EX-99.(A) 2 dex99a.htm LETTER FROM VULCAN ENERGY Letter from Vulcan Energy

Exhibit 99(a)

 

VULCAN ENERGY CORPORATION

505 FIFTH AVENUE SOUTH

SEATTLE, WASHINGTON 98104

 

July 20, 2004

 

Via Facsimile (832) 239-6210

Plains Resources Inc.

700 Milam Street, Suite 3100

Houston, Texas 77002

 

Attn: Board of Directors

 

Gentlemen:

 

Further to our letter we sent you on July 19, 2004, attached for your information is a model illustrating the value that is likely to be achievable in a leveraged recapitalization. In our model, we use reasonable assumptions that we have discussed with you and detailed in our July 19th letter and that you have further clarified in your July 19th press release. As we have also discussed, we arrive at an implied share price for the post-recapitalized Plains Resources of $12.07 - $14.13 per share. In addition, we have provided a net asset value analysis which clearly shows that the net asset value per share, after giving effect to a $7.95 to $8.35 per share embedded tax liability, is $11.46 to $12.05.

 

We remain committed to completing our $17.25 per share all-cash transaction with Plains Resources.

 

Respectfully,

 

/s/ David N. Capobianco

David N. Capobianco

Vice President

 

Attachment

 

cc: R. Joel Swanson, Baker Botts L.L.P.

Plains Resources Inc.

Recapitalization Analysis assuming Tender @ $18.00 per share

 

     PLX Pro forma
Recapitalization Value
  
     Midpoint (a)
      High end (b)
  

PAA 2005E LP Distribution

    $ 2.44      $ 2.58  

PAA LP units

      12.4        12.4  

LP unit cash flow

      30.3        32.0  

PAA General Partner cash flow (c)

      6.5        7.9  
    
  

Total Cash Flow

    $ 36.7      $ 39.8  

Less: G&A

      (2.5 )      (2.5 )
    
  

EBIT

    $ 34.2      $ 37.3  

Interest expense @ 7.5% rate

      (11.3 )      (11.3 )
    
  

Pre-tax income

    $ 23.0      $ 26.1  

Taxes @ 20% rate

      (4.6 )      (5.2 )
    
  

Free Cash Flow

    $ 18.4      $ 20.9  

Free Cash Flow Multiple

      12.5x        12.5x  

PLX Equity capitalization

    $ 230.0      $ 261.0  

Pro forma average 2005 fully-diluted shares

      19.1        19.0  
    
  

PLX post-Recap share price

    $ 12.07      $ 13.75  

 

     PLX pro forma
share price sensitivity

Tender Price

                

$17.00

    $ 12.40      $ 14.13

$18.00

    $ 12.07      $ 13.75

 

Summary Recapitalization Assumptions

 

Tender Price per share

    $ 18.00  

New Debt raised

    $ 150.0  

Calumet sale proceeds

      20.0  
    

Total Sources of Cash

    $ 170.0  

Repayment of Net debt

      (28.1 )

Fees and Expenses

      (38.0 )
    

Cash available for Tender

    $ 103.9  
(a) Plains All American LP distribution as per PLX Board of Directors, July 19th, 2004 press release.
(b) Plains All American LP distribution based on high end of guidance, as per PAA press release dated June 16th, 2004.
(c) Plains All American LP units outstanding as per PAA 8-K dated June 16th, 2004.

 

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Plains Resources Inc.

Recapitalization Analysis assuming Tender @ $18.00 per share

 

Cash Sources and Uses—Comparison to LUK Model

 

LUK Assumptions

New Debt issued

    $ 175.0  

Calumet sale proceeds

      35.0  
    

LUK Sources

    $ 210.0  

Repayment of Net debt

      (10.0 )

Transaction / Financing fees

      (5.0 )

Management Severance

      (5.0 )

Vulcan Capital Expenses

      (6.0 )
    

LUK Cash Available for Tender

    $ 184.0  

 

Adjustments for Inaccurate Assumptions

Less: Incremental debt over reasonable leverage ($150MM)

      (25.0 )

Less: Net debt understatement

      (18.1 )

Less: Calumet sale proceeds overstatement

      (15.0 )

Less: Vulcan break-up fee (a)

      (15.0 )

Less: PLX transaction-related expenses (a)

      (5.0 )

Less: 280G tax gross-up payment related to severance

      (2.0 )
    

Cash Available for Tender

    $ 103.9  

LUK Overstatement of Cash Available for Tender

    $ 80.1  

Net Debt Calculation (b)

 

Short-term Debt

    $ 20.0  

Long-term Debt

      25.0  

Funded working capital (c)

      4.0  

Cash

      (15.8 )

Restricted cash

      (5.1 )
    

Net Debt

    $ 28.1  
(a) Based on PLX proxy statement dated June 23rd, 2004.
(b) PLX public filings.
(c) Estimate based upon PLX working capital needs.

 

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PLX Net Asset Value

 

PLX Net Asset Value  

($ in millions)

                 
     Low
     High
  

Price of PAA LP Unit

    $ 35.40     $ 35.40  

Number of PAA LP Units

      12.4       12.4  
    
 

LP Unit Valuation

    $ 439.0     $ 439.0  

GP Valuation

      70.0       90.0  

Calumet Florida Oil & Gas Valuation

      20.0       25.0  
    
 

Pre-Tax Enterprise Value (LP+GP+Florida)

    $ 529.0     $ 554.0  

Tax Liability @ 40.0%

      (200.7 )     (210.7 )
    
 

Net Asset Value

    $ 328.3     $ 343.3  

Net Debt

      (28.1 )     (28.1 )

Fees and Expenses

      (11.0 )     (11.0 )
    
 

Equity Value

    $ 289.2     $ 304.2  

Fully Diluted Shares Outstanding

      25.2       25.2  

Net Asset Value After Tax ($ / Share)

    $ 11.46     $ 12.05  

Tax Liability ($ / Share)

    $ 7.95     $ 8.35  

Tax Liability Calculation

                 

Pre-Tax Enterprise Value (LP+GP+Florida)

    $ 529.0     $ 554.0  

Tax Basis

      (12.3 )     (12.3 )
    
 

Embedded Gain (Enterprise Value — Tax Basis)

    $ 516.7     $ 541.7  

NOL

      (15.0 )     (15.0 )
    
 

Embedded Gain Post-NOL

    $ 501.7     $ 526.7  
    
 

Tax Liability @ 40.0%

    $ 200.7     $ 210.7  

 

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