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Valuation Servicesfor Accounting & Taxation
Oil and Gas Companies
August 2015
Table of Contents
Section 1 Valuation Services
Section 2 Why Navigant ?
Section 3 Practice Leadership
Appendix A Technical Capabilities
Section 1Valuation Services
Why do you need a valuation ?
Start by asking the key scoping questions !
What is the valuation needed for ?
Why is a professional valuation requested ?
Required - Accounting & Taxation
Expert Valuation
Commercial Valuation
Who is the audience ?
What is the standard of value ?
What is really at stake ?
How should it be priced ?
Required Valuations-Accounting & Taxation
Required Valuations are prepared when audiences such as the SEC,
the IRS, and/or lenders ask for them to be done
They are prepared to fulfill requirements under US GAAP, IFRS, and/or the IRC
They are more theoretical than commercial
The standard of value is Fair Value or Fair Market Value
Generally Accepted Valuation Principles must be used
Cost method
Market method
Income method
The point of view for the valuation is a market participant’s view, i.e. a third person
viewpoint
Financial Reporting Examples
Fair Value Measurements & Disclosures (ASC 820)
Property, Plant, & Equipment (ASC 360)
Intangibles, Goodwill and Other (ASC 350)
Business Combinations (ASC 805)
Derivatives & Hedging (ASC 815)
Financial Instruments (ASC 825)
Compensation-Stock Compensation (ASC 718)
Taxation Examples
Property transferred for services (IRC 83 (b))
Income from discharge of indebtedness (IRC 108)
“Worthless Stock” analysis and support
Charitable contributions and gifts (IRC 170)
Golden parachute payments (IRG 280G)
Stock purchases treated as asset acquisitions (IRC 338)
Built-in-Losses
More Taxation Examples
NOL Limitations (IRC 382)
Compensation (IRC 409A)
Designated settlement funds (IRC 468B)
Transfer Pricing (IRC 482)
IRC 864 Allocations
State & Local Taxation
Gift and Estate Taxation
Restructuring & Forbearance Valuations
Risks & Pricing
Risks
Compliance Audit Reporting Enforcement Reputation Internal optics Audit fee escalation
Pricing
Fixed - Negotiated one time fixed fee; or
Hybrid - Variable to set up the valuation portfolio and defend in audit review, followed by monthly or quarterly fixed fee updates
Essential Success Factors
Detailed documentation and support Experience = Broad and deep, practicing in front of Big 4, SEC, and IRS Transparency = No “black boxes” Carefully selected and vetted market inputs Ability to clearly articulate findings to any audience Expert and clean model design Monte Carlo Simulation (“MCS”) expertise Real industry experience Commodity markets analysis and forecasting in support of valuations One-stop shopping = we can appraise real estate and machinery/
equipment as well associated with oil and gas assets
Section 2Why Navigant ?
Navigant Consulting, Inc.
Business Description
Navigant Consulting, Inc. is a specialized, independent advisory firm that supports companies, lenders, institutional investors, legal counsel, and government agencies. The company focuses on entities and industries facing the challenges of uncertainty, risk, distress and significant change, and on the issues driving these transformations.
Ticker NCI (NYSE)
2014 Revenue $860 million
Professionals 4,000+
Headquarters Chicago, IL
Senior Management
■ Julie Howard, CEO and Chairman, Navigant
■ Cindy Baier, CFO and EVP
■ Richard D. Hitt, Managing Director, Head of Navigant’s Corporate Finance Practice
Navigant Consulting, Inc. (“Navigant”)
NCI’s 2,500+ professionals maintain a presence in 45 cities internationallythroughout North America, Europe and Asia, including a significant concentration of
resources in Chicago, Houston, London, New York, and Washington DC.
Comprehensive Energy Complex Coverage
Commodity Hedge Funds
Energy Services
Energy Trading & Marketing
LNG
Oil and Gas - Upstream
Oil and Gas – Midstream
Power Generation, Transmission, & Distribution
Refined Products
Renewable Energy
Comprehensive Valuation Capabilities
We have valuation expertise across the range of structures. We commonly value:
Investment grade debt High yield and distressed debt Complex securities Hybrid securities Common and preferred equity Options, warrants & other derivatives Partnership interests Real estate and other tangible assets Exotic options Commodities and futures contracts Interest rate and currency swaps Earnouts and other contingent claims Power Purchase Agreements PIPE’s
Take or Pay contracts Restricted stock Oil and gas royalties Mining interests VPP’s Intellectual property IPR&D Trade names Goodwill Customer relationship intangibles Loan portfolios Insurance reserves Economic loss damages/lost profits
Our Strengths
Broad and deep expertise across the Energy Complex We have consulting, banking, and corporate experience in diverse financial and commodity
markets, in addition to valuation & financial reporting technical capabilities. Our experiencedteam includes MBAs, CPAs, CFAs, CBAs, ASAs, CAIAs, and MAI’s.
