 GMT

Investment Entity: Sago Energy, LLC
Geography: Louisiana & Texas
Sector: Gathering & Processing
Investment Fund: Fund I, Fund II
Initial Investment: March 2000
Date of Disposition: March 2004

In March 2000, Fund I acquired a 93.6% ownership interest in Sago with the purchase of the Ledco gathering and processing facilities in Louisiana, from Tejas Gas LLC, an affiliate of Shell Oil Company. The assets were small non-core assets that Shell deemed non-strategic after its acquisition of Tejas Gas. Haddington had a historical working relationship with one of the founders of Sago, and believed that Sago could establish operations with the purchase of the Louisiana assets, and then grow through opportunistic acquisitions of additional smaller, under-performing midstream assets.

Revenues from the Louisiana assets served to fund overhead while Sago pursued additional acquisitions. After evaluating more than 30 follow-on acquisition opportunities over the next three years, Sago purchased the Jameson Processing Plant and 2,200 miles of natural gas gathering systems in west Texas in March 2003 at an attractive earnings multiple. This follow on investment was made by Fund II and significantly augmented the size of Sago’s business and permitted it to expand operations into the Permian Basin of West Texas. In March 2004, Sago was acquired by West Texas Gas Inc.

Proton Energy Systems

Wed, 11 May 2011 00:10:12 GMT

Investment Entity: Proton Energy Systems
Geography: U.S.A.
Sector: Energy Technology (Fuel Cell)
Investment Fund: Fund I
Initial Investment: April 2000
Date of Disposition: September 2000 (IPO) – Proton stock sold in multiple branches

The investment in Proton was a late-round, “pre-IPO” investment that was sourced by a limited partner. The perceived investment merits were a strong management team, an intellectual property and competitive/technological advantage, limited downside due to a strong base business model, large upside potential, and multiple exit strategies. The perceived investment risks included the uncertain prospects for commercialization of fuel cells, technology risk and competition.

Fund I purchased Series C Preferred Stock in Proton. The Series C converted automatically into common shares upon completion of an initial public offering on a 1:1 basis. Fund I held 3.0% of the Series C Preferred Stock. Proceeds from the Series C round were to fund approximately two years of working capital needs. Proton successfully completed its IPO in September 2000.

Nations Energy Holdings, LLC

Wed, 11 May 2011 00:09:46 GMT

Investment Entity: Nations Energy Holdings, LLC
Geography: Ohio & Massachusetts
Sector: Power Generation (Combined Heat & Power)
Investment Fund: Fund I, Fund II
Initial Investment: January 2000
Date of Disposition: December 2004

In early 2000, the Principals believed that the continued deregulation of the U.S. electric industry created an opportunity to develop and operate state-of-the-art combined heat and power generation facilities. Many power plants provided utility services to particular business centers or districts inefficiently, and were unable to operate within environmental regulatory limits on pollution. Haddington believed that an opportunity existed to provide business centers with increased efficiency and reduced pollution by developing such cogeneration facilities from the ground up or acquiring and then expanding and updating an existing facility.

In January 2000, Fund I acquired Nations Energy from Acetex Corporation. Initially, Fund I was the sole investor in Nations Energy. Subsequent investments by both Fund I and Fund II through December 31, 2003 were used to fund project development costs, project equity, and working capital. Haddington sold the operating assets of Nations Energy to Thermagen Power Group LLC in December 2004.

Lodi Gas Storage

Wed, 11 May 2011 00:09:26 GMT

Investment Entity: Western Hub Properties, LLC
Geography: California
Sector: Natural Gas Storage
Investment Fund: Fund I, Fund II
Initial Investment: November 1998
Date of Disposition: December 2005

In the late 1990s, Haddington perceived a need for development of high deliverability natural gas storage projects in the western United States. California was beginning to deregulate several segments of the energy industry. At the time of WHP’s inception, Haddington believed California had insufficient natural gas storage capacity to stabilize the energy market. California demand was growing dramatically in excess of national rates, while little investment was being made in natural gas infrastructure. California was encouraging new entrants into the natural gas market and the supply profile was expected to change through the development of new market options for the Midwest by Canadian producers via the then proposed Alliance Pipeline and the previously announced expansions on TransCanada and Northern Border. In Haddington’s view, deregulation encourages the development of new services and assets and ultimately leads to commodity price volatility due to fluctuating supply and demand. High deliverability storage can stabilize fluctuating supply and demand.

