Presentation to the University of Colorado Investment Banking March 30, 2011
Overview of the Presentation Agenda I. Introduction to Valuation II. M&A Valuation A. B. III. Drivers of M&A and Role of an Investment Banker Valuation Methodologies and the “Football Field” IPO Valuation A. What Matters and is Most Important? B. In-depth IPO Valuation
Introduction to Valuation
Valuation Overview Introduction to Valuation is a Central Discipline in Investment Banking ¡ Nearly Every Activity in Investment Banking and Private Equity is Driven by Valuation Analyses } Determining the value of the Company is generally the first step – M&A ⇛ Determining the value in a transaction – Equity Capital ⇛ Pricing the Initial Public Offering – Leveraged Finance ⇛ Determining collateral value and/or financing capacity } Securities design and pricing is an extension of the same fundamental concepts ¡ Valuation Requires the Interpretation of Information and Sound Judgment (Balance of “Science” & “Art”) } Information provides a foundation of knowledge about the asset and the marketplace } Interpretation of the information and correct judgment distinguishes the quality of the analysis ¡ At the Core, Valuation is About Finding the Equilibrium Between Risk and Reward } Fair market value is typically defined as the price at which a willing buyer and a willing seller will transact around an asset / company when both have complete information and neither is under any compulsion to act } Obviously, buyers and sellers may value assets differently based on a variety of factors, thereby creating a market 1
Valuation Overview (Cont’d) Introduction to Valuation Definition of Key Terms ¡ Firm Value (or “Enterprise Value”) } The total value of an operating business regardless of its capital structure ¡ Equity Value (or “Market Value of Equity”, “Market Value” or “Market Cap”) } The value of an operating business to its equity holders } The value of an operating business after the satisfaction of its creditors and preferred claim holders Firm Value less Net Debt equals Equity Value ¡ Net Debt } The sum of: – Total indebtedness for borrowed money – Preferred claims against the value of the business } Less the sum of: – Cash and cash equivalents ¡ Preferred Claims against the Value of the Business } May include preferred stock, “out-of-the-money” convertible securities or minority interests 2
Valuation Overview (Cont’d) Introduction to Valuation Definition of Key Terms @ M&A Control Value ¡ Typically involves a premium over the publicly traded equity value } Ability to control the Board, management and strategy of the business } Ability to integrate with other assets and capture synergies } Ability to access all cash flows and create the optimal capital structure ¡ Commonly represented by publicly traded equity value Fully Distributed Equity Value @ IPO Value } Assumes adequate liquidity in the market } Generally subject to existing Board, management and strategy } @ Trading Access to cash flow limited to dividends ¡ Typically involves a discount to the publicly traded equity value } } 3 Discount reflects a lack of market history and therefore certain liquidity and valuation risk Also reflects an attempt to “entice” shareholders of similar companies to buy IPO (bargain price)
M&A Valuation
Drivers of Mergers & Acquisitions M&A Valuation Why Deals Happen and Don’t Happen Why Deals Don’t Happen ¡ Compelling Strategic Rationale for a Transaction } Diversification vs. Focus (Broaden or Narrow Business Mix) } Manage Market Position and Scale (Commit to a Product / Market or Exit) } Geographic Expansion vs. Retrenchment (Globalization / Cost of Entry) } Vertical Integration vs. Outsourcing } Defensive (What If Our Competitor / Pursuer Wins? ) ¡ Insufficient Strategic or Financial Rationale ¡ Management / Board of Directors Resistance (Social Issues) ¡ Market / Shareholder Concerns (Dilution / Lack of Understanding / Credibility) ¡ Inadequate Financial Resources Available to the Buyers ¡ Anti-Trust Considerations ¡ Changes in Relative Valuation ¡ Compelling Financial Rationale for a Transaction ¡ Accounting, Tax, Legal, and Environmental Issues Are } Low Relative Cost or High Relative Opportunity Insurmountable } Financing Markets (Ability to Leverage Equity Returns) } Equity Market Perception / Reaction (Valuation Metrics / ¡ Regulatory (Domestic or Abroad) Business Model / Growth / Profitability) } Financial Synergies (Different Value Available to Different Owners) } Financial Stress (Company Selling Subsidiary to Raise Cash) } Financial Sponsor Exit ¡ Other Reasons } Management Ego } Change in Management 4
