BARCLAYS CAPITAL Tobacco Securitization Update May 19, 2010 Proprietary and Con?dential Executive Summary 23.74% of the State?s tobacco settlement revenues remain unpledged, equivalent to approximately $57 million in 2010 The market for tobacco securitizations has improved markedly over the past 12 months I A traditional unenhanced tobacco securitization would generate approximately $642 million in upfront proceeds - Alternately, Barclays? proprietary structure ?unenhanced tobacco would generate $462 million upfront plus: an average annual BABs subsidy of $6.3 million from 2011?2022 with a present value of $62.3 million; and (ii) residual TSRs with a present value of $21 1 million from 2022-2028 A unenhanced tobacco BABs structure which delays the TSR pledge until 2013, thereby mitigating near?term budget impact, would reduce net bond proceeds by approximately $121 million and release approximately $60 million in 2011 and 2012 for budget relief BARCLAYS Tobacco Market Conditions The market for pure tobacco bonds have recently become less volatile as illustrated by the bellwether NJ 2007 bond Long term tax-exempt yields have declined over the last several weeks due to relatively favorable economic indicators, a reduction in tax-exempt supply given the issuance of $99.8 billion of Direct Payment BABs and relatively steady high yield bond fund in?ows The improved market tone has positively impacted tobacco market yields Series 2007-1 2041 bonds are trading around 8.0% in the secondary market, signi?cantly lower than the all time highs (over 10%) Unenhanced Tobacco TSFC (NI) Series 2007-1 5.00% 2041 CIB v. 30 yr MMD Yield 12 10 8 mm 5 355prs 4 MW. i 2 0 May-09 May-10 ?30 Yr MMD (NJ) 2041 5.00% The secondary market for tobacco bonds has been driven by fundamentals rather than sector technicals BA RC CAPITAL Tobacco Securitization Alternatives Unenhanced Tax-Exempt Tobacco Unenhanced Tobacco BABs I Given the improvement in unenhanced tobacco yields, the I Tobacco BABs could be sold with a net cost bene?t over pure current environment may provide an opportunity to extract value tax-exempt tobacco bonds from the Unpledged 23.74% of the State?s tobacco settlement we have ?mited the maturity to a 10 year average life to reVenueS dovetail with taxable asset-backed investor appetite I Up to $462 million in upfront net proceeds can be generated for capital projects if the Corporation securitizes its Unpledged TSRs I A securitization of the Unpledged TSRs would generate approximately $642 million in upfront net proceeds I The structure would have a rated final maturity of 2025 and an expected final maturity of 2022 with a net 3.93% cost of funds which is approximately 193 basis point lower than pure tax- exempt tobacco bonds under current market conditions The structure would have a rated final maturity of 2038 and an expected final maturity of 2028 with a 5.86% cost of funds The PV of residual TSRs from 2022 (expected final of BABs) I Given the likelihood of more stringent rating agency criteria, we to 2028 (expected fina of Unenhanced Tax_Exempt) is $211 have conservatively structured the transaction taking into million account the projected effects of the 2009 FET increase in 2010 From 2011-2022, the average annual subsidy is $6.3 million and thereafter with a present value of $62.3 million I By delaying the pledge to 2013, the Corporation can generate $341 million upfront with an average annual subsidy of $5.4 million from 2013-2022 Scenario First TSRs Pledged Net Proceeds Cost of Funds RatEd Fina] Expected Final Tax-Exempt 201 1 $642 mil 5.86% 2038/2028 BABs 201 1 $462 mil 3.93%* 2025/2022 Delayed Pledge BABs 2013 $341 mil 4.08%* 2024/2022 Net BABs Yield 01! BARCLAYS Summary of Results Summar of Results CAPITAL Scenario TE BABs Delayed Pledge BABs Rated Final Maturity 2038 2025 2024 Expected Final Maturity 2028 2022 2022 First TSRs Pledged 2011 2011 2013 CIB Par 753,065,000 533,115,000 453,525,000 OIP (OID) (28,031,521) Total Sources 725,033,479 533,115,000 453,525,000 Upfront Net Proceeds 642,088,008 462,272,955 340,788,393 DSRF 60,051,919 53,311,500 45,352,500 Capitalized Interest 15,362,902 12,199,395 62,698,857 Cost of Issuance 7,530,650 5,331,150 4,685,250 Total Uses 725,033,479 533,115,000 453,525,000 All-In TIC 5.86% 3.93%* 4.08%* Average Coverage 1.26x 1.20x 1.20x Minimum Coverage 1.20x 1.20x 1.20x Net BABs Yield 10 4 Sector Developments Tobacco Consumption Declined Dramatically