In 1998, Haddington formed Western Hub Properties (WHP) as a provider of cost efficient energy storage services to traditional gas users and independent power producers. Haddington presented WHP with an opportunity to develop a project located near Lodi, California. Haddington used its proprietary methodology of calculating storage value to predict that the Lodi project would generate acceptable rates of return. Haddington formed Lodi Gas Storage, a wholly owned subsidiary of WHP, to operate the Lodi project, recruited the Lodi Gas Storage management team, and assisted in arranging the original project financing.

In October of 2002, ArcLight acquired a 50% equity interest in Lodi Gas Storage. In December 2005, ArcLight acquired the remaining 50% equity interest in Lodi Gas Storage, effectively completing the sale of WHP’s only natural gas storage asset.

CAES Development Company

Wed, 11 May 2011 00:08:50 GMT

Investment Entity: CAES Development Company Geography: Ohio Sector: Electric Storage / Power Generation Investment Fund: Fund I, Fund II Initial Investment: June 1999 In 1999, the Principals believed that the Midwestern United States was oversupplied in base load coal and nuclear facilities and recognized that the oversupply was generating excess capacity, forcing base load units to operate sub-optimally. The oversupply of electricity was amplified by the deregulation of certain electricity generation markets in the Midwest as many facilities became competitive assets, not rate-based assets. As a result, owners of competitive coal and nuclear plants were at risk for load factor, fuel efficiency and operations and maintenance costs. Haddington and their consultants generated the idea to develop a new method for the bulk storage of electricity that would increase electricity output at these facilities while simultaneously cutting costs. The method,...

Bear Paw Energy

Wed, 11 May 2011 00:08:29 GMT

Investment Entity: Bear Paw Energy
Geography: Wyoming
Sector: Gathering & Processing
Investment Fund: Fund I
Initial Investment: January 2000
Date of Disposition: March 2001

In January 2000, Fund I acquired Bear Paw Energy (BPE) in a leveraged buy-out. BPE’s existing business in the Williston Basin had strong but volatile cash flow. Haddington believed that BPE could use cash flow from the Williston Basin operations plus funds from credit facilities to expand into the Powder River Basin (PRB). Haddington anticipated that this use of funds would stabilize revenues by increasing fixed rate fee revenue from the growing PRB business. Haddington estimated that, over two to three years, the percentage of BPE’s cash flow tied to “percentage of proceeds” type contracts which prevailed in the Williston Basin would be reduced from over 90% to 25%, since PRB contracts were fixed fee contracts. The seller was capital constrained, so the acquisition was completed at an attractive projected earnings multiple.

Commodity prices escalated throughout 2000 and volumes in the PRB increased, increasing BPE’s fixed fee revenues. In December 2000, Northern Border Partners, L.P. (NYSE: NBP) approached BPE with an acquisition offer. NBP purchased BPE in March 2001.

Bobcat Gas Storage

Wed, 11 May 2011 00:08:08 GMT

Investment Entity: Port Barre Investments, LLC
Geography: Louisiana
Sector: Gas Storage
Investment Fund: Fund III
Initial Investment: September 2005

In September 2005, Haddington acquired the development rights to the Bobcat gas storage project, a high deliverability salt dome, greenfield development gas storage project located at Port Barre, Louisiana. The project site is located on the boundary between the supply and market areas, has excellent pipelines in close proximity, all the necessary property rights, and predictable geological formations. After acquiring the rights to the 83 acre site, Haddington recruited the Bobcat management team whom then secured all permits to construct the facility.

In March 2007, Haddington secured an equity investment from GE Energy Financial Services and a $185 million syndicated construction loan. Using this and Haddington's capital, Bobcat constructed 19 BCFW of natural gas storage, 22,500 hp of compression, 21 miles of total pipeline with five interstate pipeline connections, as well as began drilling a well to expand the facility by another 10 BCFW.

In March 2010, Haddington sold the company to Spectra Energy Corp (NYSE: SE) for $540 million, who plans to invest another $400 million to expand the facility to almost 50 BCFW.

Additional information can be found on the company's website at www.bobcatstorage.com.