Presentation to:
The 10th African Oil & Gas Trade and Finance
Conference & Exhibition
Financing Upstream and Downstream Assets
April 4, 2006
The 10th African Oil & Gas Trade and Finance Conference
Financing Upstream and Downstream Assets
Table of Contents
1. Introduction
1
2. Financing Upstream Assets
3
3. Financing Downstream Assets
10
4. Structural Enhancements
15
5. Rating Agency Considerations
17
6. Appendices
19
Case Study: Gazprom
19
Case Study: EGPC
23
Merrill Lynch Commodities Credentials
29
Merrill Lynch Commodities Capabilities
32
Introduction
Introduction
Financing of Commodity Related Assets

A number of companies in the energy industry have used oil, coal, gas and other commodity derivatives and
contracted revenues to subsidise the cost of their borrowing. This typically involves monetising long term
contracted sales to ensure lower credit risk and taking advantage of the natural long position that energy producers
have in the underlying commodity to monetise this commodity position

By embedding a strategic hedge into the financing, commodity producers are able to link debt repayment
obligations to discrete project economics or to the more generalised returns of the underlying business

This is particularly attractive at times such as this year, when the underlying commodity prices are high by
historical standards and operating in contango

It is straightforward when commodity products are an exchange-traded commodity with a transparent pricing
mechanism

In less liquid markets, alternatives may be found if the pricing of the underlying products are indexed to more
liquid commodity products or markets

Various commodity producers have also used financing techniques to raise debt on a limited or non-recourse basis
as a means to maximise the proceeds in an asset disposal situation or to lower certain risks such as political and
currency
1
Introduction
Key Considerations In Executing Structured Transactions

Legal jurisdiction of offtakers

Local currency laws

Contract for offtake arrangements (EFET, specific contracts)

Negative pledge issues

Tax issues

Hedging requirements

Legal/security arrangements

Political risk

Ratings

Feasibility of more sophisticated credit derivative deals
2
Financing Upstream Assets
Financing Upstream Assets
Reserve Based Financing—Summary
Description

Transaction Structure
Reserve Based Financing is amortizing non-recourse debt that
is repaid by the cash flows generated by reserves:


May have borrowing base feature to fund future
development (could be divided into a senior and
subordinate tranches)
Typically requires hedging program covering life of loan

Waterfall provisions to ensure cash flows to equity are
distributed only after servicing of debt

Secured by pledge of shares of in operating companies and
related production licenses and export contracts

OilCo
Shareholders
Cash flow
Restrictions
(covenants to
be met)
Proceeds
Lenders/
Investors
OilCo
Interest &
Principal
Security in Shares of
subs and upstream
guarantees
Structure designed to allow lender to gain control of the
licences and assets in a default scenario and sell fields or
appoint an operator for recovery
Advantages / Applicability

Ease of execution

Potential for borrowing base or fixed term structure

May be applied to single field or entire portfolio

Generally applicable to most jurisdictions – large emerging
markets bank investor universe

Market capacity available in syndicated loans and high yield
bonds
License Holder
License Holder
Panther
Fields
Fields
3
Financing Upstream Assets
Reserve Based Financing—Market Analysis
Syndicated Loan Market

Focus on net cash flows available to service debt
(CFADS) after paying all opex, capex, taxes, and
royalties:



Tenor/amortization structured as follows:


Tenor up to 5 years
Minimum annual debt service coverage ratio
(DSCR) targets of 1.75x-2.00x
Minimum Reserve Tail of 25-30%
High yield investors focus on 1P/P90 but give
additional credit to development reserves:

Generally lend up to 65-70% against EV over life of
financing



Net cash flows based on 1P/P90 reserves and
production only
– Mandatory hedging program yield EV

High Yield Bond Market
Prefer to finance “going concern” business with
strong growth prospects
Key credit metrics drive ratings:

Net Debt to EBITDA

Net Debt to 1P reserves

Reserve Life

High yield issuers typically require active hedging
programs

Maturities of 5-7 years

Senior unsecured
Senior secured
Sovereign risk must be layered into credit assessment for both markets and may impact market capacity
4
Financing Upstream Assets
Prepaid Forward/Export Securitisation Structure
Description
1)
A Special Purpose Vehicle (SPV) created for purposes of the
transaction issues Notes to Lenders/Investors in return for
Proceeds from financing
2)
Offtaker uses Proceeds to make a Prepayment to OilCogainst
future deliveries of Product
3)
Offtaker takes delivery of an agreed volume of Product
(potentially from Designated Fields) for which it pays into
Escrow Account held for the benefit of Lenders/Investors
4)
Hedge counterparty makes payments to SPV under hedging
agreements (if any)
5)
Investors/Lenders are paid Debt Service from the Escrow
Account
Advantages/Applicability

Structure designed to achieve high rating/credit quality
above sovereign ceiling by being secured by oil export
contract
 Can include a AA or AAA surety bond from monoline
insurance companies enabling the debt to be priced at
lower levels

Should be lowest cost funding source as generally
structured to achieve investment-grade ratings

