HEFG/IPAA Capital Markets Breakfast

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HEFG/IPAA Capital Markets Breakfast

• August 9, 2007

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Summary of the Leveraged Bank Markets
Number of Active Bank Investors and Market Share

• With treasuries at historically low levels,
  overall rates remain attractive though market
  depth will likely be challenged over the next
  several weeks.
• While the market for larger financings that
  require institutional participation for
  successful execution is effectively closed,
  financings that are distributed exclusively to
  traditional bank investors remain viable.
• Number of banks participating in the syndicated
  loan market is at highest level since 1999.
• Wachovia expects pricing on all bank or pro
  rata deals to ultimately follow the broader
  market however, we believe there may now be a
  limited window for certain issuers to lock in
  relatively attractive terms.

Source Wachovia Securities and SP/LCD
Pro Rata BB and B Pricing Averages
Source Wachovia Securities and SP/LCD
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Leveraged Loan Market Conditions

• The leveraged/non-investment grade loan market is
  in the midst of an unprecedented technical
  correction.
• Fundamentals remain strong with default rates at
  low levels.
• The correction is driven primarily by a liquidity
  crisis in the market for collateralized loan
  obligations (CLOs), structured vehicles set up
  to invest principally in floating rate, secured
  bank debt.
• Record leverage multiples for LBOs and aggressive
  covenant-lite structures, as well as concerns
  surrounding the sub-prime mortgage market, raised
  doubts about the soundness of CLO/CDO financing
  vehicles.
• Rating agencies issued across the board
  downgrades on the debt of many of these
  structured vehicles.
• CLO/CDO bond issuance to fund the purchase of
  assets (bank loans, sub-prime mortgages, etc.)
  has dried up and new issuance is expected to be
  limited for the foreseeable future.
• Underwriters of CLO paper have also hampered
  liquidity by restricting the availability of
  warehouse credit lines.
• With little liquidity among institutional
  investors and a record forward calendar, the
  market is in a state of grid lock with widespread
  uncertainty regarding the direction of the market
  in the 4th quarter.
• Underwriters have had to fund a large number of
  underwritten financings on their own balance
  sheets as they have been unable to attract any
  meaningful interest from potential investors.

Institutional Loan Default Rate by Number of
Issuers
Source Wachovia Securities and SP/LCD
Loan Forward Calendar vs. CLO Issuance
Source Wachovia Securities and SP/LCD
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Leveraged Loan Market Conditions
LCDX Price / Spread
Discounted Spread
Source Wachovia Securities and Markit Index of
100 loan credit default swaps
Source Wachovia Securities and SP/LCD
Average Cash Loan Levels
Secondary Trading Levels
Source Wachovia Securities and SP/LCD
Source Wachovia Securities and SP/LCD
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High Yield Market Conditions
10-Year Treasury Yield

• The high yield market has also been pressured
  with secondary spreads and new issue premiums
  widening.
• The secondary market was down for the 9th week in
  a row with yields on BB and B indices widening 31
  bps and 49 bps, respectively, last week.
• Despite this, with treasuries at historically low
  levels, overall rates remain historically
  attractive though market depth will probably be
  challenged over the next several weeks.

Source Bloomberg L.P.
BB High Yield Index
B High Yield Index
Source Merrill Lynch Global Index System
Source Merrill Lynch Global Index System
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High Yield Market Conditions
Historical Market Performance
Source Markit, Merrill Lynch Global Index System
and Wachovia Securities Analysis. Note LCDX
Index was launched on 5/22/2007.
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High Yield Market Conditions
Representative Upstream Bond Performance vs.
Broader Market
D YTW 6/1 7/27
145 bps
177 bps
110 bps
113 bps
117 bps
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High Yield Market Conditions
Representative Midstream Bond Performance vs.
Broader Market
D YTW 6/1 7/27
145 bps
101 bps
120 bps
98 bps
110 bps
130 bps
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High Yield RVA Upstream
Source Advantage Data Bloomberg
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High Yield RVA Midstream
Source Advantage Data Bloomberg
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Upstream MLP Yields Since IPO Date

• For upstream assets with the appropriate reserve
  profile, an upstream MLP IPO offers a compelling
  alternative for the monetization of oil and gas
  assets.
• C-corps are likely to face increasing competition
  for long-lived reserves from tax-advantaged
  flow-through vehicles.
• Emergence is similar to historical trends in the
  midstream market and in the Canadian EP market.
• Wachovia has been involved in all but one
  upstream MLP/LLC IPO completed to date.

