presentation to the university of colorado investment banking march 30, 2011
TRANSCRIPT
Presentation to the University of ColoradoInvestment Banking
March 30, 2011
Overview of the PresentationAgenda
I. Introduction to Valuation
II. M&A Valuation
A. Drivers of M&A and Role of an Investment Banker
B. Valuation Methodologies and the “Football Field”
III. IPO Valuation
A. What Matters and is Most Important?
B. In-depth IPO Valuation
Agenda
Introduction to Valuation
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
Valuation OverviewIntroduction to Valuation
1
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
Equity ValueNet DebtFirm Value equalsless
Valuation Overview (Cont’d)
Definition of Key Terms
Introduction to Valuation
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
Control Value
IPO 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
Assumes adequate liquidity in the market
Generally subject to existing Board, management and strategy
Access to cash flow limited to dividends
Typically involves a discount to the publicly traded
equity value
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)
@ IPO
@ Trading
@ M&A
Valuation Overview (Cont’d)
Definition of Key Terms
Introduction to Valuation
Fully Distributed Equity Value
3
M&A Valuation
M&A Valuation
Drivers of Mergers & Acquisitions
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?)
Compelling Financial Rationale for a Transaction Low Relative Cost or High Relative Opportunity Financing Markets (Ability to Leverage Equity Returns) Equity Market Perception / Reaction (Valuation Metrics /
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
Why Deals Happen 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
Accounting, Tax, Legal, and Environmental Issues Are Insurmountable
Regulatory (Domestic or Abroad)
Why Deals Don’t Happen
Why Deals Happen and Don’t Happen
4
M&A Valuation
What are the Deal Mechanics and the Process?
Exclusive Sale Private Sale to a Single Buyer Limited Auction (Formal vs. Informal) Full Auction (Public vs. Private)
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
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
Types of Deals and Processes 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
Stock Sale
Stock Sale with IRC Section 338(h)(10) election Stock sale treated like an asset sale for tax purposes
Subsid./Private Company Transaction Structures
Types of Deals and Structures
5
Role of an Investment Banker
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
A financial advisor performs a broad range of functions in the M&A process
M&A Valuation
6
What is a Football Field?
Fairness Opinion Presents the range of “fair value” for a Board of Directors’
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
Internal Reference For example – supports loan to value analysis when examining
financing alternatives
Barclays Capital
Barclays Capital
Important to remember that the valuation metrics used will vary
depending on both the industry and the assignment
A football field summarizes the various metrics and assumptions used to determine the valuation of a company or business segment
M&A Valuation
7
Summary of Valuation MethodologiesMultiple types of valuation analyses will be included in a valuation summary depending on industry, type of presentation, available information and numerous other factors
Metric ConsiderationsTrading
ValueControl
ValuePrivate Co.
Metric
Forward P/E, P/CF, EV/EBITDA, EV/Revenue most common – may show more than one metric
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. pre-announcement or pre-leak)
Alternatively, may apply premium to trading multiples
Choose appropriate target range of IRR Solve for price based on fixed leverage and range of exit
multiples
Option to show with and/or without synergies
Use for distinct business segments or individual assets with different value parameters
Used as reference point 52-week most common; also 3-months, 6-months, period
since significant event
Used as reference point High/low research price targets; check length of time
forward and ensure consistent (or discount back)
Trading Multiples
Wall Street Research Price Targets
Comparable Transactions
Leveraged Buyout
Stock Price Trading Ranges
Premiums Paid
Discounted Cash Flow
M&A Valuation
Sum-of-the-Parts
8
Source of the Assumptions / Data
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
An analysis is only as good as its inputs
Always keep good back-up of all data sources and assumptions
M&A Valuation
9
Presenting the Football Field Analysis
Valuation “Bar” Presentation Options
Which value should be presented and is most relevant? Enterprise value, equity 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
Presentation options and complexities allow for additional tailoring of the valuation summary to the needs of the analysis
M&A Valuation
10
Determining Appropriate Valuation Ranges
“Science” Market information; financial data Mechanics of valuation methodologies
“Art” 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? 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?
Step Back and Look at the “Bigger Picture”
Sanity Check
“Science” vs. “Art”
M&A Valuation
Science, Art or Sanity?
11
M&A Valuation
Illustrative Sellside Valuation Analysis
Financial Projections
Base EBITDA
$94$87$77$68$66
$0
$20
$40
$60
$80
$100
2011 2012 2013 2014 2015
$MM
Expansion EBITDA
9.3% CAGR
___________________________Note: 2011 PF EBITDA of $80.8 million defined as 2011E base cash EBITDA ($65.6 million) plus 2013 growth projects EBITDA of $15.2 million. Excludes re-contracting of remaining "below market” barrels.
