IPAA

1
IPAAs 12th AnnualPrivate Capital Conference

• Capital Markets Update
• Mezzanine Capital
• Paul Beck
• Macquarie Energy Capital

2
Mezzanine Historical Perspective

• Started in early/mid 80s with RIMCO and TCW
• Encap entered in the late 80s
• MG Trade Finance and Enron in early 90s
• Then the heyday in mid 90s through early 2000s
• 1b per annum market size
• Primary Players
• Aquila, Cambrian, Duke, Enron, Mirant, Shell, TCW
• Following Enron and Merchant Sector collapse, all
  but TCW ceased to exist

3
Traditional Mezzanine Structure

• Senior Secured Loan
• Always Project Focused
• High Interest Rate (10 vs. Prime _at_ 5)
• Equity Kicker
• Concurrent ORRI
• After Loan payout NPI or ORRI
• Control via Loan Covenants
• Returns of 20
• Exit Issues

4
Mezzanine Today

• Now a Plethora of Players
• AIG Financial Products Corp., ARC Financial,
  BlackRock Energy Capital, Cerberus/AbleCo.,
  Constellation Commodities Group, GasRock Capital,
  GE Capital, Goldman Sachs EP Capital, Guggenheim
  Partners, Laminar Direct Capital, Lehman Bros,
  Macquarie Bank Limited, Morgan Stanley, Municipal
  Energy Resources, NGP Capital Resources,
  Petrobridge Investment Management, Prospect
  Energy, Prudential Capital Corp, Royal Bank of
  Scotland, Sowood Capital Management, TCW, Wells
  Fargo Energy Capital
• But Market Size is Fraction of Before

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What is Mezzanine Today?

• Same as before, BUT
• Interest Rates relatively Lower
• Real Property Equity Kickers are lower,
  incorporate step-downs to bridge reserve estimate
  differences
• Warrants willing to place bet on Market
• Sophisticated Players using fewer, smarter
  Control Covenants
• Better Engineering at Lender less 3rd Party
  Dependence
• IRRs in the low teens for relatively higher risk
• New Structures with Seamless Exits

6
New Mezzanine Structures

• Senior Secured Project Loan
• Development Funding as Needed - Advance Line of
  Credit
• Cash Sweep for Debt Service
• Subordinated Debt
• Lower Cost of Capital by Blending Commercial Bank
  and Mezzanine Monies
• Structure to Enhance Interim Financial
  Flexibility
• High-grade non-PDP to Increase Bank Borrowing
  Base
• Structure to Facilitate Exit Strategy
• Nonconforming Corporate Loan
• Aggressive Borrowing Base Revolver
• Yield Enhancement via Warrants

7
New Mezzanine Structures

• Nonconforming Corporate Loan
• MEGA Structure
• Aggressive Borrowing Base Revolver
• PDP PW10 or greater
• Tiered Pricing Structure
• L2 to 7 depending on usage
• Yield Enhancement via Warrants
• Seamless Conforming Loan Transition
• Post Near-term Development

8
Energy Investment Risk/Reward
Private Equity and Industry
- 100
R I S K
Percent of Reserves Exploitation Based
MEGA Structure (Revolver)
Mezzanine Capital
VPPs and B Loans
Commercial Banks
- 0
Prime Rate
Low Teens
25
REWARD
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Mezzanine vs Equity Comparison

• Project - Offshore Acquisition in late 2002
• PDP PW10 - 10 million
• PDNP PW10 - 3.5 million
• PUD PW10 - 7 million
• Probable PW10 - 0.5 million
• Total PW10 - 21 million
• Purchase Price - 15 million
• Near-term Development Capex - 4 million
• Purchase Price 1/Mcfe

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Mezzanine vs Equity Comparison
Traditional Senior Mezzanine
Up-front Loan 9 million 13.5 million
Development Loan 0 4 million
Equity Upfront 6 million 1.5 million
Equity - Development 3 million 0
Interest 7 10
After-payout NPI 0 25
Sweep for Debt Service 50 90
RESULTS RESULTS RESULTS
Lender IRR 7.0 19.4
Lender Cash Flow 0.8 million 7.6 million
Client IRR 35.4 68.5
Client Cash Flow 12.1 million 5.3 million
Client CF PW10 7.3 million 3.5 million
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Mezzanine vs Equity Comparison
Client Risk Capital - 10m
Client Risk Capital - 1.5m
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Macquarie Group

• Overall
• Australian Based Financial Service Co.
• 7,000 Employees in 23 countries
• gtUS85b Assets under Management
• Energy Focus
• Macquarie Energy Capital
• Macquarie Energy Markets
• Price Risk Management
• Recent Acquisition of Cook Inlet
• Macquarie Securities (USA) Inc.
• Capital and MA Advisory

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Macquarie Energy Capital

• Business Unit affiliated with Metals Energy
  Capital Division
• World Leader in Natural Resource Investment
• Macquarie Bank - Energy Capital Provides a Wide
  Array of Debt and Equity Capital for the Upstream
  Oil and Gas Industry
• Conforming Senior Debt
• Senior B Loans
• Volumetric Production Payments (VPPs)
• Structured and Project Finance (Mezzanine)
• Subordinated Debt
• Corporate Restructurings and Recapitalization
• Convertible Debt
• Public and Private Equity Capital
• Deal Size - 10 million to 100 million
• Domestic and International

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Macquarie Energy Capital
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Macquarie Energy Capital
Texas Rep Office - Houston Paul Beck Brian Hughes Steve Shatto Jerry Thompson Ray Weems Tel [phone] London Andrew Sinclair Thomas Wagenhofer Tel [phone] Sydney Gavin Bradley Vanessa Lenthall Tel [phone]