Upstream MLP/LLC Distribution Yields Since
1/13/2006
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Upstream MLPs/LLCs Have Been Active Acquirers

• MLP/LLCs tend to purchase properties with high
  reserve to production ratios and significant PDP
  components.
• The highlighted rows represent transactions where
  the buyer is an MLP or has announced it is
  contemplating an MLP formation.

Recent Upstream Acquisition Activity
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Volumetric Production Payment
Overview of a VPP
Transaction Description

• A VPP is a limited term overriding royalty
  interest in oil and gas reserves.
• The VPP entitles the purchaser to receive
  scheduled production volumes over a specific time
  period from specific lease interests.
• The VPP guarantees first priority on a specific
  volume of production from specific lease
  interests.
• A VPP is free and clear of all operating costs,
  capital expenditures and taxes.

• The VPP Seller sells a VPP to a Wachovia entity.
  In addition to the conveyance, the Wachovia
  entity records a mortgage on the reserves.
• The VPP Seller (or the existing operator)
  continues to operate the properties.

VPP and related production
Wachovia
VPP Seller
Cash (VPP purchase price)
Acquisition VPP
Monetization VPP

• The VPP transaction can also be used in
  conjunction with an acquisition.
• The VPP is put in place with the seller of the
  property before the property purchaser buys the
  reserves (burdened by the VPP).
• The VPP Seller (property purchaser) would book
  the cushion reserves, LOE reserves, tail reserves
  and all upside.
• The VPP volumes would not be booked as Deferred
  Revenue.
• The Deferred Revenue account would only reflect
  the present value of the LOE volumes.

• The VPP can be used as a monetization vehicle
  through which the oil and natural gas producers
  sells a term royalty in the reserves it already
  owns.
• The VPP Seller would not book the VPP reserves.
• The VPP would be disclosed in the footnotes to
  the financial statements.
• With a Monetization VPP, the VPP volumes would
  most likely be reflected as Deferred Revenue.

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Agented VPP Lowest Cost VPP
VPP and related production

• The Seller would sell a VPP to the VPP Buyer, a
  Wachovia administered entity.
• The VPP purchase price will be based on the
  forward prices hedged by the VPP Buyer.
• The VPP Buyer raises 100 debt financing for its
  acquisition of the VPP in the institutional
  market.
• Typical pricing is approximately LIBOR 50 to 75
  bps (based on term of the VPP and the factors
  listed below).
• Class sizes will vary based upon
• Predictability and stability of the production
  profile and operating cost profile
• Well concentration
• Amount of capital raised against the underlying
  reserves (i.e., size of cushion)
• Operator / VPP seller
• Credit quality of the off-takers and basis
  volatility
• Hedging LOE
• Ability to effectively hedge basis
• Size of NGL component
• Typical transaction of minimum 300 million.

Floating Price
VPP Seller
VPP Buyer
Wachovia Bank, N.A.
Purchase Price
Fixed Price
Rated Debt
Cash
Institutional Debt Market
Comparison of VPP Structures
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Reversionary Interest Partnership Considerations

• A reversionary interest partnership structure can
  be used to partially monetize and develop
  existing properties or in conjunction with an
  acquisition.
• Wachovia would buy a portion of the property and
  contribute its pro rata share of capital
  expenditures required for development drilling as
  well as operating, maintenance and COPAS
  expenses.
• The Seller and Wachovia can continue developing
  the properties, thereby increasing the value of
  the reserves.
• Wachovias contribution to development costs
  gives the Seller access to future proved
  developed reserves with minimal upfront capital
  commitment and reduces risk during the
  exploitation period.
• This product can be also be used for acquisitions
  where Wachovia and the Seller can partner to
  acquire large properties.
• The Seller would have the opportunity to purchase
  Wachovias portion of the property to achieve its
  growth objectives.

