Pipeline Financing Discussion

1. N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Pipeline Financing Discussion Wyoming Natural Gas Pipeline Authority August 25, 2003

2. N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Discussion Topics • Economics Drive Project Viability • What Does a Basic Transaction Structure Look Like? • Various Levels of State Involvement – From Facilitator to Capacity Owner • Key Credit Factors, Regardless of Structure • Case Study: Alliance Pipeline

3. N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Project viability will be driven by gas price differentials, capital costs, and interest rates Treasury Yields(b) (b) Source: Bloomberg and Goldman Sachs Global Economic Forecast.

4.  Partners N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Basic Pipeline Transaction Framework ~ 30%$ Equity Equity Returns  Shippers Transportation Capacity Progress Payments Wyoming Natural Gas Pipeline Company, L.L.C. ConstructionConsortium Producers Others   Ship-or-Pay Contracts Project Design &Construction  Loan Proceeds Loan Payments WNGPA(or designee issuer)  $ Debt Service  Investors

5. N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Transaction Framework  Partners – Most likely Pipeline Companies and Producers in Wyoming fields. The Partners provide initial equity and take risks and benefits of ownership. Not allowed for WNGPA. Shippers – Any entity that makes a long-term commitment to the Pipeline via Ship-or-Pay contracts. Each Partner will be a primary shipper. Other shippers will include gas companies/marketers who wish to have reserved transportation capacity for gas they may purchase from producers. WNGPA (on behalf of State) could be a shipper. Ship-or-Pay Contracts – Long-term contract requiring payment regardless of whether gas is shipped. Key underlying security for Pipeline debt. Wyoming Natural Gas Pipeline Authority – Serves as a passive conduit issuer. Will issue bonds on behalf of the project and lend proceeds to project company in consideration for entering into a loan agreement which obligates project company to make loan payments in amount equal to debt service on the bonds. Wyoming Natural Gas Pipeline Company LLC – The project company formed by the equity partners. Company would have primary responsibility to develop and operate the project. Construction Consortium – Group of engineering, design, and construction firms engaged via contract(s) to develop the physical asset. Investors – Secured by project revenues and/or assets. State can be investor.      

6. N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt What techniques can Wyoming use to add value to Pipeline development? • Financial involvement and support • Contractual/physical involvement and support

7. N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt What financial techniques can Wyoming use to add value to Pipeline development? High State Involvement Low Technique

8. N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Lending the State’s Conduit Issuance Ability to the Credit • The State, through WNGPA, can act as the nominal issuer of the bonds. • Without other tangible credit support does not change credit. • May open marketing channels to “taxable municipal investors.”

9. N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Conduit Financing: Alaska Pipeline Terminal Revenue Bonds

10. O&M State asInvestor Bond MarketInvestors Equity N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Investing in Senior Securities of the Project Benefit: Core investor, sponsorship Revenues

11. Revenues O&M Bond MarketSenior Bondholders State asJunior Bondholder Equity N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Investing in Junior Securities of the Project Benefit: Enhance position of senior securities – higher rating, higher expected default recovery

12. N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Gaining Authority for Moral Obligation Bonds Revenues StateLegislature O&M Bondholders Reserve Equity

13. N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Moral Obligations Are Commonly Used In Resource Development Projects Moral Obligation of the State The Act requires that the Chairman of the Authority, at least annually, but not later than January 2 of each year, certify in writing to the Governor and the State Legislature the sum, if any, required to restore the Capital Reserve Fund to the Capital Reserve Requirement. The Bond Resolution requires the Chairman to make such certification whenever the Trustee transfers funds from the Capital Reserve Fund to pay principal of or interest on the Bonds. The State Legislature may, but is not obligated to, appropriate to the Authority the sum certified by the Chairman of the Authority. Under the Alaska Constitution, appropriations passed by the State Legislature are subject to line item veto by the Governor. The Authority required to deposit in the Capital Reserve Fund any amounts so appropriated during the then current Fiscal Year.