Commodity offtake and hedge support rating and ensure
maximum leverage against dedicated oil export volumes
Transaction Structure
OilCo
Product
(3)
Onshore
Prepayment
(2)
Designated
Fields
Product
(2)
Offshore
Hedge
Payments
(4)
Hedge
Counterparty
SPV
Product
(3)
Proceeds
(1)
Notes
(1)
Investors /
Lenders
Offtaker
Payment for
Product
(3)
Debt Service
(5)
SPV Escrow
Account
5
Financing Upstream Assets
Prepaid Forward/Export Securitisation Case Study – EGPC
Terms & Conditions
Transaction Structure
EGPC
Summary Term Sheet
Issuer:
Petroleum Export Limited (“PEL”)
Special Purpose Company registered in the Cayman Islands
Offering Type:
Rule 144A/Reg. S
Bookrunners:
Merrill Lynch, Morgan Stanley, BNP Paribas
Coupon
Average
Life
Final
Maturity
MBIA
$400mm
4.623%
3.6 years
15 June 2011
XL Capital
$250mm
4.633%
2.8 years
15 June 2010
$904mm
5.265%
3.6 years
15 June 2011
Ratings
Insurer

A1
Aaa/AAA

A2
Aaa/AAA

A3
Baa1/BBB –
Payment Frequency:
Quarterly starting 15 December 2005 (Interest only period until
15 March 2006)
Ranking:
A1, A2 and A3 notes rank pari passu
Use of Proceeds:
Fund Reserve Account, Pay Transaction costs, and Pay EGPC
Security:
Includes all Material Agreements and Material Accounts
Reserve Account:
Equal to 3 months principal, interest, and insurance premium
payments
Covenant Package:
including
Offshore
Forward Sale
Agreement
1
2
Offtake Agreement
Offtaker
3
Hedge Agreement
Hedge
Counterparty
PEL
Issuance
Amount
Class
Egypt

Limitation on additional forward sale transactions

Retention events if exports or production fall below certain
levels
Indenture
4
Noteholders
Transaction Highlights

Notes are backed by Forward Sale of crude oil and naphtha
to issuer, which is then contracted to be sold via the Offtake
Agreement subject to a floor price in the Hedge Agreement

Transaction raised a total of $1.554 billion for EGPC at
weighted average cost of borrowing of approximately 5.00%

Issuance was first the SEN by Egyptian issuer and the largest
international issuance by Egyptian corporate
6
Financing Upstream Assets
Prepaid Forward Sale Case Study - YPF
Description YPF S.A.












From 1995 to 1998, YPF executed two successive forward sales
for $400m and $350m respectively (a total value of $750m)
In 1995 Oil co. SPV raised a total of $400m from seven year
amortizing notes rated BBB, four notches above Argentina’s
VPP
foreign currency ceiling
Deliveries
Under the sale, YPF sold a total of approximately 26.5 million
barrels over a period of seven years
YPF entered into a fixed price forward hedge with Oil Co.
Both price of commodity and interest rate were fixed
Between 1995 and 1998, YPF S.A. (based in Argentina)
executed accessible VPPs with Oil Co. a special purpose
company based off-shore Argentina. The total consideration
for the VPPs was $750m
Oil co. funded the purchase of the sale by way of amortising
bonds placed in the international capital markets. The bonds
were rated BBB, three to four notches above the foreign
currency rating of Argentina
Under the terms of the 1995 Sale, YPF sold approximately 26.5
1
million barrels of crude oil at a fixed price, over a period of 7
years
2
The Sale was treated as debt for tax purposes and deferred
revenue (non debt) for accounting purposes
3
YPF’s all in cost for the transaction was approximately 150bps
lower than its unsecured shorter term cost of borrowing
4
YPF registered an immediate reduction in its reserves
In 2001, Merrill Lynch structured a similar transaction between
Repsol S.A. and its subsidiary YPF Repsol for a consideration
of $50m
Structure
YPF
4
$400m
3
1
VPP
Contract
Take or Pay
2
Oil Co
Cash
Proceeds
3
3
Contracts
Notes
Issue
AAA Oil Trader
2
Pledge of
Contracts
4
Production
Payments
US Investors
YPF sells forward to oil co, based on reserves in Argentina
Oil co enters take-or-pay contract with highly rated oil trader and pledges contracts to
investors
SPV funds purchase of forward purchase via notes issues and pays proceeds to YPF
Oil co meets desk service from proceed of sale of oil deliveries to oil trader
7
Financing Upstream Assets
VPP Case Study - Brasoil
Description