What are the Deal Mechanics and the Process? M&A Valuation Types of Deals and Structures Types of Deals and Processes Subsid. /Private Company Transaction Structures ¡ Exclusive Sale } Private Sale to a Single Buyer } Limited Auction (Formal vs. Informal) } Full Auction (Public vs. Private) ¡ Asset Sale } Transaction of specific assets and liabilities } Required if operations are not held in a distinct subsidiary or set of subsidiaries } Provides the buyer the ability to deduct transaction goodwill for tax purposes over 15 years ¡ Buy-Side Advisory } Willing Target Pursuing a Sale Process } Unsolicited Approach – Target Attitude Unknown (Formal vs. Informal) – Friendly Negotiations – “Bear Hug” – Target is Resistant (Disclosure Issues) – Hostile Offer ¡ Stock Sale with IRC Section 338(h)(10) election } Stock sale treated like an asset sale for tax purposes ¡ Equity Restructurings } Spin-off – shares of subsidiary distributed tax-free to all parent shareholders on a pro-rata basis } Split-off – shares of subsidiary distributed tax-free to self -selected parent shareholders } Targeted Stock – distributed tax-free in either manner outlined above or IPO’d ¡ Leveraged Buyouts and Recapitalizations 5
Role of an Investment Banker M&A Valuation A financial advisor performs a broad range of functions in the M&A process ¡ Drive the Process – From “cradle to grave” ¡ Valuation Advice – Provide comprehensive financial analysis to formulate (buyside) or evaluate (sellside) a bid ¡ Diligence – Assist client in the completion of a thorough and organized diligence process ¡ Marketing – Assist client in preparing diligence materials and public / investor communications ¡ Structuring – Structure transaction to meet the needs of the parties ¡ Market Intelligence – Provide industry knowledge, a perspective on any public market activity and the ability to assess the likelihood of other potential bidders of the target ¡ Bidding Strategy – Advise the client on the best way to ensure success ¡ Financing – Arrange financing alternatives (if necessary) ¡ Negotiations – Increase negotiating flexibility and leverage by acting as a go-between with the other side ¡ Opinion – Deliver fairness opinion (if appropriate) ¡ Market Reaction – Anticipate market reaction and marketability of securities 6
What is a Football Field? M&A Valuation A football field summarizes the various metrics and assumptions used to determine the valuation of a company or business segment ¡ Fairness Opinion } Presents the range of “fair value” for a Board of Directors’ Barclays Capital consideration in a sale context } Provides guidance to justify a bid value in a buy-side ¡ Sell-Side } Summarizes Barclays’ proposed positioning and target valuation range based on preliminary analysis ¡ Buy-Side } Demonstrates Barclays’ knowledge of the asset, suggests how other buyers might approach valuation and provides bid range guidance Barclays Capital ¡ Internal Reference } For example – supports loan to value analysis when examining financing alternatives Important to remember that the valuation metrics used will vary depending on both the industry and the assignment 7
Summary of Valuation Methodologies M&A Valuation Multiple types of valuation analyses will be included in a valuation summary depending on industry, type of presentation, available information and numerous other factors Trading Value Control Value Metric Considerations Trading Multiples ¡ Forward P/E, P/CF, EV/EBITDA, EV/Revenue most common – may show more than one metric Comparable Transactions ¡ LTM P/E, P/CF, EV/EBITDA, EV/Revenue most common – may show more than one metric. Operational metrics used too, particularly in commodity-oriented businesses Make sure to apply premium to unaffected price (i. e. preannouncement or pre-leak) Alternatively, may apply premium to trading multiples Private Co. Metric Premiums Paid ¡ ¡ Leveraged Buyout ¡ ¡ Choose appropriate target range of IRR Solve for price based on fixed leverage and range of exit multiples Discounted Cash Flow ¡ Option to show with and/or without synergies Sum-of-the-Parts ¡ Use for distinct business segments or individual assets with different value parameters Stock Price Trading Ranges ¡ ¡ Used as reference point 52 -week most common; also 3 -months, 6 -months, period since significant event Wall Street Research Price Targets ¡ ¡ Used as reference point High/low research price targets; check length of time forward and ensure consistent (or discount back) 8