Reversionary Interest Transaction Example

• The Seller sells its working interest in a 400
  million property. The property is purchased by a
  newly formed Partnership Co. in which the company
  is the general partner (GP), with an interest
  of 2 and a Wachovia-administered entity (WAE)
  is the limited partner, with an interest of 98.
• The partnership agreement entitles WAE and the GP
  to receive their proportionate units of the net
  revenue from the reserves until WAE achieves a
  predetermined IRR target (cash on cash), which is
  based on the property profile. At this time, WAE
  will receive 65 of the net cashflows while the
  GP receives 35. The IRR calculation will include
  cashflows from production (including hedging) and
  any proceeds from the sale of the property.
• Net revenues will be calculated by taking COPAS,
  capital expenditures, LOE and cash flow from
  hedges into account.
• This structure can be used as a complement to a
  partial direct working interest purchase of a
  property.

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Case Study EnerVest Management Partners, Ltd.
EnerVest Management Partners, Ltd.
170,000,000 Co-Investment through a Wachovia
Reversionary Interest Partnership Sole Arranger

• EnerVest Management Partners, Ltd. (EnerVest)
  was founded on October 30, 1992, to acquire,
  exploit, operate, and manage oil and gas
  properties on behalf of institutional investors.
• Currently operates approximately 11,500 wells in
  11 states including Colorado, Kansas, Louisiana,
  Michigan, New Mexico, New York, Ohio, Oklahoma,
  Pennsylvania, Texas and West Virginia
• Serves as the general partner or manager of
  various institutional funds and partnerships,
  including EV Energy Partners (EVEP), a publicly
  traded master limited partnership
• Has made over 2.0 billion in acquisitions,
  including the 750 million acquisition from
  Anadarko, and over 467 million in divestitures
  since January 2005

Wachovias Role
Asset Description Acquisition Rationale

• April 16, 2007 EnerVest announced that EVEP and
  certain institutional partnerships it manages
  have signed an agreement to acquire oil and
  natural gas properties in Central and East Texas
  from Anadarko Petroleum Corp. for 728 million
  (the Transaction).
• 1,297 active wells (892 operated)
• 82 PDP
• 52 gas, 21 crude and 27 NGLs
• R/P of 8.1 years
• Estimated productive life of over 40 years
• Implied value of 2.48/Mcfe and 7,029/MMCfe/d.
• EVEP expects the acquisition to be 45 accretive
  to distributable cash flow per unit in 2H 2007.
• The acquisition closed on June 27, 2007.

• Wachovia co-invested in the Transaction through
  its Reversionary Interest Partnership product.
• Wachovia will be entitled to its proportionate
  share of cash flows and will provide capital for
  its share of the necessary capital expenditures,
  thus reducing the developmental risk to EnerVest
  and EVEP.
• Wachovias initial interest in the partnership is
  reduced as certain IRR targets are met
• Through the Reversionary Interest Partnership and
  EnerVests institutional funds, EnerVest and
  Wachovia allowed EVEP to participate in an
  acquisition that would have been too large to
  conduct independently.
• Wachovias participation also allowed EnerVest to
  allocate its investment capital available to
  other ventures and reduce any investment
  concentration risks.

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Disclaimer
Wachovia Securities is the trade name for the
corporate and investment banking services of
Wachovia Corporation and its subsidiaries. Debt
and equity underwriting, trading, research and
sales, loan syndications agent services, and
corporate finance and MA advisory services are
offered by Wachovia Capital Markets, LLC, member
NASD, NYSE and SIPC. Mezzanine capital, private
equity, municipal securities trading and sales,
cash management, credit, international, leasing
and risk management products and services are
offered by various non-broker dealer subsidiaries
of Wachovia Corporation.
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