In 1996, Brasoil, the international arm of Petrobras executed a
VPP with Petroleum Funding Corp a special purpose company
based off-shore Brazil
Under the VPP, Brasoil sold $123m worth of production from
designated properties in Angola and Colombia
The VPP raised $90m in fixed seven year amortising notes
rated BBB- in the international capital markets, three notches
above Brazil’s foreign currency rating
The VPP was a “fixed value” contract where commodity price
was assumed by Brazil and production/reserve risk was
assumed by investors
Under the terms of the VPP, Brasoil sold approximately $123
million barrels of oil equivalent from properties in Colombia
and Angola
Which the terms of the VPP, Brasoil could deliver oil from
back-up fields in Brazil
Brasoil’s consideration was $90m, which was funded from
proceeds of a 7-year amortising note issued in the international
capital markets by PFC
The notes were rated BBB-, four notches above the foreign
currency rating of Brazil
Brasoil executed a “fixed value” VPP pursuant to which it
assumed price risk and PFC assumed production and reserve
risk
Brasoil’s all-in-cost for the transaction was approximately
175bps lower than its corporate cost of debt servicing
Brasoil registered a reduction in reserves which was
recognised over time
Structure
Angola Reserves
Colombian Reserves
Brasoil
VPP
Deliveries
4
$90m
3
1
VPP
Contract
Brazil Reserves
Take or Pay
2
PFC
Cash
Proceeds
3
3
Note
Issue
Contracts
AAA Oil Trader
2
Pledge of
VPP and
T.O.P
4
Production
Payments
US Investors
1
2
Brasoil enters VPP contracts with SPV “Petroleum Funding Corp”, based on reserves
in Angola, Colombia, and Brazil
SPV enters back-to-back take-or-pay contracts with highly rated oil trader and pledges
contracts to investors
3
SPV funds purchase of VPP via anotes issue and pays Brasoil upfront
4
SPV meets debt service from sale of VPP deliveries by oil trader
8
Financing Upstream Assets
Examples of Public Style Transactions
Pemex Finance
PDVSA Finance
Petrobras Finance
YPF S.A.
Gazprom
Mexico
Venezuela
Brazil
Argentina
Russia
BB/B2/BB
BB/Ba2
BB-/Ba3
BB/B2/BB
BBB-/Ba1
Notional
$3.5 bn
$1.9 bn
$550 mm
$1.2 bn
$1.25bn
Tranches
Multiple
Multiple
Multiple
Multiple
Multiple
Maturity
Up to 17 years
Up to 15 years
Up to 12 years
Up to 10 years
Up to 15 years
Amortizes
Amortizes
Amortizes
Amortizes
Amortizes
Sale of Receivables
Sale of Receivables
Sale of Receivables
Structured Export
Notes
Structural Export
Notes
Export Receivables
from Multiple Short
Term Contracts
Export Receivables
from Multiple Short
Term Contracts
Export Receivables
from Multiple Short
Term Contracts
Export Receivables
from 1 Long Term
Contract
Export Receivables
from 2 Long Term
Contracts
Baa1/BBB
Baa1/BBB-
Baa2/BBB-
Baa1/BBB
BBB-
Sovereign
Sovereign Rating
(at issuance)
Repayment
Structure
Security
Transaction Rating
9
Financing Downstream Assets
Financing Downstream Assets
Overview

Merrill Lynch has been an active advisor in the most recent sales of downstream assets, from which we have
determined that:


Spending on downstream assets always carries the risk that refining margins/gas prices will decline below
assumptions used in the initial investment decision
Given price levels of recent asset sales, increasingly large amounts of capital are required to fund
acquisitions, upgrades, or new construction of downstream assets

Downstream producers can use risk management techniques to “lock in” margins and reduce volatility

Strategic commodity hedging may be embedded in financings to reduce volatility, improve pricing, and increase
debt capacity
10
Financing Downstream Assets
Using Hedging To Finance Refinery Capex

Investments in refining assets always carry the risk that refining margins will decline below the assumptions used in
the investment case

Refinery capital expenditures have a lag time of 3-5 years before production can come on stream

Given the uncertainty around new build capacity in the refining sector and prevailing refining margins at the time
of completion, it is prudent to use financing techniques that align the economics of upgrade programs with the cost
of financing

Commodity Linked Financing can help manage refining volatility and therefore:

“Lock in” a portion of the value spent on upgrading assets

Lower cost of funding

Reduce volatility in the overall economics of the refining assets

Benefit from improved accounting treatment for financial instruments with embedded derivatives (IFRS does
not require mark to market for derivatives embedded within a financing)

Merrill Lynch can create highly customised solutions to fit a refinery’s specific operating and financial objectives

Merrill Lynch can act as a credit enhancer to the financing by way of its physical and financial commodities
capabilities
11
Financing Downstream Assets
Refining Margin Linked Bonds
Refining Margin Linked Bond

Illustration
Refinery raises debt in market through issuance of a
bond linked to refining margins:

Oil
Supplier
Investors have two options with the refining margin
indexed bond:
Oil Cash Payments
– Investor receives refining margin participation
– Investor receives standard coupons by
swapping the refining margin risk with ML


Bond has either a fixed or floating coupon and either an
amortisation schedule or bullet repayment, with a
variety of potential refining margin indexation features
Refinery continues to buy crude and sell refined
products in the market at spot

Refinery receives dividends from refinery that are
proportional to the refining margin economics

Refinery has achieved a refining margin hedge indirectly
via the refining margin bond to secure minimum
dividend performance on the refinery asset
Crude Oil
Refined
Products
Export
Buyers
Refinery
Product
Cash
Payments
Refining Margin
Linked Bond
Issuance
Bond Investors
Regular Bond
Refining Margin
Hedge
Merrill
Lynch
Bond Investors
Refinery Bond
12
Financing Downstream Assets
Margin / Spread Indexed Bonds
Description

Borrower issues USD debt for which repayment will be linked
to its refining margin:


Borrower pays more when margins are higher and less
when margins are lower
Debt can be either structured as:


