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EST Dinner Meeting Monday, January 22, 2001

Confidential. EST Dinner Meeting Monday, January 22, 2001. The New Industry Model --The Book Club --. Welcome!. Steering Team Members ... Cliff Cook/Mike Gothard … Bill Esslinger for Gretchen Watkins … Andy Esterer … John Fitzgerald … Dave Kirshner (via phone)

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EST Dinner Meeting Monday, January 22, 2001

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  1. Confidential EST Dinner MeetingMonday, January 22, 2001 The New Industry Model --The Book Club --

  2. Welcome! • Steering Team Members ... Cliff Cook/Mike Gothard … Bill Esslinger for Gretchen Watkins … Andy Esterer … John Fitzgerald … Dave Kirshner (via phone) Mary Kole … Ray Kurkjy … Herb Whitney … Hal Zesch • Extended Steering Team Members … Randy Boelkes for Doug Gleason … Jeff McCall for Eric Schlueter … Tom Nichta … Marty Power… Bob Werner … Jim Wood for Don Hinderhofer … • Legal Counsel …David Ivey • Work Team Leader … Marty Stetzer ST meeting draftv2 deck 1-22-01

  3. This Evening’s EST Agenda 7:00 Mingle and Gather … Cocktail Hour 8:00 Eat Dinner 8:30 Welcome, Agenda, Etc. 8:45 What You Asked of Us Last Wednesday 9:00 Go Forward Options 10:00 Break 10:15 NewCo Equity Structure Primer 10:45 Governance 11:15 Next Steps • Phase 1 Done! Now What? Discussion • Wrap Up 11:45 Sweet Dreams! ST meeting draftv2 deck 1-22-01

  4. Evacuation Route • The Omni Hotel - Paluxy I, II, III • stairwell location ... ST meeting draftv2 deck 1-22-01

  5. Antitrust Guidelines … handout • Information exchange is necessary for the formation and operation of any joint venture. Exchange of confidential, competitively sensitive information among competitors, however, is particularly sensitive under the antitrust laws because such information exchange can facilitate price collusion or other anti-competitive coordinated conduct. • Exchange of confidential, competitively sensitive information should take place only when necessary to effectuate the formation of the Venture. Exchange the least sensitive information whenever possible. If competitively sensitive information must be exchanged, it should first be reviewed by antitrust counsel (either corporate or antitrust counsel). • “Confidential information” means all non-public information, the unauthorized disclosure of which could be detrimental to a party’s interests, and includes without limitation research, technical, manufacturing, cost, pricing, marketing, financial, personnel and other business information and plans, whether in oral, written, graphic or electronic form. • “Competitively sensitive information” means all confidential information that, if known by a party’s competitor would enhance the competitor’s ability to predict the party’s future price and output strategies, including the Party’s likely responses to price and output initiatives of the competitor. • Absent prior legal clearance and legal guidance, there should be no discussion or exchange of information among committee or team members regarding the following subjects concerning their respective Companies: • prices, price changes, price quotations, bids, or pricing policies; • any element of price, including freight, credit, warranties, and other terms and conditions of sale; • output, capacity, down time, inventory levels or costs (including production, inventory, distribution, or wage, salary or benefits cost); • the customers to whom a Company sells, or the territories in which a Company sells; • the amount that a Company pays for goods or services; future plans concerning the production, distribution, or marketing of particular products; discussion about the Venture’s future plans is acceptable. • Absent prior legal clearance and legal guidance, there should be no solicitation, acceptance, or exchange of documents or information relating to the subjects listed above. • An accurate record of each committee or team meeting should be prepared. ST meeting draftv2 deck 1-22-01

  6. What We Heard From You Last Week … The majority … • don’t want to form NewCo now. • question the $ for our next phase. • lack confidence in economics as presented. • are concerned about the exit strategy. ST meeting draftv2 deck 1-22-01

  7. What You Asked of Us Last Wednesday • Re-define/update Options, Focus on Option 3 • What will a delay “cost” us? • Introduce us to equity & governance • I need to see more than IRR & NPV! • Is there a residual (terminal) value to NewCo? • List of system vendors (delivered Thursday) • Individual company, fully loaded economics ST meeting draftv2 deck 1-22-01