Source of the Assumptions / Data M&A Valuation An analysis is only as good as its inputs The Projections ¡ Consideration must be given to which projections to use – can present multiple cases or one case only ¡ Fairness opinion valuations may involve a base case and a downside and should be provided by or blessed by management ¡ Buy-side valuations may involve management case and revised due diligence case ¡ If preliminary valuation, consider adding due diligence contingencies for unknown factors that may impact value The Key Assumptions ¡ Trading Comps: must have back-up for all analysis and consistently apply methodology (e. g. IBES consensus, exclude finance subsidiaries, include / exclude underfunded pension liabilities, etc. ) ¡ Transaction Comps: be sure to use publicly available data if creating a fairness opinion for a public company; and be thorough in your search – have rationale for exclusion of deals ¡ Exit multiples: justify LBO and DCF exit multiples through trading and transaction comps or cycle analysis ¡ WACC: perform a detailed WACC analysis to justify discount rates for DCF ¡ Leverage: discuss leverage assumptions with Lev Fin to make appropriate LBO valuation ¡ Premiums: clearly define the transaction size, time period and reference point of premiums used in analysis ¡ Share count: use exercisable or outstanding options where appropriate ¡ Change in Control Costs: review proxy materials to determine if change in control costs are relevant Always keep good back-up of all data sources and assumptions 9
Presenting the Football Field Analysis M&A Valuation Presentation options and complexities allow for additional tailoring of the valuation summary to the needs of the analysis Valuation “Bar” Presentation Options ¡ Which value should be presented and is most relevant? Enterprise value, equity value/share (apply circular shares depending on metric) ¡ How should metrics be grouped? Trading value vs. control/acquisition value or other ¡ How should synergies be presented (if applicable)? With or without for different metrics ¡ How should additional scenarios be presented (if applicable)? Dotted lines, additional bars, etc. ¡ Should trading values also be shown with a premium? Comparability to control value ¡ Stock-for-stock football field complexities (exchange ratio): range type (high to low, same to same), typically similar assumptions for metrics (multiples, discount rates, etc. ) Other Items for Inclusion ¡ What other analytics/metrics should be included on the page? Implied multiples; implied EV, equity value or equity value/share; other ratios; lines for averages, transaction price, current price, etc. ¡ What key assumptions should be presented for each metric? What needs to be footnoted? Formatting Nuances ¡ Rounded results vs. actual ¡ Horizontal vs. vertical 10
Determining Appropriate Valuation Ranges M&A Valuation Science, Art or Sanity? ¡ “Science” vs. “Art” } Market information; financial data } Mechanics of valuation methodologies ¡ “Art” } } Step Back and Look at the “Bigger Picture” Valuation inputs and assumptions are based on industry knowledge, experience and common sense Senior bankers and industry coverage will opine on the appropriate ranges and assumptions ¡ Individual valuation ranges may seem reasonable, but do they make sense with respect to one another? } i. e. , Transaction multiples vs. trading multiples ¡ Are assumptions consistent between methodologies? } i. e. , DCF or LBO exit multiples vs. trading multiples or transaction multiples ¡ Is the valuation range too wide or too narrow? Sanity Check ¡ Go back and check the assumptions and calculations } Are there any outliers in the comparable multiples? } Are the earnings drivers correct? (i. e. , LFCF & earnings for equity value multiples, EBITDA for enterprise value multiples) } Have I used the right share count (exercisable vs. outstanding options)? } Is implied perpetuity growth rate appropriate? } What metric does the industry trade on? 11
Illustrative Sellside Valuation Analysis M&A Valuation Financial Projections Base EBITDA Expansion EBITDA 9. 3% CAGR ______________ Note: 2011 PF EBITDA of $80. 8 million defined as 2011 E base cash EBITDA ($65. 6 million) plus 2013 growth projects EBITDA of $15. 2 million. Excludes re-contracting of remaining "below market” barrels. 12