1H 2011E 2H 2011E 2011E 2011E PF 2012E 2013E 2014E 2015E 2016E
Base EBITDA $36.9 $36.9 $73.9 $73.9 $76.0 $81.9 $89.1 $95.5 $98.9Development EBITDA $0.4 $0.4 $0.9 $15.2 $4.2 $15.2 $15.5 $15.8 $16.1
Adjusted EBITDA $37.4 $37.4 $74.8 $89.1 $80.3 $97.1 $104.6 $111.3 $115.0Contract Amortization (non-cash) (4.1) (4.1) (8.3) (8.3) (8.3) (5.2) (2.2) (1.8) 0.0
Cash EBITDA $33.2 $33.2 $66.5 $80.8 $71.9 $91.9 $102.4 $109.5 $115.0
OpCo Interest Expense (6.8) (6.8) (13.6) (13.6) (15.2) (16.3) (17.1) (17.6) (18.2)Maintenance Capex (0.9) (0.9) (1.9) (1.9) (2.7) (2.0) (2.0) (2.1) (2.1)
OpCo Distributable Cash Flow $25.5 $25.5 $51.0 $65.3 $54.0 $73.6 $83.3 $89.8 $94.7
Growth Capital Expenditures (55.3) (22.6) (77.9) (77.9) (19.9) (2.0) 0.0 0.0 0.0
OpCo Free Cash Flow ($29.8) $2.9 ($26.9) ($12.6) $34.2 $71.6 $83.3 $89.8 $94.7
$16$15$15
$4$1
$13$12
$0
$0$0
$0
$10
$20
$30
2011 2012 2013 2014 2015
$MM
Development EBITDA Upside
12
$975
$1,100
$1,150
$850
$1,000
$925
$1,000
$1,025
$1,100
$1,100
$850 $925 $1,000 $1,075 $1,150 $1,225
Comparable Transactions
Private Equity LBO
Infrastructure LBO
Ability-to-Pay
Discounted Cash Flow
Preliminary Valuation – the “Football Field”
Preliminary Review of Valuation Parameters
Initial EBITDA Multiple: 14x – 16x
RR EBITDA Multiple Range: 8x – 10x
Enterprise Value ($MM):
WACC: 8.0%-10.0%
Terminal EBITDA Multiple: 10.0x
M&A Valuation
Target 0% 2012 AccretionMLPs: 11.0x to 13.0x 2012 EBITDAMLPs: 10.0x to 12.0x 2013 EBITDA
Exit Multiple: 10.0x
IRRs: 10%-15%
Exit Multiple: 10.0x
IRRs: 17.5%-22.5%
EBITDA Multiple Statistic
2011 $66.5 12.8x 13.9x 15.0x 16.2x 17.3x 18.4x
2011 PF $80.8 10.5x 11.5x 12.4x 13.3x 14.2x 15.2x
2013 $91.9 9.2x 10.1x 10.9x 11.7x 12.5x 13.3x
2014 $102.4 8.3x 9.0x 9.8x 10.5x 11.2x 12.0x
13
Purchase Price Ratio AnalysisM&A Valuation
Preliminary Valuation Analysis
PPR Analysis($ in millions)
Enterprise Value $900 $950 $1,000 $1,050 $1,100 $1,150 $1,200 $1,250
Less: Projected OpCo Debt (6/30/11) (294) (294) (294) (294) (294) (294) (294) (294)
Implied Equity Value to the Buyer $606 $656 $706 $756 $806 $856 $906 $956
Less: Projected HoldCo Debt (6/30/11) (305) (305) (305) (305) (305) (305) (305) (305)
Net Proceeds to Sponsor A $301 $351 $401 $451 $501 $551 $601 $651
Enterprise Value as a Multiple of: Statistic:
2011E PF EBITDA $80.8 11.1x 11.8x 12.4x 13.0x 13.6x 14.2x 14.9x 15.5x
2012E Cash EBITDA 71.9 12.5x 13.2x 13.9x 14.6x 15.3x 16.0x 16.7x 17.4x
2013E Cash EBITDA 91.9 9.8x 10.3x 10.9x 11.4x 12.0x 12.5x 13.1x 13.6x
2014E Cash EBITDA 102.4 8.8x 9.3x 9.8x 10.3x 10.7x 11.2x 11.7x 12.2x
14
M&A Valuation
Discounted Cash Flow Analysis
DCF Analysis
Present Value of Terminal ValueDiscount PV of Based on EBITDA Multiples of: Preliminary Enterprise Value Preliminary Equity Value to the Buyer
Rate Cash Flows 9.0x 9.5x 10.0x 10.5x 11.0x 9.0x 9.5x 10.0x 10.5x 11.0x 9.0x 9.5x 10.0x 10.5x 11.0x10.0% $275.9 $673.8 $711.3 $748.7 $786.2 $823.6 $949.7 $987.1 $1,024.6 $1,062.0 $1,099.5 $655 $693 $730 $768 $8059.0% $282.5 $702.1 $741.1 $780.1 $819.1 $858.1 $984.6 $1,023.6 $1,062.6 $1,101.6 $1,140.6 $690 $729 $768 $807 $8468.0% $289.3 $731.8 $772.5 $813.2 $853.8 $894.5 $1,021.2 $1,061.8 $1,102.5 $1,143.1 $1,183.8 $727 $767 $808 $849 $889
($ millions) Year-End2H 2011E 2012E 2013E 2014E 2015E 2016E
EBITDA $37.4 $80.3 $97.1 $104.6 $111.3 $115.0Contract Amortization (4.1) (8.3) (5.2) (2.2) (1.8) Maintenance Capital Expenditures (0.9) (2.7) (2.0) (2.0) (2.1) Growth Capital Expenditures (22.6) (19.9) (2.0) - - Unlevered Free Cash Flow 0 9.7 49.4 87.9 100.4 107.4 1,149.7
Terminal Value Calculation2016E EBITDA 115.0FWD EBITDA Multiple 10.0xTerminal Enterprise Value of FCF $1,149.7
Discount Rate 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%Discount Factor 0.979 0.917 0.842 0.772 0.708 0.679PV of Cash Flows $9.5 $45.3 $74.0 $77.5 $76.1 $780.1
Enterprise Value $1,062.1
Less: OpCo Debt (6/30/11) ($294.4)
Less: HoldCo Debt (6/30/11) ($305.0)
Net Proceeds to Sponsor A $462.7
