Current GP / IDR Market Trends Platts Conference Houston, TX October 11, 2011
Forward-Looking Statements Statements made by representatives of Vanguard Natural Resources, LLC during the course of this presentation that are not historical facts are forward looking statements, including (but not limited to) statements about the acquisition (including its benefits, results and effects), the related financing plans, whether and when the acquisition will be consummated, the operating results of Encore Energy Partners LP following the acquisition and statements with respect to future distributions. These statements are based on certain assumptions and expectations made by the Company which reflect management s experience, estimates and perception of historical trends, current conditions, anticipated future developments and other factors believed to be appropriate. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the Company, which may cause actual results to differ materially from those implied or anticipated in the forward looking statements. These include risks relating to the satisfaction of the conditions to closing of the acquisition, uncertainties as to timing, financial performance and results, our indebtedness under our revolving credit facility, availability of sufficient cash to pay our distributions and execute our business plan, prices and demand for oil, natural gas and natural gas liquids, our ability to replace reserves and efficiently develop our reserves, our ability to make acquisitions on economically acceptable terms and other important factors that could cause actual results to differ materially from those anticipated or implied in the forward looking statements. See Risk Factors in the Company s 10-K Annual Report for 2010, Form 10-Q dated March 31, 2011 and any other public filings and press releases. Vanguard Natural Resources, LLC undertakes no obligation to publicly update any forward looking statements, whether as a result of new information or future events. This presentation has been prepared as of October 8, 2011. 2
The GP / LP Relationship MLPs are partnerships with a general partner and limited partners General partner manages the assets and operations of the MLP Typically the GP is controlled by the sponsor or parent entity (in this case, Unit Corporation would own the general partner) Limited partners provide capital, but have no management role The principal business objective for MLPs is to increase the quarterly distributions to unitholders over time while ensuring the ongoing stability of the business In order to incentivize the GP to raise distributions to LPs, the GP will be entitled to increase its percentage of cash flow received through the IDR structure as it raises the distribution level and reaches certain distribution thresholds The distribution paid to the GP becomes a larger portion of the overall distribution, as certain target levels are met Example of Relatively Standard % Allocations of Available Cash Annual Amount Limited Partner's General Partner's Target Distribution Per Unit Percentage Percentage Minimum Annual Distribution $2.00 98% 2% 1st Target Distribution up to $2.20 98% 2% 2nd Target Distribution > $2.20 up to $2.50 85% 15% 3rd Target Distribution > $2.50 up to $3.00 75% 25% Thereafter > $3.00 50% 50% 3
Rather Have a Slice or the Whole Pie? Assuming the IDR Structure as outlined in the previous slide, the below depicts the growing cashflow attributed to the GP at different quarterly distribution levels Target 1 - $0.55/unit Target 2 - $0.625/unit Target 3 - $0.75/unit Thereafter- $0.80/unit $102 $112 $245 $661 $5,000 $5,500 $6,250 $7,500 LP GP IDRs become a burden on the MLP s cost of capital advantage, especially as higher IDR targets are reached Cumulative Allocation Summary Quarterly Distribution Implied Unit Price (@ 8% Yield) Level LP GP Total IDRs No IDRs IDRs No IDRs Variance MQD 98.0% 2.0% 100.0% $0.50 $0.50 $25.00 $25.00 0.0% Target 1 98.0% 2.0% 100.0% $0.55 $0.55 $27.50 $27.50 0.0% Target 2 96.2% 3.8% 100.0% $0.63 $0.64 $31.25 $31.82 1.8% Target 3 91.9% 8.1% 100.0% $0.75 $0.80 $37.50 $39.99 6.6% Thereafter 87.3% 12.7% 100.0% $0.80 $0.90 $40.00 $44.89 12.2% 4 Note: Distribution cash flow assumes 10.0 MM units with a minimum quarterly distribution of $0.50/unit and assumes current quarterly distribution of $0.80 /unit.