Preliminary Valuation – the “Football Field” M&A Valuation Preliminary Review of Valuation Parameters Enterprise Value ($MM): WACC: 8. 0%-10. 0% Terminal EBITDA Multiple: 10. 0 x Target 0% 2012 Accretion MLPs: 11. 0 x to 13. 0 x 2012 EBITDA MLPs: 10. 0 x to 12. 0 x 2013 EBITDA Exit Multiple: 10. 0 x IRRs: 10%-15% Exit Multiple: 10. 0 x IRRs: 17. 5%-22. 5% Initial EBITDA Multiple: 14 x – 16 x RR EBITDA Multiple Range: 8 x – 10 x 13
Preliminary Valuation Analysis M&A Valuation Purchase Price Ratio Analysis PPR Analysis 14
Discounted Cash Flow Analysis M&A Valuation DCF Analysis 15
Discounted Cash Flow Analysis (Upside Case) M&A Valuation ¡ The valuation below includes all of the potential expansion projects and is discounted at a 10% rate to account for the additional risk associated with un-contracted projects DCF Analysis 16
MLP Ability-to-Pay Analysis M&A Valuation MLPs will be willing to bid up to a 2012 breakeven accretion assuming they can receive accretion in 2013 once contracted growth projects are running Enterprise Value at 2012 Breakeven Accretion (1) 2013 Accretion Assuming 2012 Breakeven Purchase Price ______________ 1. Assumes seller is responsible for retirement of Hold. Co debt. 17
Infrastructure Funds M&A Valuation Infrastructure funds will be an important part of the process ¡ We believe that infrastructure funds will be highly attracted to Company A ¡ Although these funds typically target businesses with longer-term contracts, the Company’s proven track record of rolling contracts and increasing rates, combined with the fact that there is a waiting list will be key selling points ¡ With a longer holding period and a lower return threshold (generally 10 -15%), infrastructure funds would be able to pay significantly more than a private equity sponsor ¡ Infrastructure funds also differ from traditional private equity funds in that they target a “cash on cash” return as well and generally like to structure transactions to allow for distributions } 10% of initial equity is generally the goal, but 5 -6% is acceptable ¡ Further, infrastructure funds generally like to maintain investment grade ratings ¡ Accordingly, we have structured the financing to meet the requirements set forth above; we would expect a Hold. Co bond to be preferred given its more liberal distribution capacity but can also offer a loan structure ¡ We believe that the infrastructure funds will be competitive or even beat the MLPs / strategics in the process 18
Indicative IRR Analysis M&A Valuation Capitalization & Sources / Uses Private Equity Infrastructure Funds Pro Forma Capitalization at 6/30/2011 Sources & Uses ______________ Note: 2011 PF EBITDA of $80. 8 million defined as 2011 E cash EBITDA ($65. 6 million) plus 2013 growth projects EBITDA of $15. 2 million. 19
Indicative IRR Analysis – Infrastructure Funds M&A Valuation Assumptions Sensitivity to Cash Sweep on Hold. Co Debt ¡ The returns analysis assumes a 5 -year holding period ¡ We target an IRR of 10% to 15% which equates to an enterprise value of $1, 050 million ¡ We made the following debt assumptions: } Current Op. Co Debt assumed to stay in place Sensitivity to Exit Multiple – While there is additional debt capacity at the Op. Co level, we assumed additional leverage would be placed at the Hold. Co level for greater flexibility } We have assumed a 7. 5% interest rate on new debt financing at the Hold. Co level Sensitivity to Financing Mix (1) – Assumes 100% distribution } We assumed a debt level that will still be appropriate for acquirer to take equity distributions ______________ 1. Assumes a 10. 0 x EBITDA exit multiple. 20
Recent Storage Transactions M&A Valuation Comparable Transactions Valuation ______________ 1. Per Wells Fargo research and Spectra press release. Initial EBITDA assumed to be run-rate at time of acquisition. Post-expansion EBITDA as of 2015. EBITDA backed into based on multiples provided by Wells Fargo research. 2. Per Inergy investor presentation. 3. Per PAA investor presentation. Initial EBITDA represents 2010 E EBITDA. 4. Adjusts for expansion project which is projected to cost ~$400 million and add $75 million of EBITDA. 21