15
M&A Valuation
Discounted Cash Flow Analysis (Upside Case)
DCF Analysis
Present Value of Terminal ValueDiscount PV of Based on EBITDA Multiples of: Preliminary Enterprise Value Preliminary Equity Value to the Buyer
Rate Cash Flows 9.0x 9.5x 10.0x 10.5x 11.0x 9.0x 9.5x 10.0x 10.5x 11.0x 9.0x 9.5x 10.0x 10.5x 11.0x11.0% $255.9 $719.4 $759.3 $799.3 $839.3 $879.2 $975.3 $1,015.3 $1,055.2 $1,095.2 $1,135.1 $681 $721 $761 $801 $84110.0% $262.4 $749.3 $790.9 $832.5 $874.1 $915.8 $1,011.7 $1,053.3 $1,094.9 $1,136.6 $1,178.2 $717 $759 $801 $842 $8849.0% $269.2 $780.7 $824.1 $867.4 $910.8 $954.2 $1,049.8 $1,093.2 $1,136.6 $1,180.0 $1,223.3 $755 $799 $842 $886 $929
The valuation below includes all of the potential expansion projects and is discounted at a 10% rate to account for the additional risk associated with un-contracted projects
($ millions) Year-End2H 2011E 2012E 2013E 2014E 2015E 2016E
EBITDA $37.4 $80.3 $97.1 $117.0 $123.9 $127.8Contract Amortization (4.1) (8.3) (5.2) (2.2) (1.8) Maintenance Capital Expenditures (0.9) (2.7) (2.0) (2.0) (2.1) Growth Capital Expenditures (22.6) (38.0) (18.2) (2.0) - Unlevered Free Cash Flow 0 9.7 31.2 71.8 110.8 120.1 1,278.4
Terminal Value Calculation2016E EBITDA 127.8FWD EBITDA Multiple 10.0xTerminal Enterprise Value of FCF $1,278.4
Discount Rate 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%Discount Factor 0.976 0.909 0.826 0.751 0.683 0.651PV of Cash Flows $9.5 $28.4 $59.3 $83.2 $82.0 $832.5
Enterprise Value $1,094.3
Less: OpCo Debt (6/30/11) ($294.4)
Less: HoldCo Debt (6/30/11) ($305.0)
Net Proceeds to Sponsor A $494.9
16
$1,104 $1,044 $1,029$914 $887 $884 $822 $794 $776
0
200
400
600
800
1,000
1,200
MMP BPL EPD NS GEL PAA SXL KMP NGLS
$MM
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
M&A Valuation
MLP Ability-to-Pay Analysis
___________________________1. Assumes seller is responsible for retirement of HoldCo debt.
Enterprise Value at 2012 Breakeven Accretion (1)
2013 Accretion Assuming 2012 Breakeven Purchase Price
3.4% 3.5%
0.5%
3.1%
9.8%
1.1%
3.0%
0.5%
2.7%
0%
2%
4%
6%
8%
10%
12%
MMP BPL EPD NS GEL PAA SXL KMP NGLS
17
Infrastructure funds will be an important part of the process
M&A Valuation
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 HoldCo 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
Infrastructure Funds
18
M&A Valuation
Indicative IRR Analysis
Private Equity Infrastructure Funds
Sources & Uses Sources & Uses
Pro Forma Capitalization at 6/30/2011 Pro Forma Capitalization at 6/30/2011
Capitalization & Sources / Uses
___________________________Note: 2011 PF EBITDA of $80.8 million defined as 2011E cash EBITDA ($65.6 million) plus 2013 growth projects EBITDA of $15.2 million.
Adj 2011($ in millions) Pro Forma % of EBITDA
6/30/11 Capitalization MultipleOpCo Debt
Revolver $34.4 3.3% 0.4xSenior Notes 185.0 17.6% 2.3xIKE Bonds 75.0 7.1% 0.9x
Total OpCo Debt 294.4 28.0% 3.6x
HoldCo DebtNew Senior Notes 250.0 23.8% 3.1x
Total Debt 544.4 51.8% 6.7x
Equity 505.6 48.2% 6.3xEnterprise Value $1,050.0 100.0% 13.0x
Adj 2011($ in millions) Pro Forma % of EBITDA
6/30/11 Capitalization MultipleOpCo Debt
Revolver $34.4 3.5% 0.4xSenior Notes 185.0 19.0% 2.3xIKE Bonds 75.0 7.7% 0.9x
Total OpCo Debt 294.4 30.2% 3.6x
HoldCo DebtNew Term Loan 350.0 35.9% 4.3x
Total Debt 644.4 66.1% 8.0x
Equity 330.6 33.9% 4.1xEnterprise Value $975.0 100.0% 12.1x
2011 AdjEBITDA
Sources Multiple UsesBuyer Equity $330.6 4.1x Company A Equity $375.6New Term Loan 350.0 4.3x Refi Holdco Notes 305.0Assumed Debt 294.4 3.6x Assumed Debt 294.4Total Sources $975.0 12.1x Total Uses $975.0
2011 AdjEBITDA
Sources Multiple UsesBuyer Equity $505.6 6.3x Company A Equity $450.6New Senior Notes 250.0 3.1x Refi Holdco Notes 305.0Assumed Debt 294.4 3.6x Assumed Debt 294.4Total Sources $1,050.0 13.0x Total Uses $1,050.0
19
M&A Valuation
Indicative IRR Analysis – Infrastructure Funds
Sensitivity to Exit Multiple
Assumptions
Sensitivity to Financing Mix (1)