MLP Relative Price Performance Since 1/1/2009 Relative Price Performance 200.0% GP MLP Index Alerian MLP Index S&P 500 Index 150.0% 100.0% 50.0% 0.0% (50.0%) 1/1/09 5/5/09 9/7/09 1/10/10 5/15/10 9/16/10 1/19/11 5/24/11 9/26/11 5 Source: Capital IQ. (1) Includes: AHGP, ETE, KMI, NSH and TRGP.
Current Yields Across MLP Segments Current Yields 14.0% 12.0% 10.0% 8.4% 9.2% 8.4% 11.1% 9.8% 10.3% 11.8% 10.0% 8.0% 6.0% 4.0% 6.8% 4.9% 6.6% 5.2% 6.8% 6.9% 5.6% 4.7% 7.4% 6.3% 8.1% 8.4% 5.4% 4.3% 8.2% 2.0% 2.8% 0.0% General Partner Large Cap Pipeline Small & Mid Cap Pipeline Gathering & Processing Propane Upstream Coal Gas Storage 6 Source: Capital IQ, as of 9/26/2011. (1) Includes: AHGP, XTXI, ETE, KMI, NSH, TRGP. (2) Includes: BWP, BPL, EPB, EEP, ETP, EPD, KMP, MMP, NS, OKS, PAA, WPZ. (3) Includes: GEL, HEP, SEP, SXL, TCLP, TLP. (4) Includes: AMID, APL, CHKM, CPNO, CMLP, XTEX, DPM, EROC, MWE, RGNC, NGLS, WES. (5) Includes: APU, FGP, NRGY, NGL, SPH. (6) Includes: BBEP, EVEP, LGCY, LINE, PSE, QRE, VNR. (7) Includes: ARLP, NRP, RNO, PVG, OXF. (8) Includes: NKA, PNG.
Comparative General Partner Analysis Distribution Growth Leverage Analysis (1) 4.0x 3.5x 3.5x 3.0x 2.5x 2.0x 1.5x 1.2x 1.4x 1.5x 1.6x 1.7x 1.0x 0.5x 0.0x KMI AHGP ETE NSH XTXI TRGP 7 Source: Partnerships filings. (1) Reflects GP distribution growth assuming a 10% increase in underlying MLP distribution. Includes cash flow from ownership of LP and GP interests in the MLP.
MLP / GP Distribution Growth History Compound Annual Growth Rate (Since 6/30/08, unless otherwise noted) 70.0% 60.0% 60.9% MLP General Partner 50.0% 40.0% 33.2% 30.0% 26.8% 20.0% 10.0% 0.0% 18.2% 14.5% 11.8% 11.2% 9.2% 8.4% 3.6% 3.6% 0.0% ARLP / AHGP XTEX / XTXI ETP / ETE KMP / KMI NS / NSH NGLS / TRGP 8 (1) Represents three quarters of distribution/dividend growth, annualized. XTEX/XTXI reinstated distributions/dividends in October 2010 following two quarters of suspended payments. (2) Represents one quarter of distribution growth, annualized. KMI s IPO occurred on February 10, 2011. (3) Represents two quarters of distribution growth, annualized. TRGP s IPO occurred on December 6, 2010.