Selected Comparable Midstream Transactions M&A Valuation Historical Liquids Pipeline Transactions Pembina / AEC Enbridge Income Alberta / AEC BC Gas / En. Cana Fund / Enbridge Inc. Alberta / Trans. Canada Buckeye Partners / First Reserve (BORCO) Plains All American / Enterprise Products Pacific Energy Partners acquires TEPPCO Partners Plains All American / Link Energy Inter Pipeline Fund / KMI Plains All American / Shell Pipeline 10. 0 x Median Magellan / Shell Oil Products KN Energy / Kinder Morgan TEPPCO / Duke Plains All American / Murphy MDP / Riverstone / Williams Koch / BP Colonial Kaneb / Tesoro Magellan / Osage Pipeline Pacific Energy / Rangeland Pipeline Energy Funds Mgmt. / Koch NGL / Citgo (Colonial) ONEOK Buckeye / Shell Oil Products Enbridge Energy / Shell Pipeline Announcement Date 22 Pacific Energy / Valero ONEOK / KMP KKR / Colonial Magellan / Longhorn KMP / Transmontaigne
IPO Valuation
Comparable Company Analysis Defined IPO Valuation Comparable Company Analysis Explained ¡ The equity of fundamentally similar, or “comparable” companies tends to be valued on a relatively consistent basis by the public markets } Broadly speaking, if Company A competes in the same industry as Company B, using a similar business model, the equity markets are likely to value the two businesses in a relatively consistent manner ¡ The Comparable Company Analysis seeks to identify a group or “universe” of public companies which are deemed fundamentally comparable to the target and compares the “market trading multiples” of these companies to determine a range of value for the target, expressed in valuation multiples ¡ By analyzing certain key ratios and operating data for each of the comparable companies it is possible to determine how the comparable companies valued relative to their profitability, growth prospects, etc. } Public markets typically place premiums to companies which portrays growth and margin profiles better than those of industry average ¡ As Comparable Company Analysis is based on an analysis of currently publicly trading companies, valuations received by the comparable universe DO NOT typically reflect: } Premium a buyer must pay for control of a company in an M&A transaction; or } Discount the market may place on shares which are newly introduced in an IPO 23
Comparable Company Analysis Defined (Cont’d) IPO Valuation Most Widely Used Valuation Tool What is it? Use of Trading Multiples ¡ Fundamental valuation tool used for deriving Importance company value ¡ Initial Public Offering ¡ Helps in benchmarking performance and ¡ Buy-side M&A valuations across companies within a sector ¡ Sell-Side M&A ¡ Valuation tool based on how comparable companies are valued by the stock market as a ¡ Add-on financings multiple of profit, sales or other parameters ¡ Share repurchases ¡ Assumes that the stock market is relatively efficient ¡ Leveraged Buy-out in valuing comparable companies 24
Enterprise and Equity Value Multiples IPO Valuation Equity Value Multiples Enterprise Value Multiples ¡ Takes into account capital structure in decision making ¡ Focus towards quality of operation ¡ Denominator after interest expense ¡ Denominator before interest expense ¡ Main multiples are } EV / Sales } EV / EBITDA } EV / EBIT or EV / EBITA } EV / Capital Employed } EV / Subscribers (telecom, similar ratios based on operating figures in other industries) ¡ Unlevered Capital Structure } P/E ratio } Equity Market Value / Net Income } Price / Book ratio } Price / CFPS Summarize the Results ¡ Summary Statistics } Mean, Median, High Low (The Median is the most meaningful statistic because it will naturally screen outliers) ¡ Outliers should be evaluated and possibly eliminated } 1 st Quartile (25 th percentile) and 3 rd Quartile (75 th percentile) are sometimes used to define the multiple range for particularly large or wide-ranging results 25
Comparison of Multiples IPO Valuation Choice of the Multiple Depends on Industry, Profitability, Accounting Regimes Multiple EV / Sales Advantage Disadvantage ¡ Meaningful for loss-making companies ¡ Does not take differences in profitability ¡ Very limited impact of into accounting differences EV / EBITDA ¡ No distortions based on different depreciation policies ¡ Does not take differences in capital expenditures into account EV / EBIT ¡ Valuation based on quality of operation ¡ Possible distortions based on different accounting policies EV / Capital Employed ¡ Based on invested capital, which determines potential earnings power ¡ Does not take differences in profitability into account ¡ Distortions through accounting differences P/E Ratio ¡ Focuses on earnings to shareholders ¡ Accounting differences may distort true measures of earnings Price / CFPS ¡ “Cash is king” ¡ Does not take differences in capital expenditures into account Price / Book ¡ Based on equity, which determines earnings power ¡ Does not take differences in profitability into account 26