___________________________1. Assumes a 10.0x EBITDA exit multiple.
Sensitivity to Cash Sweep on HoldCo 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 OpCo Debt assumed to stay in place
– While there is additional debt capacity at the
OpCo level, we assumed additional leverage
would be placed at the HoldCo level for
greater flexibility
We have assumed a 7.5% interest rate on new
debt financing at the HoldCo level
– Assumes 100% distribution
We assumed a debt level that will still be
appropriate for acquirer to take equity
distributions
5-Year IRRCash Sweep
0.0% 25.0% 50.0% 75.0% 100.0%
$1,000 15.7% 15.4% 15.1% 14.9% 14.5%
$1,025 14.1% 13.9% 13.7% 13.4% 13.2%
$1,050 12.6% 12.4% 12.3% 12.1% 11.9%
$1,075 11.2% 11.1% 11.0% 10.9% 10.7%
$1,100 9.9% 9.8% 9.7% 9.7% 9.6%
En
terp
rise
V
alu
e
5-Year IRRExit Multiple (EBITDA)
9.0x 9.5x 10.0x 10.5x 11.0x
$1,000 11.4% 13.7% 15.7% 17.7% 19.5%
$1,025 9.8% 12.1% 14.1% 16.0% 17.8%
$1,050 8.4% 10.6% 12.6% 14.5% 16.3%$1,075 7.0% 9.2% 11.2% 13.1% 14.9%
$1,100 5.7% 7.9% 9.9% 11.7% 13.5%
En
terp
rise
V
alu
e5-Year IRR
HoldCo Debt$150 $200 $250 $300 $350
$1,000 14.4% 15.0% 15.7% 16.6% 17.8%
$1,025 13.1% 13.6% 14.1% 14.8% 15.6%
$1,050 11.8% 12.2% 12.6% 13.1% 13.7%$1,075 10.7% 10.9% 11.2% 11.5% 12.0%
$1,100 9.5% 9.7% 9.9% 10.1% 10.3%
En
terp
rise
V
alu
e
20
Recent Storage Transactions
Comparable Transactions
___________________________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 2010E EBITDA.4. Adjusts for expansion project which is projected to cost ~$400 million and add $75 million of EBITDA.
M&A Valuation
Valuation
($ in millions) Tres SouthernBobcat (1) Palacios (2) Pines (3) BORCO (4)
Mean
Purchase Price $540.0 $725.0 $750.0 $1,700.0Expansion Capex / Milestone Payment 425.0 85.5 105.0 400.0
Total Capital Investment $965.0 $810.5 $855.0 $2,100.0
Initial EBITDA $38.6 $56.2 $32.0 $138.0Post-Expansion EBITDA 120.6 95.0 82.5 215.0
Investment as a Multiple of:Initial EBITDA 14.0x 12.9x 23.4x 12.3x 15.7xPost-Expansion EBITDA 8.0x 8.5x 10.4x 9.8x 9.2x
($ in millions)
EBITDA $MM Relevant Multiples Implied Value Range ($MM)Initial EBITDA (2011E) $66.5 14.0x - 16.0x $930 - $1,0632011 PF EBITDA $80.8 12.0x - 14.0x $969 - $1,131Post-Expansion EBITDA (2014E) $102.4 8.0x - 10.0x $819 - $1,024
Preliminary Comparable Transactions Value Range $1,000 - $1,100
21
9.3x
12.3x
10.3x
12.9x
11.8x
7.4x
8.2x
11.6x
15.5x
13.4x
12.7x11.8x
11.2x
6.2x
11.4x 11.3x
7.8x
9.9x
8.3x
7.9x
8.5x
8.0x
9.0x9.6x
10.5x
13.0x
7.0x
11.0x
7.0x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
Oct-98 Aug-00 Mar-01 Oct-02 Dec-02 Jun-03 Dec-03 Mar-04 Jun-04 May-05 Jun-06 Mar-07 Jul-07 Jul-09 Feb-11
EBITDA Multiple
Historical Liquids Pipeline Transactions
TEPPCO / Duke
KN Energy /Kinder Morgan
Alberta / AEC
Alberta / TransCanada
Pembina / AEC
Plains All American /
Murphy
Koch / BP Colonial
Kaneb / Tesoro
MDP / Riverstone /
Williams
Enbridge Income Fund /
Enbridge Inc.BC Gas / EnCana
Announcement Date
Plains All American /
Shell Pipeline
Enbridge Energy / Shell Pipeline
Pacific Energy /
Rangeland Pipeline
Plains All American / Link Energy
Magellan /
Osage Pipeline
Selected Comparable Midstream Transactions
Magellan / Shell Oil Products
Buckeye / Shell Oil Products
Koch NGL / ONEOK
Pacific Energy / Valero
Plains All American / Pacific Energy
Energy Funds Mgmt. /
Citgo (Colonial)
Inter Pipeline Fund / KMI
KMP / Transmontaigne
ONEOK / KMP
M&A Valuation
10.0x Median
Enterprise Products Partners acquires TEPPCO Partners
Magellan / Longhorn
KKR / Colonial
Buckeye Partners / First Reserve (BORCO)
22
IPO Valuation
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
Comparable Company Analysis Defined
Comparable Company Analysis Explained
IPO Valuation
23
Comparable Company Analysis Defined (Cont’d)
What is it? Use of Trading Multiples
IPO Valuation
Fundamental valuation tool used for deriving
company value
Helps in benchmarking performance and
valuations across companies within a sector
Valuation tool based on how comparable
companies are valued by the stock market as a
multiple of profit, sales or other parameters
Assumes that the stock market is relatively
efficient in valuing comparable companies
Importance
Initial Public Offering
Buy-side M&A
Sell-Side M&A
Add-on financings
Share repurchases
Leveraged Buy-out
Most Widely Used Valuation Tool
24
IPO Valuation
Enterprise and Equity Value Multiples
Takes into account capital structure in decision making
Denominator after interest expense
Main multiples are P/E ratio Equity Market Value / Net Income Price / Book ratio Price / CFPS
Equity Value Multiples Focus towards quality of operation
Unlevered Capital Structure
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)
Enterprise Value Multiples
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 1st Quartile (25th percentile) and 3rd Quartile (75th percentile) are sometimes used to define the multiple range
for particularly large or wide-ranging results
Summarize the Results
25
Comparison of Multiples
Multiple Advantage Disadvantage
EV / Sales
Meaningful for loss-making companies Very limited impact of
accounting differences
Does not take differences in profitability into account
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
Choice of the Multiple Depends on Industry, Profitability, Accounting Regimes
IPO Valuation
26
Industry and Sector Outlook
Competitive Position
Research Views
Historical Performance One of Key Indicators of Future Performance Revenue Growth Operating Margins
Qualitative Factors Impact Market’s Belief of the Company’s Future Performance Management Quality and Track Record Corporate and Operating Strategy Ownership Profile
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
Cash Flow
Net Income
Regulatory Issues
Environmental Issues
Legal Issues
Understanding Key Drivers of “Multiples”
Why Do Comparable Companies Differ in Valuation?