Comparative General Partner Analysis Comparative General Partner Analysis ($ in millions, except per unit data) Current Distributions Value of GP 9/26/2011 Current Cash Flow Paid to GP / Ownership (1) / Unit/Stock Equity Market Distribution/ 2011E MLP to GP Total Cash Flow Distribution Public GP GP MLP Price Capitalization Dividend Current Yield Coverage from MLP Distributions From GP Growth Name Ticker Ticker GP MLP GP MLP GP MLP GP MLP Ratio Interests Paid by MLP Ownership (1) / Leverage (2) Alliance Holdings GP, L.P. AHGP ARLP $44.43 $67.96 $2,659.7 $2,550.3 $2.33 $3.69 5.2% 5.4% 1.8x $142.7 64.6% 18.8x 1.4x Crosstex Energy, Inc. XTXI XTEX 14.44 16.28 681.3 840.8 0.40 1.24 2.8% 7.6% 1.6x 23.5 35.7% NM 1.7x Energy Transfer Equity, L.P. ETE ETP 36.52 42.51 8,143.0 9,049.7 2.50 3.58 6.8% 8.4% 1.0x 677.1 46.4% 16.0x 1.5x Kinder Morgan, Inc. (3) KMI KMP 26.34 69.29 18,622.4 23,311.8 1.20 4.60 4.6% 6.6% 1.0x 1,003.0 53.5% 20.7x 1.2x NuStar GP Holdings, LLC NSH NS 32.08 54.60 1,365.5 3,599.7 1.98 4.38 6.2% 8.0% 1.0x 87.2 26.8% 19.2x 1.6x Targa Resources Corp. TRGP NGLS 30.24 33.01 1,280.7 2,854.9 1.16 2.28 3.8% 6.9% 1.4x 62.4 27.2% 25.2x 3.5x Low 2.8% 5.4% 1.0x 26.8% 16.0x 1.2x Median 4.9% 7.3% 1.2x 41.0% 19.2x 1.6x Mean 5.3% 7.1% 1.2x 43.7% 20.0x 1.8x High 6.8% 8.4% 1.8x 64.6% 25.2x 3.5x 9 Source: Partnerships filings, Capital IQ and Wall Street research. (1) Excludes value of L.P. units and cash flow from L.P. units. (2) Reflects GP distribution growth assuming a 10% increase in underlying MLP distribution. Includes cash flow from ownership of LP and GP interests in the MLP. (3) Assumes distributions on outstanding i-units.
Illustrative Example of IDR Impact on Cost of Equity Cost of Capital With GP (In millions) The following hypothetical unit issuance illustrates the impact of IDRs on an MLP s equity cost of capital Assumptions: 1.0 million units issued -- $3.00 annualized distribution -- $37.50 price per LP unit Pre-Unit Issuance Distributions Total LP GP Distr. Tier 1 $45.0 $0.9 $46.0 Tier 2 6.1 1.1 7.2 Tier 3 10.2 3.4 13.6 Tier 4 0.0 0.0 0.0 Total $61.4 $5.4 $66.8 Post-Unit Issuance Distributions Total LP GP Distr. Tier 1 $47.2 $1.0 $48.2 Tier 2 6.4 1.1 7.6 Tier 3 10.7 3.6 14.3 Tier 4 0.0 0.0 0.0 Total $64.4 $5.7 $70.1 Summary Tot. Add'l Cash Distributed $3.3 Number of New LP Units Issued 1.0 Tot. Add'l Cash per New Unit $3.26 Effective Cost of Equity 8.7% 10 LP Units Outstanding 20.5 Total Units (incl GP) 20.9 Cost of Capital Without GP Pre-Unit Issuance Distributions Total LP GP Distr. Tier 1 Tier 2 Tier 3 Tier 4 Total $66.8 $0.0 $66.8 LP Units Outstanding (1) 20.9 Total Units (incl GP) 20.9 (1) Includes an assumed 0.4 million GP units currently outstanding. LP Units Outstanding 21.5 Total Units (incl GP) 21.9 Post-Unit Issuance Distributions Total LP GP Distr. Tier 1 Tier 2 Tier 3 Tier 4 Total $69.8 $0.0 $69.8 LP Units Outstanding 21.9 Total Units (incl GP) 21.9 Summary Tot. Add'l Cash Distributed $3.0 Number of New LP Units Issued 1.0 Tot. Add'l Cash per New Unit $3.00 Effective Cost of Equity 8.0% Comparison Summary Effective Cost of Equity w/gp 8.7% Effective Cost of Equity w/o GP 8.0% % Decrease in Cost of Equity 8.1%