Bullet repayment = Coupon linked to Margin, in which the
Coupon owed fluctuates as Margins rise/fall
Amortizing = Principal repayment linked to Margin, in
which the Coupon stays flat but Amortization fluctuates
as Margins rise/fall
Illustration
Coupon Linked to Margin
Spread to
LIBOR (bppa)
Refinery Margin
($/MT)
100
200
80
150
60
100
40
50
20
0
0
30.0
37.5
45.0
52.5
60.0
67.5
75.0
82.5
90.0
Margin ($/MT)
Margin
Margin Indexed Spread
Standard Spread
Benefits



Repayment is closely linked to ability to pay, which improves
the overall credit profile of the borrower
Principal
Repayment
Principal Linked to Margin
Refinery Margin
($/MT)
$7,500,000
100
Interest rate will be lower than current borrowing as investor
has opportunity to benefit from increased margin levels
$6,000,000
80
$4,500,000
60
If principal indexed to margin, more substantive hedge on
production and downside exposure is capped
$3,000,000
40
$1,500,000
20
$0

Refinery sells up-front a portion of production margin
0
30.0
37.5
45.0
52.5 60.0 67.5
Margin ($/MT)
Margin
Margin Repayment
75.0
82.5
90.0
Standard Repayment
13
Financing Downstream Assets
Project Finance Considerations
The success of the financing will depend on the following factors

Credit Risk:



Security: What security will be available for the financing? What are the legal parameters in the relevant
jurisdiction for perfection over that security?
Recourse v. Non-Recourse: Will lenders/investors have access to the parent company’s balance sheet for the
transaction or only to the project company?
Completion Risk:

Investors/lenders are unlikely to be comfortable with completion risk:
– Turnkey contract from creditworthy contractor
– Guarantee from creditworthy sponsor


Sovereign Risk:

Many project finance transactions have included some measure of sovereign risk

Political Risk Insurance (PRI) may be used for projects in high-risk countries
Market Risk:


Traditional project finance lenders are not always willing to take market risk
New investors (i.e., infrastructure funds, hedge funds, project bond investors) have emerged that are more
willing to take market risk for appropriate rates of return
14
Structural Enhancements
Structural Enhancements
Third Party Guarantees
Surety Bond

It may be possible to incorporate a double-A or triple-A surety bond from Monoline insurance companies (the
“Insurer”) enabling the debt to be priced at lower levels

In such a structure, the Insurer would guarantee the timely payment of principal and interest to investors and
would assume the performance risk of the exporter, the credit risk of the buyer and the sovereign interference risk
Guarantee
Insurer
Surety Bond
Agreement
Designated
Customer(s)
US$
US$ Debt Service
Trust
Investors
Exporter
15
Structural Enhancements
Contractual Agreements
Back-up Buyer/Supplier

The incorporation of a long-term purchase and/or supply contract with or a highly rated third party serves as a structural enhancement to mitigate
the credit risk of the Export Customers and non-performance by the Exporter
$ Payments for Oil
Collection Account
$ debt service
Investors
Cayman Islands
Trust
$ Payments
for Oil
Third Party
(the "Back-up Buyer/
Supplier")
Export Customers
U.S.$
Notes
Exports
Offshore
Russia
Back-up
Purchase/
Supply Contract
Exporter
(The "Issuer")
16
Rating Agency Considerations
Rating Agency Considerations
Ratings Methodology for Structured Financings
Key Credit Criteria
Considerations
Mitigants

Exporter operating performance


Established export markets (Designated Buyers)
High quality Buyer
Supply Risk

Exporter track record
Price Risk

Overcollateralization will help mitigate $ risk

Sovereign (e.g. product re-direction) risk
mitigated by buyer consent agreements
Growing importance of certain exports to
emerging market economies
Credit Risk
Payment Risk
Sovereign Risk

17
Rating Agency Considerations
Piercing the Sovereign Ceiling
The Concept
Onshore
Offshore
Local
Currency
Transaction
Rating
Foreign
Currency
AAA
Issuer