IPO Valuation
27
Many Factors are Evaluated at Time of IPO
IPO Valuation
What Else Matters in an 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
$1.58 Bn – $1.93 Bn 4.0x – 4.9x EBITDA
$2.25 Bn – $2.57 Bn 5.7x – 6.5x EBITDA
$1.88 Bn – $2.16 Bn 4.8x – 5.5x EBITDA
$1.80 Bn – $2.20 Bn 4.6x – 5.6x EBITDA
$2.57 Bn – $3.01 Bn 6.5x – 7.6x EBITDA
$2.16 Bn – $2.56 Bn 5.5x – 6.5x EBITDA
$600 Mm ~36% of Company (at mid-
point)
$500 Mm ~25% of Partnership (at
mid-point)
$500 Mm ~27% of Partnership (at
mid-point)
~$50 Mm ~$200 Mm ~$50 Mm
~$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: ~$185 Mm
Enterprise Value (Fully Distributed)
Enterprise Value(At IPO)
Debt Pay down
IPO Valuation
MLP ScenariosC-Corp Scenario
Distribution to Private Owners
Make Whole / Fees
IPO Size (Base Deal)
Maximum claw-back Pre funding capexPre funding capex
Growth Capex / Cash
Use
of
Pro
ceed
s
Leverage Post IPO
C-Corp vs. MLP
29
IPO Valuation
Positioning Company B vs. Its C-Corp Peers
Positioning “Company B” vs. Its C-Corp Peers
Metric
Contract Profile (2)
2011E 86% 78% 92% 87% 90%
2012E 65% 43% 41% 40% 58%
2013E 54% 0% 1% 0% N/A
2014E 51% 0% 1% 0% N/A
2015E 56% N/A N/A N/A N/A
2011E Production 28.7 159.8 87.3 130.2 97.1
% Met 0.0% 4.3% 15.8% 19.0% 0.0%
Reserves 856.8 4,445.2 2,253.5 5,029.8 970.0
Reserve Life (relative to 2011E Production) 29.8 27.8 25.8 38.6 10.0
Cash Cost ($ / ton) $35.84 $18.70 $33.62 $44.47 $9.10
Coal Reserve LocationNorthern App 61.2% - 38.1% 19.1% -Central App - 8.3% 31.6% 67.4% -Illinois Basin 31.4% 8.2% 1.3% 0.6% -PRB - 77.5% 29.0% 13.0% 100.0%Other 7.4% 6.0% - - -
Coal Type: Steam / Metallurgical (reserves) 100% / 0% 97% / 3% 86% / 14% 81% / 19% 100% / 0%
MinesUnderground 86% 70% 58% 69% 0%Surface 14% 30% 42% 31% 100%
Number of Mines 7 23 66 150 4
Union Status Minor Minor ~20% ~10% Non-union
S&P Debt Adjustments $262.5 $623.3 $866.8 $0.0 $120.0
'11 - '13 Projected EBITDA CAGR 41.6% 16.1% 7.0% 9.5% 10.1%
Primary Comp Secondary Comps
Peer 1 Peer 2 Peer 3 Peer 4Company B
30
IPO Valuation
Relative Benchmarking
$15,717
$7,412 $7,292
$2,000 $1,716
$0
$4,000
$8,000
$12,000
$16,000
Peer 3 Peer 2 Peer 1 Company B Peer 4
$ in millions
Enterprise Value ($ in millions)
5,030
4,445
2,254
970 857
0
1,000
2,000
3,000
4,000
5,000
Peer 3 Peer 1 Peer 2 Peer 4 Company B
tons in millions
2010A Reserves (million tons)
EBITDA CAGR: 2011E – 2013E 2010A EBITDA / ton
41.6%
16.1%
10.1% 9.5%7.0%
0%
10%
20%
30%
40%
Company B Peer 1 Peer 4 Peer 3 Peer 2
%$12.50
$9.69$8.87
$4.65
$3.39
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
Peer 3 Peer 2 Company B Peer 1 Peer 4
$/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.
Reserves /2011E Prod.
38.6 yrs 27.8 yrs 25.8 yrs 10.0 yrs 29.8 yrs
31
3.1x 2.7x1.9x 2.1x
1.2x1.6x
0.3x1.0x0.7x
2.0x
1.9x2.2x2.2x2.2x
2.8x3.4x
4.0x
1.8x 1.6x
1.0x
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
4.0x
4.5x
Peer 6 Peer 8 Peer 7 Peer 10 Peer 1 Peer 4 Peer 3 Peer 9 Peer 5 Peer 2
(Multiple)
Net Debt/LTM EBITDA Total Debt/LTM EBITDA
Relative Benchmarking: Balance Sheet Strength
Total Liquidity (1)
___________________________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.
IPO Valuation
BB+ (Stable)Ba1 (Stable)
BB (Watch)Ba2 (Watch)
BB (Watch)Ba2 (Watch)
BB- (Stable)Ba3 (Stable)
B+ (Watch)B2 (Stable)
BB- (Pos)B1 (Pos)
B+ (Stable)Caa1 (Stable)
B- (Stable)Caa2 (Stable)
BB- (Stable)Ba3 (Stable)
BB- (Watch)B1 (Stable)
Total Debt/Net Debt/LTM EBITDABB (Watch)Ba2 (Watch)
BB (Watch)Ba2 (Watch)
BB- (Stable)Ba3 (Stable)
Net Debt Median 1.9x
Total Debt Median 2.2x
B- (Stable)Caa2 (Stable)
BB- (Watch)B1 (Stable)
B+ (Watch)B2 (Stable)
BB- (Pos)B1 (Pos)
BB- (Stable)Ba3 (Stable)
B+ (Stable)Caa1 (Stable)
BB+ (Stable)Ba1 (Stable)
$1,713
$952
$775
$330$162
$0
$300
$600
$900
$1,200
$1,500
$1,800
P eer 3 P eer 2 P eer 1 P eer 4 Company B
($ in millions)
2011E Cash Flow from Operations2011E EBITDA
$2,115
$1,181$1,031
$348$236
$0
$300
$600
$900
$1,200
$1,500
$1,800
$2,100
$2,400
Peer 3 Peer 2 Peer 1 Peer 4 Company B
($ in millions)
$2,507
$1,488 $1,480
$1,063
$730
$450 $395 $390$235
$87
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
P eer 5 P eer 2 P eer 3 P eer 1 P eer 4 P eer 6 P eer 6 P eer 8 P eer 9 P eer 10
($ in millions)