Understanding Key Drivers of “Multiples” IPO Valuation Why Do Comparable Companies Differ in Valuation? ¡ Industry and Sector Outlook ¡ Competitive Position ¡ Research Views ¡ Historical Performance One of Key Indicators of Future Performance } Revenue Growth ¡ Cash Flow } Operating Margins ¡ Net Income ¡ Qualitative Factors Impact Market’s Belief of the Company’s Future Performance ¡ Regulatory Issues } Management Quality and Track Record } Corporate and Operating Strategy ¡ Environmental Issues } Ownership Profile ¡ Legal Issues Valuation ultimately assesses the present value of the potential future financial rewards Current trading valuations or “multiples” of a Company are a reflection of public market’s belief in the future financial rewards by owning the securities of the Company 27
What Else Matters in an IPO? IPO Valuation Many Factors are Evaluated at Time of IPO ¡ Peer Group: Clear peer group with sizeable number of companies } Only need one; none allows Company / Banks to define the “valuation / story” ¡ Liquidity: % of float and ADTV vs. other comparable companies } Need adequate IPO size to attract institutional investors ¡ Growth: What are organic and acquisitive growth prospects of the Company? } How do those projects / returns compare vs. peers and how achievable / financeable are they? ¡ Stability vs. Volatility: Is Company’s business volatile, risky, stable, cyclical? } Ability to dampen volatility or smooth out earnings? Capital structure and risk policies ¡ Stage of Company: What stage is the Company experiencing in its life cycle? } Developing, nascent, growth, mature? } Capital structure and cash flow generation / reinvestment ¡ Capital Structure: Credit ratings and leverage vs. peers and appropriate levels for Company / industry ¡ Market Conditions at time of IPO ¡ Management, Board composition and PE backing ¡ Banking relationships and research coverage } Credit support and capital markets access in the future 28
Illustrative IPO Valuation C-Corp Scenario C-Corp vs. MLP Scenarios Pre funding capex Enterprise Value (At IPO) ¡ $1. 58 Bn – $1. 93 Bn Enterprise Value (Fully Distributed) ¡ $1. 80 Bn – $2. 20 Bn ¡ ¡ $2. 25 Bn – $2. 57 Bn 4. 0 x – 4. 9 x EBITDA ¡ 5. 7 x – 6. 5 x EBITDA ¡ $2. 57 Bn – $3. 01 Bn Pre funding capex ¡ $1. 88 Bn – $2. 16 Bn ¡ 4. 8 x – 5. 5 x EBITDA ¡ $2. 16 Bn – $2. 56 Bn ¡ 4. 6 x – 5. 6 x EBITDA ¡ 6. 5 x – 7. 6 x EBITDA ¡ 5. 5 x – 6. 5 x EBITDA ¡ ¡ $600 Mm ~36% of Company (at midpoint) ¡ ¡ $500 Mm ~25% of Partnership (at mid-point) ¡ ¡ $500 Mm ~27% of Partnership (at mid-point) Distribution to Private Owners ¡ ~$50 Mm ¡ ~$200 Mm ¡ ~$50 Mm Growth Capex / Cash ¡ ~$400 Mm ¡ None ¡ ~$400 Mm ¡ ~$102 Mm ¡ ~$242 Mm ¡ ~$15 Mm ¡ ~$48 Mm ¡ ~$58 Mm ¡ ~$35 Mm ¡ Net Debt: ~$97 Mm ¡ Net Debt: ~$358 Mm ¡ Net Debt: ~$185 Mm IPO Size (Base Deal) Use of Proceeds Maximum claw-back Debt Pay down Make Whole / Fees Leverage Post IPO 29
Positioning Company B vs. Its C-Corp Peers IPO Valuation Positioning “Company B” vs. Its C-Corp Peers Primary Company B Peer 1 30 Secondary Comps Peer 2 Peer 3 Peer 4
Relative Benchmarking IPO Valuation Enterprise Value ($ in millions) 2010 A Reserves (million tons) Reserves / 38. 6 yrs 2011 E Prod. EBITDA CAGR: 2011 E – 2013 E 27. 8 yrs 25. 8 yrs 10. 0 yrs 2010 A EBITDA / ton ______________ Note: Peer group data as per company filing and Wall Street equity research. Market data as of 3/23/2011. Note: Company B data per Company’s projections. 31 29. 8 yrs
Relative Benchmarking: Balance Sheet Strength IPO Valuation 2011 E EBITDA Total Liquidity BB+ (Stable) Ba 1 (Stable) BB (Watch) Ba 2 (Watch) BB- (Stable) Ba 3 (Stable) 2011 E Cash Flow from Operations Total Debt/Net Debt/LTM EBITDA (1) BB- (Watch) B 1 (Stable) BB- (Pos) B 1 (Pos) B+ (Watch) B 2 (Stable) B+ (Stable) B- (Stable) Caa 1 (Stable) Caa 2 (Stable) BB- (Watch) B 1 (Stable) B+ (Watch) B 2 (Stable) BB- (Pos) B 1 (Pos) B- (Stable) Caa 2 (Stable) BB- (Stable) Ba 3 (Stable) BB (Watch) Ba 2 (Watch) B+ (Stable) Caa 1 (Stable) BB+ (Stable) Ba 1 (Stable) BB (Watch) Ba 2 (Watch) Total Debt Median 2. 2 x Net Debt Median 1. 9 x ______________ Source: Company information and IBES Estimates. Note: All companies per 12/31/2010 filings. 1. Total liquidity is calculated cash & cash equivalents as of latest balance sheet data plus remaining balance on companies’ revolving credit facility, including LOCs. 32