Good track record

Decent credit
Export contract

Long-term

Binding and
enforceable

Take and/or pay
Investor
Debt service
Trust
U.S. $ payments
Foreign
buyer(s)
• Strong credit(s)
• Good name(s)
AA
A
BBB
BB
B
CCC
CC
C
18
Appendices
Case Study: Gazprom
Case Study: Gazprom
Transaction Overview
1
Gas Sales Contracts
2
USD Payments under Gas
Sales Contracts going into
Collections Account
3
4
5
Flow of Funds(1)
Noteholders
(Trustee)
Provided there is no
Holding Event and the
minimum Debt Service
Reserve balance is met,
cash is distributed to
Gazprom from the
Collections Account
5
2
Payment for
Gas Supply
Debt Service
on the Notes
Gazprom
International S.A.
Luxembourg
Gazprom makes debt
service payment under
the Loan Agreement
Gazprom International
S.A. uses payments under
the Loan to make
principal and interest
payments on Notes
Designated Buyers
Distribution of
proceeds under the
event of default
4
Fiduciary
(Collection Account,
Reserve Account)
3
Distribution of proceeds
from Gas Supply
Debt Service Under
the Loan
Offshore
Russia
1
Gazprom/
Gazexport
Payment in USD
Gas
Supply
Natural Gas Flow
____________________
(1) For a detailed description see Appendix A
19
Case Study: Gazprom
High Quality and Broad Distribution (Europe and Asia)
Breakdown by Investor Type
Breakdown by Investor Location
Allocation
Insurance
2.5%
Allocation
Austria
1.6%
Other
10.2%
Bank
33.4%
Denmark France
4.8%
1.4% Germany
5.5%
Other
22.6%
Greece
2.6%
USA
2.6%
Inv. Mgr.
28.3%
House
Account
6.9%
Hedge
Fund
17.1%
Broker/
Dealer
1.2%
CorporCorporate
ate
0.5%
Hong
Kong
3.6%
Italy
9.1%
Russian
Fed.
1.7%
UK
37.9%
Switz.
4.7%
NetherNetherlands
lands
1.9%
Concentration Analysis
Allocation
$m
250
42.3
62.6
78.2
86.8
200
100.0
% of Total
150
100
180.0
50
86.0
67.0
0
Top 10
11-25
26-50
36.0
56.0
51-75
Over 75
20
Case Study: Gazprom
High Quality and Broad Distribution (U.S.)
Breakdown by Investor Type
Breakdown by Investor Location
Allocation
Allocation
Other
19.4%
Research
Firm
0.5%
EEU
Countries
9.5%
Switz.
1.5%
UK
6.3%
Invest.
Adv.
44.8%
Bank &
Trust
12.2%
Corporati
Hedge
Corporate
on
Fund
7.9%
8.3%
Russian
Fed.
0.1%
US
82.6%
Ins. Co.
7.1%
Concentration Analysis
Allocation
$m
400
32.9
59.5
82.8
94.3
100.0
300
% of Total
200
287.0
100
232.0
203.0
100.0
0
Top 10
11-25
26-50
51-75
50.0
Over 75
21
Case Study: Gazprom
Reduced Borrowing Costs
Trading Levels Over Swaps(1)
104



On the US$1.25bn size
Gazprom saves circa
US$15m in interest
cost per annum
Gazprom’s spreads
have tightened
significantly since the
SEN was issued
Access to the
investment grade
market has materially
improved Gazprom’s
borrowing costs
Trading Levels vs.
Benchmark(1)
230
115
220
102
210
105
100
200
98
95
190
96
Jul-04
Aug-04
Sep-04
Price
180
Sep-04
85
Jul-04
Spread over Swaps
Aug-04
SEN
Aug-04
Sep-04
Gazprom 2013
Sep-04
Russia 2030
Gazprom Bond Yields(2)
YTM
10.000
9.000
Delta
Unsecured
vs Secured
22 July 2004
170bbs
10 Oct 2004
60bps
8.000
170 bps
60 bps
7.000
6.000
5.000
Jan-04
Feb-04
Mar-04
Apr-04
Jun-04
Jul-04
____________________
Gazprom Unsecured
Gazprom SEN
(1) Source: Bloomberg
(2) Gazprom 2003 9 5/8% Matures 1 March 2013, Gazprom SEN, Russian Sovereign Debt 1996 3.0% Matures 14 May 2011
Aug-04
Oct-04
Russian Sovereign
22
Case Study: EGPC
Case Study: EGPC
Transaction Summary
Summary Term Sheet
Issuer
Petroleum Export Limited (“PEL”)
Special Purpose Company registered in the Cayman Islands
Offering Type
Rule 144A/Reg. S
Expected Ratings
(Moody’s/S&P)
Baa1/BBB
Class
Expected Rating
(Moody’s/S&P)
Expected Size
Expected
Average Life
Expected
Final Maturity
A1
Aaa/AAA
MBIA
$500mm
3.6 years
15 June 2011
A2
Aaa/AAA
XL Capital
$250mm
2.8 years
15 June 2010
A3
Baa1/BBB
–
$800mm
3.6 years
15 June 2011
Insurer
Payment Frequency
Quarterly starting 15 December 2005 (Interest only period until 15 March 2006)
Ranking
A1, A2 and A3 notes rank pari passu
Use of Proceeds
Fund Reserve Account, Pay Transaction costs and Pay EGPC
Security
Includes all Material Agreements and Material Accounts
Reserve Account
Equal to 3 months principal, interest and insurance premium payments
Covenant Package including

Limitation on additional forward sale transactions

Retention events if exports or production fall below certain levels
23
Case Study: EGPC
Pre-Paid Forward: Contractual Agreements
Contractual Agreements

EGPC sells forward to PEL under the Forward Sale
Agreement (FSA) and commits to deliver fixed
volumes of crude and naphtha
EGPC
Egypt

PEL and Off-taker enter into an Offtake Agreement
(“OTA”) where Off-taker commits to buy at market
price the volumes of crude and naphtha delivered
by EGPC to PEL


2
Off-taker is highly rated entity (Aa3/A+)
PEL enters into a Hedge Agreement (“HA”) with
Off-taker providing a floor price for the crude and
naphtha


1
Forward Sale
Agreement
Offtake
Agreement
Off-take
Hedge
Agreement
Hedge
PEL
Hedge payments are guaranteed by Off-taker
(Aa3/A+)
Indenture governing the issuance of Notes
Offshore
3
4
Indenture
Noteholders
24
Case Study: EGPC
Pre-Paid Forward Sale: Flow of Funds
Flow of Funds