Current Market Challenges The IDR structure has been very successful in incentivizing GPs but eventually increases the cost of capital for the underlying MLP and makes distribution growth harder to achieve In response, MLPs have adopted various approaches: 1. Eliminating the 50% IDR tier and capping IDRs at 25% Enterprise Products and NuStar have utilized this approach 2. Temporary give up of IDR payments related to a specific acquisition Plains All-American used the approach to facilitate the acquisition of Pacific Energy Partners and this approach has become common 3. No IDR structure at IPO Introduced by Copano and used by Duncan Energy Partners (and many of the E&P MLPs) 4. Reset mechanism Introduced by DCP Midstream and now a standard feature of new MLPs 5. Acquisition of General Partner interest and/or IDRs MarkWest, Magellan, Buckeye, Inergy, Enterprise, Penn Virginia, Natural Resource Partners and Genesis Energy 11
Benefits and Considerations of a GP / IDR Restructuring GP/IDR restructurings can reposition MLPs for sustained growth Benefits Lowers MLP s cost of equity Improves accretion from acquisition and expansion projects Enhances acquisition competitiveness Higher distribution growth Enhances stock market appeal Increased market capitalization No-IDR structure favored by many investors More directly aligns management s interests with MLP unitholders Enhances ability to pursue large strategic opportunities Considerations Transaction may be initially dilutive to MLP DCF Transaction may initially decrease MLP s distribution coverage ratio If future distributions were to be reduced, for whatever reason, the incentive distributions would no longer exist as a possible mitigating factor 12
Selected General Partner Transactions Analysis (1) ($ in millions, except per unit data) Implied GP Implied GP Implied GP Value (2) / GP GP % Premium / Distribution Announced Transaction % of GP Tier at Value Excluding Value (2) / GP Cash Flow Distribution (Discount) Growth Date Acquiror Target Value Acquired Acquisition LP Units Cash Flow (3) at 1.1x (4) Increase (5) to Last Close Leverage (6) 12/28/2010 Genesis Energy, L.P. Genesis Energy, LLC $690.4 NA 51.0% $690.4 57.7x 28.2x 159.1% NA 5.7x 11/17/2010 Vanguard Natural Resources, LLC Encore Energy Partners LP 380.0 100% NA 46.0 45.6x 38.6x NA NA 1.0x 9/21/2010 Penn Virginia Resource Partners, L.P. Penn Virginia GP Holdings, L.P. 956.6 100% 50.0% 466.0 17.7x 24.5x 33.0% 9.4% 2.1x 9/20/2010 Natural Resource Partners L.P. (7) NRP (GP) LP 881.9 N/A 50.0% 881.9 17.0x 14.8x 22.9% NA 2.8x 9/7/2010 Enterprise Products Partners, L.P. Enterprise GP Holdings L.P. 8,028.1 100% 25.0% 7,198.9 27.6x 22.6x 65.0% 15.6% 1.7x 8/9/2010 Inergy, L.P. Inergy Holdings, L.P. 1,921.5 100% 48.7% 1,921.5 26.5x 38.3x 66.6% 4.9% 2.2x 7/22/2010 Crestwood Holdings Partners LLC General Partner of Quicksilver Gas Services LP 701.0 100% 24.6% 277.4 94.9x 63.9x NA NA 1.7x 6/11/2010 Buckeye Partners LP Buckeye GP Holdings 1,160.6 100% 45.0% 1,155.9 21.0x 23.4x 46.1% 31.7% 1.5x 5/11/2010 Energy Transfer Equity, L.P. General Partner of Regency Energy Partners LP 300.0 