Current Trading Multiples IPO Valuation EV / 2011 E EBITDA EV / 2012 E EBITDA EV / 2013 E EBITDA Primary Comp Secondary Comps Others ______________ Note: IBES consensus estimates as of 3/23/2011. 33
Illustrative C-Corp IPO Valuation Pre funding capex scenario Illustrative C-Corp IPO Valuation ______________ 1. Per company projections as of 9/30/2011. Some of the IPO proceeds are used for debt repayment. 2. Adjusted for the interest decrease after debt pay down with the IPO proceeds of $101. 9 million and an indicative tax rate of 28%. 34
Drivers of MLP Valuation IPO Valuation 1. Distributable Cash Flow: Determining Appropriate Forward 12 -Month Period } We believe that for a 3 Q 2011 IPO, the appropriate period for calculating Company B’s “ability to pay” is Q 4 2011 through Q 3 2012 – } Our valuation is therefore based on an estimated EBITDA level of $382. 8 million Capture of expected increases in production / pricing should be balanced with desired timing of monetization 2. Maintenance and Replacement Capex Accruals } Capex accrual methodology will need to be explained } We can work with the management team throughout the process to arrive at the number that adequately supports the MLP while at the same time maximizing valuation, for the purposes of the valuation we’ve assumes $4. 50/ton production in line with “MLP Peer 1” guidance } Given the length of the reserve life, impact should be muted 3. Coverage } Investors will focus on three primary issues when analyzing the appropriate level of coverage 1. 2. Cushion to underpin any growth story 3. } Coverage levels for coal comparables Cushion to protect MQD in a protracted pricing downturn We believe that given Company B’s contract and growth profile (potential EBITDA CAGR of 41. 6% from 2011 -2013), a level of coverage inside of MLP Peer 1’s is supportable. We are recommending an initial level of 1. 40 x versus Peer 1’s 2011 coverage of 1. 63 x and Peer 1’s 2012 coverage of 1. 54 x 4. Fully Distributed Yield } MLP Peer 1 is the most relevant comparable partnership given its scale, asset base, attractive contract profile and seasoned management team } MLP Peer 2 has exposure to similar market fundamentals as Company B, however is a less relevant comparable given its smaller size and surface mining operations } MLP Peer 3 is less comparable given its significant smaller size and met exposure, but might be still considered as a comp by some investors 5. IPO Discount } Given the size of the offering, we have assumed an IPO discount of 100 bps in structuring the Company B MLP IPO 35
Positioning Company B vs. Other Coal MLPs IPO Valuation Positioning Company B vs. Other Coal MLPs Company B MLP Peer 1 MLP Peer 2 MLP Peer 3 Total Company B production position is sizeable Large reserves base with a long reserve life Lack of substantial met coal exposure will be additionally favored by MLP investors, as it implies less volatility of future cash flows û Less mine diversity Primarily non-union workforce will be perceived positively 36 Company B stable and relative high contract profile will be very well received by investors as a sign of certainty of future cash flows ______________ Source: Company guidance and Wall Street equity research. Company B Information as of November 30, 2010. 1. Based on Wall Street equity research estimates of production and committed tons per year. Easier to execute accretive deals when not in “high splits” Attractive growth story
Peer Comparison – Yields & Distribution Coverage IPO Valuation Distribution Yield Comparison 2011 E Distribution Coverage and Yield Comparison 7. 70% Implied Coverage (2) 1. 40 x 8. 35% 2012 E Distribution Coverage and Yield Comparison (2) 10. 68% 9. 15% 7. 70% 7. 17% 1. 63 x 1. 23 x (1) 1. 24 x 1. 40 x Distribution Yield 8. 95% 7. 55% 1. 54 x 1. 17 x DCF Yield ______________ 1. As of 3/23/2011. 2. Coverage for the coal comps is calculated as DCF per LP unit divided by estimated distribution due to higher variability in cash flows associated with the coal operators. 37 1. 29 x (2)
Illustrative MLP IPO Valuation – Scenario 1 IPO Valuation Maximum claw-back scenario Preliminary IPO Valuation IPO Capitalization ______________ 1. Estimates represent data at time of IPO based on numbers provided by management, as Q 4 2011 E EBITDA and 75% of the estimated EBITDA for 2012 E. 2. Maintenance capital expenditures based on $4. 50/ton production for the next twelve months as of 9/30/2011 and will require further diligence by Barclays Capital. 3. Estimated net debt at 9/30/2011, adjusted for the $242 million pay down from net IPO proceeds. 4. Assumes 6. 00% gross spread, 0. 375% structuring fee and additional transaction fees of $2. 0 million. 5. Interest saved of $24. 8 million. Interest expense reflects application of $500 million of IPO proceeds which will be used to pay down debt and as a distribution the Owners. 6. Assumes that the 35% equity claw will occur at 110 to par. 38