We are a one-stop shop, as we do complex commodity derivatives valuations alongside ourbusiness and corporate valuation work.
Collaborative process While our opinions are independent, you are involved throughout our process, because you
know your investments better than anyone. We want to understand your thinking, and we wantyou to understand ours.
Thoroughness and accuracy We give you more than just the conclusions. We give you thoroughly supported, accurate
valuation reports.
Integrity We are only interested in getting to the right answer, employing generally accepted valuation
principles.
“Trusted Advisor” to our clients Our clients view us as business partners, working together to establish best practices in valuation
and transaction work as competitive advantages for their firms.
What makes Navigant unique?
Accepted in the Marketplace
Our work has supported KPMG, PwC, Deloitte, E&Y, BDO, GT, and other audit firms’ technical & audit staffs, undergoing detailed review of our fair value analyses for financial reporting and tax purposes.
Our work has been reviewed and accepted by the SEC in numerous filings.
We have extensive experience defending our valuations before the IRS(including Tax Court) and other tax and regulatory bodies.
Our senior professionals have performed technical reviews during their tenure at the major accounting firms. We maintain continuing professional relationships with current reviewers at these firms.
Our methodologies and findings have been presented to, and accepted by numerous rating agencies, qualified institutional buyers and certified investors.
Our professionals have published and spoken extensively on valuation topics as they pertain to the investment community.
Trusted Advisor
Service
A combination of…..
… resulting in a “Trusted Advisor” relationship creating valuation as a competitive advantage.
Flexibility
Collaboration
Accuracy
Thoroughness
Timeliness
Integrity
Expertise
“Excellent communication”
“Very responsive from a process and analysis standpoint”
“Exceeds expectations in response time “
“Investors have reached out to Navigant on methods and assumptions and have only provided positive feedback”
“Meets all schedules and deadlines”
“Provides creative ideas and suggestions”
References available upon request
What our clients say about us….
Navigant vs. Big 4
We have a diverse skill set; not just CPAs,
We have corporate industry experience, they do not,
Valuation is based on Economics and Finance, it is not based upon Accounting, and
We are not limited by rules-based thinking and checklists.
Navigant vs. Wall Street
We do not have trading and marketing desks, so we can be more objective,
We understand regulatory and statutory valuation, bankers sometimes do not, and
We get all of the accounting and tax rules that are unique to the Energy Complex.
Navigant vs. Boutique Firms
Our balance sheet and brand stand behind our work,
We can deploy a wide variety of resources globally,
We do not have to outsource or sub-contract anything, we are a one-stop shop, and
Small firms cannot be counted on to be there with you through all of your regulatory challenges.
Section 3Practice Leadership
Resumes
Richard D. Hitt, Jr.Managing DirectorNational Practice Leader
Navigant Consulting30 South Wacker DriveSuite 3100Chicago, IL 60606Cell: 312.953.7197Tel: 312.583.2621
Professional History
Navigant Consulting, Inc.
BearingPoint, Inc.
KPMG, LLP
Education
M.S.A., Eastern Michigan University
B.S., University of Michigan
Licenses & Certifications
Certified Public Accountant
Richard Hitt is a Managing Director and the Practice Leader for the Valuation & Financial Risk Management practice of Navigant Consulting, Inc., based out of the Chicago office. He has more than 25 years of valuation and financial advisory experience working with financial institutions and energy companies of all sizes.
In his current role at Navigant Consulting, Mr. Hitt oversees engagements governing acquisitions and sales of banks and thrifts and is a leader in the firm’s efforts to develop and employ effective valuation and due diligence techniques. His clients include some of the largest and best known financial service and energy corporations in America, including Deutsche Bank, Bank of America, Bank of Montreal, KeyCorp, Charles Schwab, First Republic Bank, E*Trade Financial Corp., NRG, LS Power, Primary Energy and Aquila.
Formerly a Managing Director of BearingPoint Inc’s Valuation and Financial Services Advisory practice, Rick led the development of a multi-faceted practice that focused on banks, thrifts, specialty finance and energy companies. His experience includes financial advisory to community and regional banks, including due diligence, fairness opinions, shareholder value analyses, merger and acquisition transactions as well as capital raising and investment strategies. Prior to BearingPoint, Mr. Hitt was a partner in KPMG’s Valuation Services Practice.
Recent assignments Mr. Hitt has directed include:
• Valued individually all the domestic and international electric generating facilities of a $5 billion utility for asset-backed funding purposes. The project included separate valuations of the power contracts and merchant plants.
• Valued the domestic and international electric generating, electric and gas transmission and distributionassets of a $4 billion utility for asset-backed funding purposes. The project also included valuing complex electricity and natural gas derivatives.