32
IPO Valuation
Current Trading Multiples
7.1x 7.4x6.3x
4.9x 5.6x7.2x
5.1x
8.1x 8.8x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
Peer 1 Peer 3 Peer 2 Peer 4 Peer 7 Peer 8 Peer 10 Peer 9 Peer 5
Multiple
EV / 2011E EBITDA
EV / 2012E EBITDA
___________________________Note: IBES consensus estimates as of 3/23/2011.
5.5x 6.1x5.3x
4.4x 5.2x 4.5x 4.6x5.6x
7.3x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
Peer 1 Peer 3 Peer 2 Peer 4 Peer 7 Peer 8 Peer 10 Peer 9 Peer 5
Multiple
EV / 2013E EBITDA
5.2x6.2x 5.5x
4.1x
6.1x4.5x 5.0x 5.4x
7.1x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
Peer 1 Peer 3 Peer 2 Peer 4 Peer 7 Peer 8 Peer 10 Peer 9 Peer 5
Multiple
Secondary Comps OthersPrimary Comp
33
IPO Valuation
Illustrative C-Corp IPO Valuation
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 $101.9 million and an indicative tax rate of 28%.
Pre funding capex scenario
($ in millions) SOURCES USESFully Distributed IPO C-Corp IPO $600.0 Cash for Expansion Projects $300.0Enterprise Value $1,800.0 $1,900.0 $2,000.0 $2,100.0 $2,200.0 Cash to Balance Sheet 100.0
Less: Net Debt (1) 97.4 97.4 97.4 97.4 97.4 Distribution to Owners 50.0Pro Forma Equity Value $1,702.6 $1,802.6 $1,902.6 $2,002.6 $2,102.6 Debt Pay-down 101.9Discounted IPO IPO Transaction Fees 38.0Pro Forma Equity Value $1,702.6 $1,802.6 $1,902.6 $2,002.6 $2,102.6 Est. Debt Tender Premium 10.2
Less: 15% Discount (222.1) (235.1) (248.2) (261.2) (274.3) TOTAL $600.0 TOTAL $600.0IPO Equity Value 1,480.5 1,567.5 1,654.4 1,741.4 1,828.4
Plus: Net Debt (1) 97.4 97.4 97.4 97.4 97.4IPO Enterprise Value $1,577.9 $1,664.9 $1,751.8 $1,838.8 $1,925.7
IPO Size, and as % sold of total IPO equity value $600.0 41% 38% 36% 34% 33%Company B Peer Group Trading Multiples (as of: 3/23/11)
Statistic Average Median Peer 1 Peer 3 Peer 4Enterprise Value to:EBITDA 2011E $236.1 7.6x 8.0x 8.5x 8.9x 9.3x 6.5x 7.1x 7.1x 7.4x 4.9x
2012E $394.6 4.6x 4.8x 5.1x 5.3x 5.6x 5.3x 5.5x 5.5x 6.1x 4.4x2013E $473.4 3.8x 4.0x 4.2x 4.4x 4.6x 5.2x 5.2x 5.2x 6.2x 4.1x
Equity Value to:Net Income (2)
2011E $55.5 30.7x 32.5x 34.3x 36.1x 37.9x 13.2x 14.0x 14.0x 14.3x 11.3x2012E $120.4 14.1x 15.0x 15.8x 16.6x 17.5x 9.6x 9.3x 9.3x 10.5x 9.1x2013E $148.0 11.5x 12.2x 12.9x 13.5x 14.2x 9.3x 8.7x 8.7x 10.8x 8.4x
CFFO (2)2011E $172.5 9.9x 10.4x 11.0x 11.6x 12.2x 6.4x 7.4x 7.4x 7.8x 4.1x2012E $268.9 6.3x 6.7x 7.1x 7.4x 7.8x 5.2x 5.6x 5.6x 6.1x 3.7x2013E $337.5 5.0x 5.3x 5.6x 5.9x 6.2x 4.8x 4.7x 4.7x 6.2x 3.6x
Ent. Value / Reserves 856.8 mm tons $2.10 $2.22 $2.33 $2.45 $2.57 $2.18 $1.77 $1.64 $3.12 $1.77
Enterprise Value to:EBITDA 2011E $236.1 6.7x 7.1x 7.4x 7.8x 8.2x
2012E $394.6 4.0x 4.2x 4.4x 4.7x 4.9x2013E $473.4 3.3x 3.5x 3.7x 3.9x 4.1x
Equity Value to:Net Income (2)
2011E $55.5 26.7x 28.3x 29.8x 31.4x 33.0x2012E $120.4 12.3x 13.0x 13.7x 14.5x 15.2x2013E $148.0 10.0x 10.6x 11.2x 11.8x 12.4x
CFFO (2)2011E $172.5 8.6x 9.1x 9.6x 10.1x 10.6x2012E $268.9 5.5x 5.8x 6.2x 6.5x 6.8x2013E $337.5 4.4x 4.6x 4.9x 5.2x 5.4x
Ent. Value / Reserves 856.8 mm tons $1.84 $1.94 $2.04 $2.15 $2.25
Fully Distributed Multiples
IPO Discounted Multiples
34
Drivers of MLP Valuation 1. Distributable Cash Flow: Determining Appropriate Forward 12-Month Period
We believe that for a 3Q 2011 IPO, the appropriate period for calculating Company B’s “ability to pay” is Q4 2011 through Q3 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. Coverage levels for coal comparables
2. Cushion to underpin any growth story