PEL issues notes to investors and uses proceeds to
pay EGPC for the FSA
EGPC delivers fixed volumes of crude and naphtha
to PEL on a monthly basis
Off-taker purchases crude and naphtha from PEL at
market prices
MSCG makes hedge payments if crude or naphtha
market prices fall below the floor prices
1
Up-front
Payment
6
Price
Balance
Crude &
Naphtha
Cash flow from OTA and HA provide
a min 1.11x DSCR
After payment of all obligations, PEL pays excess
cash, if any, to EGPC
4
2
Hedge
Payment
Fixed
Volume
PEL
PEL uses payments received from OTA and HA to
pay debt service on a quarterly basis


EGPC
1
Proceeds
from
Notes
Debt
Service
3
Off-take
Market
Price
5
Noteholders
Cash $
Physical bbl/mt
25
Case Study: EGPC
FSA: Core Commercial Agreement
Forward Sale Agreement
Description
EGPC agrees to sell and deliver to PEL a fixed amount of barrels of EGPC crude and tonnes of Naphtha for the life of
the financing
EGPC has the option of delivering any of 7 types of exportable crudes
Term
April 2011
Volumes
Total
AV Monthly
Crude
Naphtha
41,250,000 bbl
5,576,000 MT
600,000 bbl
84,000 MT
Key Events of Default
Delivery failure, Cross default, change of ownership and material disposals
Covenants

Limitations on additional forward sale transactions (long-term and short-term incurrence tests)

Retention Events

EGPC Exports/FSA volumes <1.40x

Crude or Naphtha production decrease >25%

Protection against adverse fluctuations of crude differential and naphtha transportation costs (Value Deficit)
Arbitration

Agreement subject to internationally accepted arbitration
True Sale

Physical commercial agreement with PEL enjoys priority over any delivery of crude and Naphtha
26
Case Study: EGPC
Hedge Agreement Protects Against Price Exposure
Hedge Agreement
Description
Set floor to Dated Brent and Naphtha NWE prices
Term
A six-year hedge agreement with MSCG
Volumes
Same as FSA
Price
Crude: Based on a floor price of approximately $30/bbl
Naphtha: Based on a floor price of approximately $260/MT
27
Case Study: EGPC
Robust Debt Service Profile
Principal & Interest Payments

No basis risk between Offtake and Hedge

Based on the same index monthly average
US$ mm
140
1.8x
120
1.11x
100
80
60
40
20
Principal
Jun-11
Sep-11
Mar-11
Dec-10
Jun-10
Sep-10
Mar-10
Dec-09
Jun-09
Sep-09
Mar-09
Dec-08
Jun-08
Sep-08
Mar-08
Dec-07
Sep-07
Jun-07
Mar-07
Dec-06
Sep-06
Jun-06
0
Mar-06
EGPC is obligated to deliver commodity products
at a minimum DSCR of 1.11x eliminating any
possible basis risk
Dec-05

(At Current price)
Interest
28
Merrill Lynch Commodities Credentials
Commodity Finance Experience
Structured Transactions
Structured Transactions Executed by Team Members
EGPC

Merrill Lynch structured and placed a $1.25 billion structured-export bond for Gazprom. The issue
was backed by proceeds of long term export contracts between Gazprom and both Gasunie and ENI.
The bonds had a maturity of 15 years and were rated BBB-/BBB from both S&P and Fitch, respectively.
The bonds were placed in the US and Europe pursuant to a Reg 144a and RegS placement.

Merrill Lynch structured and executed a US$1.5 billion Forward Sale of Oil for the Egyptian General
Petroleum Corporation. The Notes were issued by a SPE and were backed by a Forward Sale
Agreement between the SPE and EGPC as well as a Commodity Hedge Agreement. The financing was
able to achieve an investment grade rating of AAA/Aaa from both S&P and Moody’s, respectively, for
the class A-1 and A-2 notes and a rating of BBB/Baa1 for the class A-3.

YPF executed a US$400 million Forward Sale of Oil with a 7-year maturity and a 4.4-year average life.
The Notes were issued by a SPE, offshore Argentina, and were backed by a Forward Sale Agreement
between the SPE and YPF as well at a Commodity Hedge Agreement. The financing was able to
achieve an investment grade rating of BBB/Baa3 from both S&P and Moody’s, respectively, and was
priced at a spread of 143bps over U.S. Treasuries. The Notes issued by the SPE were "wrapped" by a
"AAA" monoline insurance company, enabling YPF to realize significant savings on its cost of debt.

Braspetro executed a US$90 million Forward Sale of Oil with a 7-year maturity and a 4.4-year average
life. The Notes were issued by a SPE and were backed by a Forward Sale Agreement between the SPE
and Braspetro (a fully owned subsidiary of Petrobrás, the Brazilian state oil company) which provided
for oil deliveries from Petrobrás’ offshore oil fields in Angola and Colombia to meet debt service
payments to the new Noteholders. The financing was able to achieve an investment grade rating of
BBB- and was priced at a spread of 215bps over U.S. Treasuries.
29
Commodity Finance Experience
Structured Transactions
Structured Transactions Executed by Team Members

Merrill Lynch structured and sole managed a US$100 million 5-year Oil-Linked loan for Rafineria
Gdanska, a Polish refiner and Brent consumer. The fund provided financing for the expansion and
upgrading of a "hydroskimming" refinery at Gdansk. The loan was offered in conjunction with an asset
swap package converting the company’s variable oil-linked interest payments into U.S. dollars. Interest
payments were indexed to Brent and increased linearly with any dollar decrease in oil prices below
$15/bbl.