• Performed financial analyses for the domestic operations of a $10 billion utility for debt restructuring purposes.
• Rendered a fairness opinion to a Midwest life company as part of establishing a mutual holding company.
• Rendered a fairness opinion to a retail self insurance fund related to an investment in a workers compensation insurance company.
• Provided SFAS 141 and 142 valuation assistance in the merger of two $150 billion US banks.
Thomas J. McNultyDirector
Navigant Consulting909 Fannin St. Suite 1900Houston, TX 7010Tel: 713.646.5078Cell: 832.472.3717
Professional History
Navigant Consulting, Inc.
Sirius Solutions LLP
Plains All American
Duke Energy
Enron International
US Foreign Service
Brown Brothers Harriman
Education
M.B.A. (Accounting & Finance), Kellogg, Northwestern University
B.A. (History), Yale University
Tom McNulty is a Director in the Valuation & Financial Risk Management practice of Navigant Consulting, Inc. His specialties are transaction and commercial analytics, valuation, and risk management. Specifically, his practice offers clients a unique combination of strategic, financial, and transactional advisory services. Mr. McNulty is based out of the Houston office, and he has more than 20 years of financial advisory and related experience work.
As a consultant, Mr. McNulty has advised clients drawing on his valuation, transactions, risk management, treasury and international credentials. Specifically, he has assisted with the valuation of securities, business units, acquisition targets, derivatives, and equity incentive plans. In industry, and as an advisor, he has worked on more than $38 billion in MD&A deals and has valued more than $8.5 billion notional in futures, options, and other derivatives.
In his current role at Navigant Consulting, Mr. McNulty directs engagements governing acquisitions and divestitures throughout the energy complex, including upstream oil & gas, midstream, merchant power, renewable energy, energy services, trading and marketing, as well as LNG. He also performs valuation work for clients with complex equity, fixed income, and commodity derivative instruments.
Recent assignments Mr. McNulty has led include:
• Provided ASC 815 assistance to several energy companies related to their derivatives portfolios.
• Rendered a comfort opinion to a energy hedge offering a new midstream oil & gas fund.
• Rendered an opinion to an oilfield services company for a related party transaction.
• Directed ASC 805 project for the reverse merger of two private drilling companies.
• Provided ASC 718 valuation assistance to a publicly traded oilfield services company for its restricted stock units and stock options.
• Delivered ASC 718 valuation assistance to a privately held upstream oil & gas company for its equity incentive plan.
• Led the valuation work on the GP interest in a privately-held midstream company for a large litigation engagement.
Resumes
Tom HoulihanDirector
Navigant Consulting1180 Peachtree Street N.E.Suite 1900Atlanta, GA 30309Tel: 404.602.5038Cell: 404.849.1243
Professional History
Navigant Consulting, Inc.
Intercontinental Exchange
Mirant Corporation
JC Bradford & Co
Associations and Licenses
FINRA Series 7 & 63
Candidate Member, American Society of Appraisers
Education
MBA, Finance, Vanderbilt
BSBA Finance, Creighton
Thomas Houlihan is a Director in the Valuation & Financial Risk Management practice of Navigant Consulting, Inc.
Mr. Houlihan’s principal focus is on valuation and advisory engagements related to the energy sector. In this role, has provided clients with valuation consulting services for purposes including transaction due diligence, fairness opinions, capital raising & investment strategy as well as litigation, tax and regulatory purposes. With more than 16 years of valuation and financial advisory experience, Tom has provided valuation and transaction assistance for client engagements involving some of the world’s largest energy companies and utilities, as well as mid‐sized companies, energy start‐ups and private investment funds.
Prior to joining Navigant Consulting, Tom held various roles in investment banking and corporate finance, including senior positions in the debt capital markets division of JC Bradford & Co (now UBS Capital Markets) and more recently in corporate development and asset management positions with Mirant Corp (Southern Energy) and as Director of Finance and Strategy for Intercontinental Exchange (ICE).
Recent assignments Mr. Houlihan has directed include:
• Fair Market Value of multiple nuclear power plants - Retained by a large investor owned utility to assist with evaluating options with respect to the early buyout or termination of lease financings secured by the company’s interest in several nuclear power plants.
• Valuation of a municipal waste-to-energy generation facilities to assist a client with evaluating lease repurchase and financing options;
• Acted as primary valuation advisor to support a client’s effort to finance the $210 million purchase of 680 MW North American peaking facility. NCI provided the client with additional valuation services to support the company with allocation of purchase price for financial reporting.
• Performed the valuation of North American gas distribution system serving approximately 426 active meters through approximately 11 miles of gas distribution mains. NCI provided an estimate of the fair market value of the business to assist the client’s effort to secure just compensation for the assets, which were taken through condemnation proceedings.