3. 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 1.40x versus Peer 1’s 2011 coverage of 1.63x and Peer 1’s 2012 coverage of 1.54x
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
IPO Valuation
35
IPO Valuation
Positioning Company B vs. Other Coal MLPsPositioning Company B vs. Other Coal MLPs
___________________________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”
Company B stable and relative high contract profile will be very well received by investors as a sign of certainty of future cash flows
Total Company B production position is sizeable
Large reserves base with a long reserve life
Less mine diversity
Primarily non-union workforce will be perceived positively
Attractive growth story
Lack of substantial met coal exposure will be additionally favored by MLP investors, as it implies less volatility of future cash flows
Metric
Current IDR Status 98% / 2% 50% / 50% 98% / 2% 98% / 2%
Contract Profile (1)
2011E 86% 95% 100% 76%
2012E 65% 69% 78% 39%
2013E 54% 49% 52% N/A
2014E 51% 35% 47% N/A
2015E 56% N/A N/A N/A
2011E Production 28.7 32.6 9.1 4.9
% Met 0.0% 0.0% 0.0% 8.7%
Reserves 856.8 647.2 68.6 309.0
Reserve Life 29.8 19.9 7.5 63.4
Maintenance & Replacement Capex ($ / ton) ~$4.50/ton $4.50 $4.12 $3.74
Cash Cost ($ / ton) $35.84 $32.33 $29.56 $36.89
Coal Reserve LocationNorthern App 61.2% 23.3% 73.6% 21.5%Central App - 4.2% - 32.5%Illinois Basin 31.4% 72.5% 26.4% 35.4%PRB - - - -Other 7.4% - - 10.6%
3Coal Type: Steam / Metallurgical (reserves) 100% / 0% 100% / 0% 100% / 0% 96% / 4%
MinesUnderground 86% 99% 0% 50%Surface 14% 1% 100% 50%
Number of Mines 7 13 17 10
Union Status Minor Non-union Non-union Non-union
Total Legacy Liabilities $263mm $171mm $13mm $42mm
'11 - '13 Projected EBITDA CAGR 41.6% 3.7% 17.4% N/A
'11 - '13 Projected Distribution CAGR 6.9% 9.8% N/A
2011E DCF Yield 7.17% 8.35% 9.15%Current Distribution Yield 4.07% 6.40% 7.01%2011 DCF per L.P. Unit / 2011E Distribution per Unit 1.63x 1.23x 1.24x2011 DCF per L.P. Unit / LQA Distribution per Unit 1.76x 1.30x 1.31x
Company B MLP Peer 1 MLP Peer 2 MLP Peer 3
36
IPO Valuation
Peer Comparison – Yields & Distribution Coverage
Distribution Yield Comparison (1)
2011E Distribution Coverage and Yield Comparison (2)
4.07%
6.40%7.01%
0.00%
3.00%
6.00%
9.00%
MLP Peer 1 MLP Peer 2 MLP Peer 3
Yield
5.50% 4.41%6.76% 7.40%
0.00%
3.00%
6.00%
9.00%
12.00%
Company B MLP Peer 1 MLP Peer 2 MLP Peer 3
7.70%
Implied Coverage
Distribution Yield DCF Yield
(2)
7.17%
1.40x 1.63x
___________________________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.
1.23x
8.35%
1.24x
9.15%
5.50% 4.90%7.68% 8.30%
0.00%
3.00%
6.00%
9.00%
12.00%
Company B MLP Peer 1 MLP Peer 2 MLP Peer 3
2012E Distribution Coverage and Yield Comparison (2)
7.70%7.55%
8.95%
10.68%
1.40x 1.54x 1.17x 1.29x
Current2011E Distribution At 100 bps IPO
Comparables DCF Yield Yield Discount
MLP Peer 1 7.17% 4.07% 5.07%MLP Peer 2 8.35% 6.40% 7.40%MLP Peer 3 9.15% 7.01% 8.01%
37
Maximum claw-back scenario IPO Valuation
Illustrative MLP IPO Valuation – Scenario 1
Preliminary IPO Valuation IPO Capitalization
___________________________1. Estimates represent data at time of IPO based on numbers provided by management,
as Q4 2011E EBITDA and 75% of the estimated EBITDA for 2012E.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 $500 million of IPO proceeds which will be used to pay down debt and as a distribution the Owners. 6. Assumes that the 35% equity claw will occur at 110 to par.
($ in millions)NTM as of 9/30/2011E
EBITDA (1)$382.8 Interest Expense Adj.