14. N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Operating Support Techniques High State Involvement Low Technique

15. N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Acting as Aggregator for Smaller Producers MajorProducersBBB 15 Years300 mcfd ChicagoLDCsA 15 Years300 mcfd Pipeline Co. 15 Years300 mcfd X 5 Years50 mcfd 10 Years100 mcfd WNGPA Y 8 Years75 mcfd Z

16. State ofWyoming WNGPA Bondholders N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Acting as Capacity Owner for RIK Gas 750 mcfdContract $ ConstructorsorPipelines RIKGas Pipeline $ D/S

17. N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Construction Risk Mitigation Usual Standard forProject Finance Alliance Pipeline Wyoming Gas Pipeline • 100% turnkey construct, fixed price • Performance and delay liquidated damages • Stone & Webster opined that a full fixed price EPC contract not feasible due to size and complexity • 87% of expenses were fixed or capped • If remaining 13% costs rose, sponsor equity returns dropped; some pass through to users, some contractor absorption • Stone & Webster said 5% contingency fund enough; 6.2% used • 100% turnkey should be achievable • If not, need to maximize fixed price procurement and minimize construction risks • Bond holders will demand that other parties (producers, shippers or State) bear bulk of construction risk

18. N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Operating Risk Mitigation • Investors looking for high degree of certainty that the following will be covered – Debt Service, O&M, allowances for future capital and maintenance, and equity returns Alliance Example Wyoming Pipeline • 65% of capacity constructed for investment grade parties • 1-year LOCs for lower rated shippers • Transportation rates step down sharply at 15 years so that pipeline looks very economic once 15-year contracts are over • In Alliance, which was privately owned, sponsor group contributed cash equity on which it earned an  11% return • Firm transportation ship-or-pay contracts from investment grade parties (approximately sufficient to service debt) • Credit support for non-investment grade parties. WNGPA could provide. • Sufficient debt amortized during term of ship-or-pay contracts • Adequate quasi-equity contribution – combination of shipper prepayments and State investment

19. N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Alliance Pipeline—Example of Project Financed Pipeline

20. N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Alliance Pipeline Structure Sponsors/Equity Owners ConstructionConsortium • Fort Chicago Energy Partners • West Coast Energy Inc. • Enbridge Inc. • Williams Companies • El Paso Corp. Equity Returns Construction Contract Physical Completion ProgressPayments Alliance Pipeline Companies (US and Canada) Revenue Trustee DebtService Shippers(a) Proceeds Ship or Pay $ • 35 Companies including producers, pipeline companies, aggregations, end users • (a) Includes Sponsors. Investors Pipeline Capacity

21. N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Ship-or-Pay Contracts from Variety of Shipper Credits Example from Alliance Pipeline: “All of the 1.325 b.c.f.d. of firm transportation capacity of the System has been contracted by the shippers. . . .” • Contracts require payment regardless of pipeline use • 72.5% of shippers have investment grade rating • 14.9% were not investment grade, but accepted by lenders • 12.6% were required to post letters of credit • Contracts were 15 years in length

22. N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt Flexibility in Evolving Group of Shippers 1999(First $300 MnBond Issue) 2001(Second CapitalMarkets Issue 1998(Initial Rating) EquitySponsors 18 equity sponsors, almost all upstream Canadian oil and gas companies. Six equity sponsors. Five are investment grade companies that are themselves, or are associated with large energy companies. One (Fort Chicago Energy Partners) is not, but provided LOCs. Five Sponsors. Williams bought PanEnergy share. El Paso was successor to Coastal, after a merger. Shippers 60% of ship-or-pay contracts were with the 18 companies who were also equity sponsors. By time of first financing only 39% was contracted to parties who are equity sponsors or their affiliates. By second financing down to 36% contracted to equity sponsors or their affiliates.