Triton Oil executed a US$125 million Forward Sale of Oil with a 5-year maturity and a 3.8-year
average life. The Notes were issued by a special purpose entity (SPE) located offshore Colombia and
were backed by as Forward Sale Agreement between the SPE and Triton Colombia (a fully owned
subsidiary of Triton Energy based in the U.S.) as well as a Commodity Hedge Agreement. The financing
was able to achieve an investment grade rating of BBB from Duff and Phelps and was priced at a spread
of 220bps over U.S. Treasuries.

Merrill Lynch arranged for the structuring and placement of a C$75 million 3-year Crude Product
Storage Program for the Ultramar Corporation. The transaction was designed to reduce inefficient
working capital and achieve off-balance sheet debt treatment while maintaining product ownership
with Ultramar. Ultramar monetized its refined products inventory by selling the product to a special
purpose vehicle and retained the right to repurchase the product at maturity. A back-to-back swap
hedge converted the fixed price sale into floating.

Merrill Lynch sole managed a US$50 million Oil-Linked Loan for Slovnaft, a Slovakian refinery. The
oil-linked facility has raised a total of US$175 million for the Company since 1994 with maturities
ranging from 1.5 to 7 years. The financing enabled the Company to receive a subsidy on its interest cost
by allowing investors to participate in a portion of the company’s improved profitability, which results
from low Brent oil prices.
30
Commodity Finance Experience
Structured Transactions
Structured Transactions Executed by Team Members
 Merrill Lynch sole managed a US$250 million Aluminum Indexed Loan to fund Dubal’s expansion of
an aluminum smelter. Debt service payments under the five-year facility were indexed to the price of
aluminum, thereby providing guaranteed economics on the project. The company was able to realize an
issuing spread of LIBOR plus 0.50% through the aluminum price hedge. The loan was neither
guaranteed by the government nor was the company rated. The financing was awarded Deal of the
Year by International Financing Review.

Merrill Lynch structured and lead managed an offering of US$200 million Rule 144A Eurobond
Secured Export Notes with a 10-year final and a 6.3-year average life. The Notes were issued by a
special purpose entity located offshore Brazil and were backed by the Company’s exports of certain
soybean based commodities via an Export Contract and a Resale Contract. The remittance of payments
to an offshore trust enabled the transaction to achieve a BBB- from S&P and execution as a public style
144A.

Merrill Lynch placed and structured a non-recourse securitization of existing Coal Contract Receivables
to facilitate the tax-efficient sale of the operating coal company. The US$193million issue was placed in
the 144A market in two tranches of 16- and 21-year maturities with a Baa2/BBB rating and were issued
at a spread of 160 and 210 basis points over U.S. Treasuries. The Notes, issued via a special purpose
entity, were secured by proceeds of the coal contract and acquirer’s (RTZ) undertaking to deliver coal in
accordance with the contract terms.

Merrill Lynch sole managed a 500,000 troy ounce Gold Denominated Bond (US$200million) with a 10year maturity and 5-year call and put structure with a Baa3/BBB rating. The bonds were offered in
conjunction with an asset swap package which converted fixed gold ounces into a fixed US$ price. Due
to low gold interest rates when compared to U.S. dollar rates, Poseidon realized significant cost savings
on its debt.
31
Merrill Lynch Commodities Capabilities
Merrill Lynch Commodities Capabilities
Global Presence
Europe & Africa
London
Energy Trading
- Gas, Power, Oil,
Coal, Emissions,
Weather
Madrid
Paris
Johannesburg
The Americas
Asia Pacific
Houston
Singapore
Energy Trading
- Gas, Power,
Oil, Coal, Weather
Oil & Products
Trading
Tokyo
Mumbai
Sydney
Hong Kong
New York
Calgary
Toronto
Mexico
Sao Paulo
Energy Trading Platform
IBK, Energy & Power Team
IBK, Metals & Mining Team
32
Merrill Lynch Commodities Capabilities
European Trading and Risk Management (MLCE)

Merrill Lynch acquired EntergyKoch Trading (now Merrill Lynch
Global Commodities – “MLCE”)
from Entergy and Koch Industries
on 1 November 2004 to become one
of the leading energy firms in the
world.
 First power trade in 1998
Power
Consistently ranked as one
of the top wholesale
companies
 Current trading volume: 660 TWh p.a.
 Physical swaps, forwards and options
 Durations from real time to multi-years
 24 hour trading desk
Present in 11 European Power Markets


Portfolio of products and services
include risk management, trading of
gas, power, oil, refined products,
emissions and weather.
Merrill Lynch offer a comprehensive
range of customisable wholesale
market solutions which includes:



Risk Management: we help
clients mitigate risk
associated with fluctuating
prices
Structured Products: we help
clients capture value by
creating opportunities to
identify and offset risk
Asset optimisation: we assist
firms in managing and
extracting the most value from
their assets
 First trade in 1998
Gas
Market leading
organisation
 Current trading volume: 68 Bcm p.a.
 Physical forwards, futures and options
 Durations from real time to multi-years
 Trades in UK gas and emerging markets in continental Europe