100% 50.0% 300.0 37.2x 49.3x NA NA 2.2x 12/17/2009 Quintana Capital Group General Partner of Genesis Energy 100.0 100% 51.0% 100.0 12.4x 5.1x NA NA 4.6x 3/3/2009 Magellan Midstream Partners, L.P. Magellan Midstream Holdings LP 1,147.9 100% 50.0% 1,108.7 11.8x 9.3x 15.7% 25.0% 2.0x 9/5/2007 MarkWest Energy Partners MarkWest HydroCarbon Incorporated 734.0 90% 50.0% 576.0 21.0x 14.6x NA 22.2% 2.3x 5/7/2007 Enterprise GP Holdings L.P. General Partner of TEPPCO 1,100.0 100% 25.0% 900.2 18.6x 26.4x NA NA 1.6x 13 Note: Shading reflects 2010 transactions between GPs and the underlying MLPs. Source: Company filings, Wall Street Research and Dealogic. (1) Analysis reflects selected GP acquisitions since 1/1/2006. (2) Implied GP Value = Total Enterprise Value Market Value of LP interest owned by the GP. (3) Based on annualized MLP distribution at the time of acquisition. (4) Based on pro forma GP cash flow assuming a normalized 1.1x distribution coverage ratio at the MLP. (5) Reflects cash flow associated with GP interest and IDRs only. Excludes cash flow from LP units held by the GP prior to the transaction; only includes transactions with 100% equity consideration. (6) Reflects GP distribution growth assuming a 10% increase in underlying MLP distribution. Includes cash flow from ownership of LP and GP interests in the MLP. Summary (11) Median 23.7x 23.9x 55.6% 12.5% 2.2x Mean 27.9x 25.3x 65.4% 15.4% 2.7x (6) Based on 20 million Genesis common units and 7 million Genesis Waiver units issued. Includes 145,000 of common units that have been reserved for a new deferred compensation plan for employees. (7) Transaction represents the elimination of IDRs with the GP retaining its 2% interest in NRP. (8) Based on IDR cash flow. (9) Represents transaction value based on closing price before announcement. (10) Includes LP common units retained by Denbury. (11) Median and mean include highlighted transactions only.
Examples of GP Value Enhancement through IDRs ($ in millions) Inergy Propane 4,286% in 9 Years Genesis Energy 34,420% in 8.5 Years $2,000 $1,750 $1,500 $1,250 $1,000 $750 $500 $250 $0 LP Units (1) GP & IDRs (2) $1,921.5 $43.8 IPO - 7/25/01 Sale - 8/9/10 $800 $700 $600 $500 $400 $300 $200 $100 $0 LP Units (1) GP & IDRs (2) $690.4 $2.0 DNR Purchase - 5/6/02 Sale - 12/28/10 MarkWest 1,054% in 5.5 Years Targa Resources 398% in 4.5 Years $800 $700 $600 $500 $400 $300 $200 $100 $0 LP Units (1) GP & IDRs (2) $734.0 $63.6 IPO - 5/21/02 Sale - 9/5/07 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 LP Units (1) GP & IDRs (2) $254.2 IPO - 2/8/07 $1,265.0 Current Market Cap. 14 Note: Sale information based on data as of the announcement date of the transaction. (1) Equals the common and subordinated units held by the general partner times the common unit price, including unit purchases and sales from the time of IPO to the time of sale. (2) Equals the number of implied general partner units times the common unit price plus the value of the IDRs. At the time of sale, the value of the GP and IDRs is assumed to equal the total transaction value less the market value of the L.P. units (if any) held by the general partner.