  8. We Think the Burning Issues Are: These are the Critical Success Factors for tonight’s decision • Forming NewCo • Equity structure and exit strategy • Amount of next phase $ ST meeting draftv2 deck 1-22-01

  9. Framing Tonight’s Discussion Around Your Questions ... • Go Forward Options • Equity Structure • Governance ST meeting draftv2 deck 1-22-01

  10. Standards …Here’s the short story … • The Blue Box is the most promising opportunity to IMPLEMENT standards across our industry. • Standards are expensive when fully costed. • Without the Blue Box, the “value” of standards is dubious (we’re not likely to implement). • Standards work (order, nature of work, resources) differs depending on your belief in NewCo. ST meeting draftv2 deck 1-22-01

  11. Go Forward Options Re-worked ST meeting draftv2 deck 1-22-01

  12. Options Cost Summary ST meeting draftv2 deck 1-22-01

  13. Option 1Club To Company … NewCo Created Project Day 1 ST meeting draftv2 deck 1-22-01

  14. Option 3All The Answers + Standards … Go / No Go!! NewCo Created ST meeting draftv2 deck 1-22-01

  15. Cost Of Delay EstimateIn a nutshell, it’s a wash … ASSUMING YOU ARE WILLING TO COMMIT YOUR FT’S! ST meeting draftv2 deck 1-22-01

  16. You’ve Told Us You Favor Option 3 To Proceed We Recommend … • A Go/No Go decision on June 30, 2001 • A $115M additional contribution from each company (to get to June 30) • 2 FT’s (Tech and Standards) from March 1 through June 30 ST meeting draftv2 deck 1-22-01

  17. Silent Ballot • Think it over • Fill out orange card, give to Mary • Kirshner: call Mary on cell • Vote: • Option 1 • Option 3 • On your card, also tell us precisely what else your company needs to fund NewCo. • Do you want us to reveal results tonight? ST meeting draftv2 deck 1-22-01

  18. BREAK !

  19. Equity Structure PrimerThree Key Questions Drive Alternatives … 1. How to fairly split equity among current members? - Four alternatives - Guiding principles 2. When to initiate equity? 3. Thinking ahead: - Always manage total equity... to include future investors ST meeting draftv2 deck 1-22-01

  20. 1) Publicly available USA data - refining capacity, as a transaction indicator 2) Private data - individual net prize - actual transaction volume 3) Equal share 4) Investment at will Common Elements - cap ï Strive for distributed ownership - min ï ”Keep skin in the game” Four Alternatives for NewCo Member Equity Split ST meeting draftv2 deck 1-22-01

  21. Your Internal Data DrivesYour Preferred Equity Structure Company Company Company Total A B C Alternative 1) USA Refining Capacity 40% 40% 20% 100% Extreme Cases 2) Net Prize 40% 10% 50% 100% 3) Equal share 33.3` 33.3% 33.3% 100% ? ? ? 100% 4) Investment @ will Company A - Prize & transaction volume aligned Company B - Prize far below transaction volume Company C - Prize far above transaction volume ST meeting draftv2 deck 1-22-01

  22. Guiding Principles - Equity Split • Use KISS principle • Consider need to attract other (later) investors • Motivate NewCo management As “Angel” members move to equity: • Use economic rationale • Try to be fair & equitable • Develop transparent owners’ formula • Strive for distributed ownership to: • reinforce neutral perception • avoid anti-trust concerns • No “free riders” • It’s never easy ST meeting draftv2 deck 1-22-01

  23. When to Initiate NewCo Equity?Two Alternatives ... • Angel w/call option - • Option to fund future rounds, but not mandatory • Low risk portion next phase of work • Low value created: standards Recommend ð Equal split • Round 1 - (capex) • Highest risk: downside economics possible, IT delivery • Value created: Substance & intellectual property Round 1 funding requirement in July… triggers decision on NewCo equity split alternatives ST meeting draftv2 deck 1-22-01

  24. Current “angel” members Reserve equity for: 1) Other future investor-users - Other oils and traders 2) Purely financial investors 3) Strategic investors 4) NewCo management & employees Preliminary Recommendation % of Total ___% ___% ___% ___% ___% ___% Thinking AheadOther equity needs... Reserved for Industry Total 100% ST meeting draftv2 deck 1-22-01