Less: Maintenance Capex (2) 149.2 Incremental Public Company Expense 2.0Unlevered Distributable Cash Flow $231.6 Interest Expense (5)
(46.0)Distributable Cash Flow $185.6
Coverage Ratio 1.40xDistributed Cash Flow $132.6
Implied Valuation at IPOAssumed IPO Equity Yield 6.00% 6.50% 7.00%Implied MLP Equity Value $2,209.4 $2,039.4 $1,893.7
Net Debt (as of 9/30/2011E, post IPO) (3)357.7 357.7 357.7
Implied MLP Enterprise Valuation $2,567.1 $2,397.1 $2,251.5
Implied Multiple of 2012E EBITDA 6.5x 6.1x 5.7xImplied Multiple of 2012E EBITDA less Maint Capex 10.5x 9.8x 9.2x
Implied Fully Distributed ValuationAssumed Fully Distributed Yield 5.00% 5.50% 6.00%Implied MLP Equity Value $2,651.2 $2,410.2 $2,209.4
Net Debt (as of 9/30/2011E, post IPO) (3)357.7 357.7 357.7
Implied MLP Enterprise Value $3,009.0 $2,767.9 $2,567.1
Implied Multiple of 2012E EBITDA 7.6x 7.0x 6.5xImplied Multiple of 2012E EBITDA less Maint Capex 12.3x 11.3x 10.5x
($ in millions)IPO
At IPO: Capitalization % of CapPublic Common Interest (IPO Size) $500.0 24.5%Sponsor Common Interest 499.3 24.5% Total Common L.P. Interest $999.3 49.0%
Subordinated Interest 999.3 49.0% Total L.P. Equity Value $1,998.6 98.0%
General Partner Interest 40.8 2.0% Total Partnership Interest $2,039.4 100.0%Net Debt (as of 9/30/2011E, post IPO) (3) 357.7 Total Capitalization $2,397.1
Fully Distributed:Public Common Interest $590.9 24.5%Sponsor Common Interest 590.1 24.5% Total Common L.P. Interest $1,181.0 49.0%
Subordinated Interest 1,181.0 49.0% Total L.P. Equity Value $2,362.0 98.0%
General Partner Interest 48.2 2.0% Total Partnership Interest $2,410.2 100.0%Net Debt (as of 9/30/2011E, post IPO) (3) 357.7 Total Capitalization $2,767.9
SourcesIPO Proceeds $500.0
Total Sources $500.0
Uses:Distribution to the Owners $200.5Paying down outstanding debt (3) 241.5Est. IPO Transaction Fees and Expenses (4) 33.9Est. Debt Tender Premium (6) 24.2
Total Uses $500.0
38
Pre-funding capex scenarioIPO Valuation
Illustrative MLP IPO Valuation – Scenario 2
Preliminary IPO Valuation IPO Capitalization
___________________________1. Estimates represent data at time of IPO based on numbers provided by management,
as Q4 2011E EBITDA and 75% of the estimated EBITDA for 2012E.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 $5.5 million. 6. Assumes that the equity claw will occur at 110 to par.
($ in millions)NTM as of 9/30/2011E
EBITDA (1)$382.8 Interest Expense Adj.
Less: Maintenance Capex (2) 149.2 Incremental Public Company Expense 2.0Unlevered Distributable Cash Flow $231.6 Interest Expense (5)
(65.3)Distributable Cash Flow $166.3
Coverage Ratio 1.40xDistributed Cash Flow $118.8
Implied Valuation at IPOAssumed IPO Equity Yield 6.00% 6.50% 7.00%Implied MLP Equity Value $1,980.2 $1,827.9 $1,697.3
Net Debt (as of 9/30/2011E, post IPO) (3)184.6 184.6 184.6
Implied MLP Enterprise Valuation $2,164.8 $2,012.4 $1,881.9
Implied Multiple of 2012E EBITDA 5.5x 5.1x 4.8xImplied Multiple of 2012E EBITDA less Maint Capex 8.8x 8.2x 7.7x
Implied Fully Distributed ValuationAssumed Fully Distributed Yield 5.00% 5.50% 6.00%Implied MLP Equity Value $2,376.2 $2,160.2 $1,980.2
Net Debt (as of 9/30/2011E, post IPO) (3)184.6 184.6 184.6
Implied MLP Enterprise Value $2,560.8 $2,344.8 $2,164.8
Implied Multiple of 2012E EBITDA 6.5x 5.9x 5.5xImplied Multiple of 2012E EBITDA less Maint Capex 10.4x 9.6x 8.8x
($ in millions)IPO
At IPO: Capitalization % of CapPublic Common Interest (IPO Size) $500.0 27.4%Sponsor Common Interest 395.7 21.6% Total Common L.P. Interest $895.7 49.0%
Subordinated Interest 895.7 49.0% Total L.P. Equity Value $1,791.3 98.0%
General Partner Interest 36.6 2.0% Total Partnership Interest $1,827.9 100.0%Net Debt (as of 9/30/2011E, post IPO) (3) 184.6 Total Capitalization $2,012.4
Fully Distributed:Public Common Interest $590.9 27.4%Sponsor Common Interest 467.6 21.6% Total Common L.P. Interest $1,058.5 49.0%
Subordinated Interest 1,058.5 49.0% Total L.P. Equity Value $2,117.0 98.0%
General Partner Interest 43.2 2.0% Total Partnership Interest $2,160.2 100.0%Net Debt (as of 9/30/2011E, post IPO) (3) 184.6 Total Capitalization $2,344.8
SourcesIPO Proceeds $500.0
Total Sources $500.0
Uses:Cash for Expansion Projects $300.0Cash to Balance Sheet 100.0Distribution to the Owners 50.0Paying down outstanding debt (3) 14.7Est. IPO Transaction Fees and Expenses (4) 33.9Est. Debt Tender Premium (6)
1.5Total Uses $500.0
39
DisclaimerThis document has been prepared by Barclays Capital, the investment banking division of Barclays Bank PLC ("Barclays"), for information purposes only. This document is an indicative summary of the terms and conditions of the securities/transaction described herein and may be amended, superseded or replaced by subsequent summaries. The final terms and conditions of the securities/transaction will be set out in full in the applicable offering document(s) or binding transaction document(s).
This document shall not constitute an underwriting commitment, an offer of financing, an offer to sell, or the solicitation of an offer to buy any securities described herein, which shall be subject to Barclays’ internal approvals. No transaction or services related thereto is contemplated without Barclays‘ subsequent formal agreement. Barclays is not acting as a fiduciary. Accordingly you must independently determine, with your own advisors, the appropriateness for you of the securities/transaction before investing or transacting. Barclays accepts no liability whatsoever for any consequential losses arising from the use of this document or reliance on the information contained herein.
Barclays does not guarantee the accuracy or completeness of information which is contained in this document and which is stated to have been obtained from or is based upon trade and statistical services or other third party sources. Any data on past performance, modelling or back-testing contained herein is no indication as to future performance. No representation is made as to the reasonableness of the assumptions made within or the accuracy or completeness of any modelling or back-testing or any other information contained herein. 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 E14 5HP. 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