Illustrative MLP IPO Valuation – Scenario 2 IPO Valuation Pre-funding capex scenario Preliminary IPO Valuation IPO Capitalization ______________ 1. Estimates represent data at time of IPO based on numbers provided by management, as Q 4 2011 E EBITDA and 75% of the estimated EBITDA for 2012 E. 2. Maintenance capital expenditures based on $4. 50/ton production for the next twelve months as of 9/30/2011 and will require further diligence by Barclays Capital. 3. Estimated net debt at 9/30/2011, adjusted for the $14. 7 million pay down from net IPO proceeds. 4. Assumes 6. 00% gross spread, 0. 375% structuring fee and additional transaction fees of $2. 0 million. 5. Interest saved of $5. 5 million. 6. Assumes that the equity claw will occur at 110 to par. 39
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All opinions and estimates are given as of the date hereof and are subject to change and Barclays assumes no obligation to update this document to reflect any such changes. The value of any investment may fluctuate as a result of market changes. The information herein is not intended to predict actual results and no assurances are given with respect thereto. Nothing herein shall be deemed to constitute investment, legal, tax, financial, accounting or other advice. Barclays, its affiliates and the individuals associated therewith may (in various capacities) have positions or deal in transactions or securities (or related derivatives) identical or similar to those described herein. IRS Circular 230 Disclosure: Barclays Capital and its affiliates do not provide tax advice. Please note that (i) any discussion of U. S. tax matters contained in this communication (including any attachments) cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor. Notwithstanding anything herein to the contrary, each recipient hereof (and their employees, representatives, and other agents) may disclose to any and all persons, without limitation of any kind from the commencement of discussions, the U. S. federal and state income tax treatment and tax structure of the proposed transaction described herein and all materials of any kind (including opinions or other tax analyses) that are provided relating to such tax treatment and tax structure. For this purpose, "tax structure" is limited to facts relevant to the U. S. federal and state income tax treatment of the proposed transaction described herein and does not include information relating to the identity of the parties, their affiliates, agents or advisors. BARCLAYS CAPITAL INC. , THE UNITED STATES AFFILIATE OF BARCLAYS CAPITAL, THE INVESTMENT BANKING DIVISION OF BARCLAYS BANK PLC, ACCEPTS RESPONSIBILITY FOR THE DISTRIBUTION OF THIS DOCUMENT IN THE UNITED STATES. ANY TRANSACTIONS BY U. S. PERSONS IN ANY SECURITY DISCUSSED HEREIN MUST ONLY BE CARRIED OUT THROUGH BARCLAYS CAPITAL INC. , 200 PARK AVENUE, NEW YORK, NY 10166. NO ACTION HAS BEEN MADE OR WILL BE TAKEN THAT WOULD PERMIT A PUBLIC OFFERING OF THE SECURITIES DESCRIBED HEREIN IN ANY JURISDICTION IN WHICH ACTION FOR THAT PURPOSE IS REQUIRED. NO OFFERS, SALES, RESALES OR DELIVERY OF THE SECURITIES DESCRIBED HEREIN OR DISTRIBUTION OF ANY OFFERING MATERIAL RELATING TO SUCH SECURITIES MAY BE MADE IN OR FROM ANY JURISDICTION EXCEPT IN CIRCUMSTANCES WHICH WILL RESULT IN COMPLIANCE WITH ANY APPLICABLE LAWS AND REGULATIONS AND WHICH WILL NOT IMPOSE ANY OBLIGATION ON BARCLAYS OR ANY OF ITS AFFILIATES. THIS DOCUMENT DOES NOT DISCLOSE ALL THE RISKS AND OTHER SIGNIFICANT ISSUES RELATED TO AN INVESTMENT IN THE SECURITIES/TRANSACTION. PRIOR TO TRANSACTING, POTENTIAL INVESTORS SHOULD ENSURE THAT THEY FULLY UNDERSTAND THE TERMS OF THE SECURITIES/TRANSACTION AND ANY APPLICABLE RISKS. Barclays Bank PLC is registered in England No. 1026167. Registered Office: 1 Churchill Place, London E 14 5 HP. Copyright Barclays Bank PLC, 2011 (all rights reserved). This document is confidential, and no part of it may be reproduced, distributed or transmitted without the prior written permission of Barclays. 40
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