  25. NewCo Governance Discussion & Recommendations ... This section covers: • The NewCo organization structure • Board and Membership Mix • Levels of Authority • Voting Power Considerations ST meeting draftv2 deck 1-22-01

  26. Proposed NewCoYou’ve seen this before … Owners Co. A Co. B Co. C Co. D Co. E Co. F Co.G Co. H Co. I Co. J Co. K Co. L Co. M Co. N Control NewCo Board Firewall & Control A E F H K M CEO CEO Intellectual Property Blue Box Application Proprietary Software Management Team Direction, Contracting, Contract Management,Marketing, Customer/Investor Relations,Legal and Financial Firewall & Control 3rd Party Providers ApplicationDevelopment &Maintenance InfrastructureDevelopment &Maintenance Accounting HRAdministration ST meeting draftv2 deck 1-22-01

  27. Board and Membership Mix • Board Composition Alternatives • Representative cash founders • Cross-section of companies • Other cash investors • Nominees of strategic investors • CEO • User Group Reps • Outside Directors • Recommend 1. Representative founders contributing cash 2. CEO 3. Consider User Groups & Outside Directors in future • Types of Potential Owners • Book Club Users • Non-Book Club Users • Financial Investors • Strategic Investors e.g. Technology Vendors • Recommend • Prioritize ownership 1. Industry Users 2. Financial Investors 3. Strategic Investors ST meeting draftv2 deck 1-22-01

  28. Owners Vote Required For: Additional capital funding Services for new markets IPO/Exit Change of board structure Board member election Recommend all of above Board Responsibility: Hire/fire NewCo CEO Approve annual business plan, capital & operating budgets Approve new services to existing markets Approve pricing structure or rebate revisions Dividend distribution Recommend all of above Levels of Authority ST meeting draftv2 deck 1-22-01

  29. Owner’s Voting Power One member = one vote One equity unit = one vote Capped voting power unrelated to amount of equity Recommend One equity unit = one vote with cap at 10% of voting power Board Voting Power One director = one vote One equity unit = one vote CEO = one vote Majority vs Supermajority Decisions Recommend 1. One director = one vote 2. No CEO vote 3. No supermajority requirement Voting Power Considerations ST meeting draftv2 deck 1-22-01

  30. January 23 & 24 Festivities Tuesday: Book Club Camp ... 777 Eldridge, 5th Floor »9:00 - 11:00 Group Q & A (either breakout or big group) » 11:30 - 12:30 Lunch » 12:30 - 2:30 Marty and Mary available (Sign up) Wednesday: Conoco Complex … Auditorium “Putting a ribbon on Phase 1” » 8:00 Breakfast » 8:30 - 2:00 AC Meeting ST meeting draftv2 deck 1-22-01

  31. Meeting Wrap-Up • This is our final Phase 1 ST meeting. • It’s been fun!! • Tentative next meeting: • February 28, 2001 • EST only? Full AC? • Meeting   ST meeting draftv2 deck 1-22-01

  32. SWEET DREAMS! ST meeting draftv2 deck 1-22-01

  33. APPENDIX ST meeting draftv2 deck 1-22-01

  34. To Be Determined by 8/01/01 Appendix A: Newco Fundingand “What’s In It For Me” ... ST meeting draftv2 deck 1-22-01

  35. Appendix B: Base EconomicsThe Economics, using 7 year life** ... Prize = $118 MM/YR IT Capex Base Case $65MM Upside Case* $85MM Downside Case* $45MM Investor User IRR 35% 54% 23% NPV $65MM $93MM $38MM NewCo IRR 20% 31% 12% NPV $25MM $43MM $6MM Funding $77MM $54MM $99MM ** No interface costs, system prize, FTE contribution or residual value. ST meeting draftv2 deck 1-22-01

  36. Appendix C: Residual Value SensitivityAnother Case ... Base Case** Prize = $118MM/Yr. With residual value, required prize drops to $80MM/Yr. Investor User IRR 35% 27% $54MM NPV $65MM NewCo IRR 20% 17% $25MM NPV $25MM ** No interface costs, system prize, FTE contribution or residual value. ST meeting draftv2 deck 1-22-01

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