• Retained by a major investment bank to provide an estimate of the prospective fair market value of a of 1,161MW CCGT. The estimate of value was necessary for financial reporting purposes, including disclosures related to residual value guarantees stipulated in lease finance transactions for the plant.
Resumes
Neeli Souli KohanAssociate Director
Navigant Consulting90 Park Avenue, 10th FloorNew York, NY 10016Tel: 646-227-4654Cell: 646-232-8855
Professional History
Navigant Consulting, Inc.
Deloitte Financial Advisory Services LLP
Overseas Shipholding Group
Education
M.B.A., Finance, Pace University
B.S., Accounting, Yeshiva University
Accreditation
Chartered Financial Analyst (CFA), CFA Institute
Certified Public Accountant (CPA), NY and NJ
Candidate, ASA
Neeli Kohan is an Associate Director in the Valuation & Financial Risk Management practice of Navigant Consulting, Inc. Ms. Kohan is based out of the New York office.
Ms. Kohan has more than 16 years of experience in the valuation of public and private businesses, securities, and intangible/tangible assets. She has performed valuations for purposes of financial reporting (including Business Combinations, Goodwill and Long Lived Asset Impairment Testing for US GAAP and IFRS), Federal tax, project financing, sale/leaseback transactions, M&A due diligence, and management information purposes. Industries served include power generation, gas, electric, water and wastewater utilities, alternative energy providers, private equity, media and entertainment, shipping and transportation.
Ms. Kohan is a Certified Public Accountant, a Chartered Financial Analyst and a candidate of the American Society of Appraisers. She has a B.S. from Yeshiva University in Accounting and an M.B.A. from Pace University in Finance. Prior to joining Navigant Consulting, Ms. Kohan was with the Valuation practice of Deloitte Financial Advisory Services, LLP.
Resumes
Appendix ATechnical Capabilities
Technical Upstream Services
Opportunity Screening and Evaluation
Strategic framework and prospect screening, detailed analysis, and project execution planning.
Economic and Capital Program Valuation
Reserves valuation, economic assessments, post-installation appraisals, risk analysis, and stochastic modeling.
Asset Exploration
Exploratory drilling, regulatory planning/administration, and environmental agencies reporting.
Oil & Gas Asset Evaluation & Exploitation
Drilling, completion, testing, production initiation, operations execution, drill-bit to sales project execution, regulatory planning, and administration.
Capital Project Design & Implementation
Infrastructure and production facilities development, planning and scheduling, full field development, portfolio management, basic engineering design, FEED, construction, procurement, PMO, engineering data management, wastes management, and water management.
Technical Upstream Services cont’d
Operations Management
Artificial lift methods, facility assessments, completion techniques and design, subsurface assessment and configuration, cost and expense management/efficiency, well integrity, real-time operations optimization, and integrated operations.
Reserve & Reservoir Engineering
Reserves re-assessment, recovery enhancement & production optimization, reservoir management, and infill programs.
Asset Management
Operating asset rationalization, asset integrity management, and turnaround optimisation.
Data Management & Innovation
Subsurface data management & data flow optimization, real-time data management, and digital oilfield rationalization and optimization.
Terry Manning
Liya Dossybieva is an upstream oil & gas professional with over 14 years of international experience inhydrocarbons production operations, business strategy & transformation, investment & divestmentprojects evaluations, business optimisation and continuous improvement. She is an expert inoptimisation of upstream operations, operational excellence, and integrated operations models. Liyadevelops and leads delivery of strategic and business transformation initiatives and programmes withthe view to optimise production assets’ efficiency, reduce operational costs, increase production levels,and improve recovery. Liya will deliver data analysis and hypothesis creation for Clients.
Liya Dossybieva
Terry Manning, a Director in Navigant’s global Oil & Gas practice based in Houston, is an upstream oiland gas professional with more than 35 years of practical execution and asset management experience.He is an experienced practitioner in the areas of production optimization, streamlining operations,reservoir management and portfolio rationalization, including well completions, reserve analysis andmanaging oil and gas assets to improve profitability. Terry has relevant and specific work experience inmany of the producing basins in the United States and in Canada. He is a strong advocate that drillingand completion program optimization originates from repeatable processes for effective and efficientdevelopment planning and real-time implementation appraisal. Terry’s Houston location providesdirect access for North American client personnel.
Mike Dyson is a Director in Navigant’s global Oil & Gas practice. He brings 30+ years of experience inthe upstream oil and gas business, having worked at Shell and BG Group around the world. His coreexpertise is in well and production operations, capital projects, supply chain strategies and newtechnology development and implementation. He is focused on providing consulting advice to oil & gasE&P companies looking to improve their business performance, and is a strong advocate of holistic andsustainable improvement by tackling all elements of transformation. These include rigorous operationsplanning and execution, collaborative working across the supply chain, application of new technology,teamwork, communications and personal leadership.
Mike Dyson
Our Upstream Professionals