Selected General Partner Transactions Additional Observations Announced Date Acquiror Target Pre-Deal Distribution Coverage (1) Accretion / Dilution Commentary 12/28/2010 Genesis Energy, L.P. Genesis Energy, LLC 1.45x Not disclosed. 9/21/2010 Penn Virginia Resource Partners, L.P. Penn Virginia GP Holdings, L.P. 0.97x Management: Transaction would result in modest dilution of PVR's distributable cash flow per unit in 2011, but expects the transaction to be accretive thereafter due to the benefits of the merger, including the elimination of incentive distributions currently being paid to PVG. NRP (GP) LP 1.18x Management: While the transaction is expected to be dilutive to cash available for distribution in the near-term, the 9/20/2010 Natural Resource Partners L.P. (3) transaction is in the long-term best interest of the partnership and management intends to recommend to the Board that the current distribution level be maintained through the remainder of 2010. 9/7/2010 Enterprise Products Partners, L.P. Enterprise GP Holdings L.P. 1.25x Management: Transaction to be mildly dilutive to DCF per unit in years 1-3 (1.5% in 2011, 1.0% in 2012, 0.5% in 2013) and breakeven or accretive during years 4-5. An affiliate of the GP agreed to waive approximately $275 mm of distributions for five years. As a percentage of total units issued in the transaction, this represents 14.7% in 2011, 12.5% in 2012, 11.4% in 2013, 10.8% in 2014, and 8.5% in 2015. The transaction is expected to result in annual cost savings of $6 mm. 8/9/2010 Inergy, L.P. Inergy Holdings, L.P. 0.91x Management: Transaction will be immediately neutral to NRGY's annualized distribution of $2.82 per unit with expected long-term accretion. Approximately 24% of the 47.7 mm units issued in the transaction are structured as PIK units, and will receive additional PIK units in lieu of cash distributions. These units will convert to common units on a one-for-basis (50% following first distribution after 1st anniversary of closing of the merger; 50% following first distribution after 2nd anniversary of closing of the merger). Fairness Opinion: Accretion / (Dilution) to DCF per unit through 2015 at levels ranging from (17.0%) (status quo case, 2011) to 3.8% (Pro forma $300mm annual wedge case, 2015). 6/11/2010 Buckeye Partners LP Buckeye GP Holdings 1.08x Management: DCF per unit dilution of about 6-7% in 2011 but expects long-term accretion. According to management, incremental $350 mm in wedge capital (over its base case) at an 8.0x EBITDA multiple completed in 2011 would result in break-even distributable cash flow per unit in 2012. Management s 2011-2014 base case includes $200mm annually in acquisitions at 9.0x EBITDA and $75 mm annually of growth capex at 6.0x EBITDA. No distribution increase was announced concurrent with the merger, but BPL announced a 5.5% increase in its per LP unit distribution as part of it 2Q10 earnings release in August. Fairness Opinion: Three cases dilutive to DCF per unit through 2014; one case through 2013. Estimate that base case would require $250 mm annual incremental wedge capital to breakeven in 2012; $120 mm to breakeven in 2013. 15 Source: Company filings, Wall Street Research and Dealogic. (1) Represents coverage during the quarter ended prior to announcement of transaction.
MLP IDR Structure Overview MLP IDR Structures by Segment Structured with IDRs Structured without IDRs IDRs Eliminated 100.0% 85.7% 40.0% 40.0% 16.7% 25.0% 12.5% 90.0% 80.0% 70.0% 8.3% 75.0% 75.0% 87.5% 60.0% 60.0% 60.0% 50.0% 40.0% 30.0% 20.0% 14.3% 10.0% 0.0% Upstream Propane Coal Gathering & Processing Large-Cap Pipeline Small-Cap Pipeline 16 Source: Partnership filings (1) Includes: BBEP, EVEP, LGCY, LINE, PSE, QRE, VNR. (2) Includes: APU, FGP, NRGY, NGL, SPH. (3) Includes: ARLP, NRP, OXF, PVR, RNO. (4) Includes: AMID, APL, CHKM, CPNO, CMLP, DPM, EROC, MWE, RGP, NGLS, WES, XTEX. (5) Includes: BWP, BPL, EPB, EEP, ETP, EPD, KMP, MMP, NS, OKS, PAA, WPZ. (6) Includes: GEL, HEP, MMLP, SEP, SXL, TCLP, TLLP, TLP.
E&P MLPs and IDRs E&P MLPs without IDRs (filed) LLC Structure Partnership Structure E&P MLPs with IDRs E&P MLPs with Other Incentive (filed) EVEP s general partner holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 25%, of the cash distributed from operating surplus in excess of $0.46 per unit per quarter LRE s general partner holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 23.1%, of the cash distributed from operating surplus in excess of second target distribution Management Incentive Fee GP Administrative Fee 17