Financial forwards and Exchange traded futures and options

Durations from front month to multi-years

Trades in Brent, WTI, Gasoil, Jet fuel and other oil products
Weather

First ever weather trade in 1997
Critical market maker

First European weather trade in 2001
Coal

Analysts studying European Coal Markets since 2002

Trading capability added in Q2 05

Analytical Capability

Trading capability added in Q2 05

Management of volatility, exposure and risk

Swaps, forwards, options, spark spreads, tolling, power purchase agreements and
load management
Oil
Emissions
Risk Management
33
Merrill Lynch Commodities Capabilities
MLC’s European Activities
London Based Operations
Merrill Lynch
Gas



UK NBP
Zeebrugge
TTF (Netherlands/
Germany)
Power









Weather
UK
Belgium
Netherlands
France
Spain
Germany
Nordic
Denmark
Austria

Global
(excluding
N.America)
Oil/Products




Brent
Gasoil
Fuel oil
Oil products
Coal

API 2 (ARA)

API 4(RBCT)
Commodity
Indices




GSCI
GSCI sub-indices
MLCI
Others
Emissions

Exotics and
Hybrids (1)
Metals



Precious Metals
(1st stage)
Base metals
(2nd stage)
Baskets
EU ETS



Exotics
Crosscommodity
Cross assetclasses
____________________
(1) Available during 2005
34
Merrill Lynch Commodities Capabilities
US Trading & Risk Management (MLCI)
MLCI North America:



Delivers, markets and
trades natural gas, power,
weather derivatives and
other energy-related
commodities.
Leverages base assets,
wholesale trading
capabilities and industry
relationships to capture
higher-margin
opportunities
Maintains long-term
growth through
expansion of existing
business and continued
new product
development
AECO
Natural Gas
(Physical & Financial)
Power
(Physical & Financial)
Weather
Risk Management
• Trade 57.5 BCF/day (50
financial, 7.5 physical)
• Financial volume accounts
for 5-8% of market on a
typical trading day
• Manage over 150 BCF of gas
storage throughout US
• Manage 2.5 BCF of transport
across major US pipelines
M3
Northern
Cal
Rockies
Zone 6
Chicag
o
Leidy
SoCal
San
Juan
Mid
Con
Station
65
Permian
Basin
Henry
Hub
Katy
All Major US
Gas Markets
• Trade over 182 TWh annually
• Significant trading presence
in each NERC region across
the US
• Over 5,000 MW of generation
capacity under management
• Leading trader and developer
of weather linked products
• Temperature/weather linked
products to manage risk
associated with power, gas,
hydro and other weather
driven commodities
• A leading risk manager for
Utilities, hedge funds
producers and other owners
of energy infrastructure
• Products include futures,
caps, floors, and other
combinations
35
Merrill Lynch Commodities Capabilities
Risk Management Tools
Tailored Risk and Liability Management Solutions

Merrill Lynch’s Risk Management teams specialise in developing and executing Risk Management solutions for its
clients

The teams aim to identify the key risks embedded within our clients’ businesses and create strategies in
conjunction with management which seek to optimally hedge risks inherent in daily operations, as well as in more
specific situations, such as raising new debt or completing an acquisition
A Broad Array of Risk Management Products
Fixed Income
Risk Management
 Hedging an anticipated debt
issuance (e.g. bonds private
placement)
 Hedging existing floating rate
debt (e.g. bank loans, CP)
 Managing fixed/floating
exposures - ongoing assetliability management
 Hedging debt repurchase
 Hedging hybrid instruments
 Tailored financing solutions
Strategic Risk
Management
 ALM analysis
 Pension Risk
 Tax solutions
Credit Risk Management
 Managing concentrated
balance sheet credit
exposures
 Forward credit spread
hedges (issuance and
repurchase)
Foreign Currency
Risk Management
 Managing long-dated FX
exposures
 Financing transactions
 Transactional versus
strategic hedging
 Cross-border acquisition
hedging
Emerging Market
Risk Management
 Exotic currency
exposure hedging
 Cross-border
financing
 Hedging Country
Risk
Commodity Risk Management
 Managing commodity price risk can be done in combination or separately from these various risk management
tools
36
Disclaimer
Merrill Lynch prohibits (a) employees from, directly or indirectly, offering a favorable research rating or specific price
target, or offering to change such rating or price target, as consideration or inducement for the receipt of business or
for compensation, and (b) Research Analysts from being compensated for involvement in investment banking
transactions except to the extent that such participation is intended to benefit investor clients.
This proposal is confidential, for your private use only, and may not be shared with others (other than your advisors)
without Merrill Lynch's written permission, except that you (and each of your employees, representatives or other
agents) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the
proposal and all materials of any kind (including opinions or other tax analyses) that are provided to you relating to
such tax treatment and tax structure. For purposes of the preceding sentence, tax refers to U.S. federal and state tax.
This proposal is for discussion purposes only. Merrill Lynch is not an expert on, and does not render opinions
regarding, legal, accounting, regulatory or tax matters. You should consult with your advisors concerning these
matters before undertaking the proposed transaction.
37