in 2009 and is Projected to Continue Declining Total cigarette industry shipment volume was down an estimated 8.6% for 2009 I Cigarette shipment volume has been and continues to be negatively impacted by the April 1, 2009 $0.62 increase in the Federal Excise Tax and the expansion of smoking bans I The table to the right shows cigarette shipment annual volume declines I Global Insight?s forecasted, yet unpublished, consumption declines for 2009 and 2010 are expected to be 8.8% and respectively Consumption declines are expected to be high through 2016 and revert back to decline trends of approximately 2% thereafter Consumption Projections Sticks (bil) 300 200 ?Unpub ished Global Insight Cigarette Consumption Projection 100 2010 2015 2020 2025 MSA Payments Have Been Impacted by Claims of An NPM Adjustment Since Sales Year 2003 to the 2003 Adjustment Any Settling State who agreed to the Arbitration Process will receive a 20% reduction on any amounts found to be owed pursuant NPM 2003 NPM Adjustment Reynolds American and Lorillard pay $755 million into DPA April 2006 Payment ?y 2004 NPM Adjustment Reynolds American and Lorillard pay $696 million into DPA April 2007 Payment 2006 NPM Adjustment Reynolds American withholds $406.5 million Lorillard pays $69 million into DPA April 2009 Payment 2005 NPM Activity PMs released approx $540 million from the DPA relating to the 2005 NPM Adjustment made for 2006* 2005 NPM Adjustment Reynolds American and Lorillard pay $503 million into DPA Feb 2009 April 2008 Payment 2007 NPM Adjustment SFD conceded by Settling States Reynolds American and Lorillard pay $542.1 million into DPA General Tobacco defaulted $86.9 mil April 2010 Payment The Settling States named Abner Mikva and the Participating Manufacturers named William Bassler. Those two arbitrators will select the third neutral arbitrator. A process is being negotiated between the states and the manufacturers to allow and resolve objections from any party as to the third arbitrator. The third neutral arbitrator will likely be in place in early May. Once the panel is selected, the pace of the arbitration should pick up; however it is likely that the overall process will be ?The 0PMs and the Settling States have engaged NERA and Dr. Andrew loskow to make the 2006 SFD. BARCIAYS 6 Excise Tax Increases, Smoking Bans and Smokeless Tobacco I Federal Excise Tax The Children?s Health Insurance Program Reauthorization Act of 2009 was signed into law on February 4, 2009. The Act increased the FET to $1.01 effective April 1, 2009 I Excise Tax Increases. The average state cigarette tax is $1.42 per pack, including taxes slated to be enacted (WA on 5/1/10; HI, NM, SC, UT on 7/1/10) Currently, 29 states, DC, Puerto Rico, the Northern Marianas, and Guam have cigarette tax rates of $1.00 per pack or higher; 14 states, DC, and Guam have cigarette tax rates of $2.00 per pack or higher; and four states (CT, HI, RI and WA) and Guam have cigarette tax rates of $3.00 per pack or higher At $3.46 a pack, Rhode Island?s excise tax is the highest in the nation South Carolina, a major tobacco growing state, recently increased its excise tax by $0.50 effective 7/1/2010 I Smoking Bans. As of May 2010, 28 states, Washington, DC, and Puerto Rico have passed smoke-free laws that cover restaurants and bars 4 other states FL, ID, LA and NV have smoke-free laws that cover restaurants, but exempt stand-alone bars 3 states KS, MS, OK - have approved smoking ban bills in 2010 On May 4, 2010, Gov. Arnold Schwarzenegger vetoed smoking bans at California?s state parks and beaches as an infringement on individual rights I Smokeless Tobacco. Since 2006 each of the OPMs have introduced smokeless products in the US. Altria believes that the smokeless category's volume grew at an estimated rate of approximately 7% in 2009 Cl. BARCLAYS CAPITAL Active Litigation I In January, it was reported that tobacco executives asked Solicitor General Kagan to drop an appeal of a lower-court ruling that the government could not collect a requested $280 billion in past industry profits or compel the companies to fund a $14 billion nationwide stop-smoking campaign. In return, the tobacco industry would drop its own appeal of the lower-court case, which found tobacco ?rms guilty of racketeering Instead, on February 19, Philip Morris USA asked the US Supreme Court to overturn the US Court of Appeals for the District of Columbia's May 2009 decision that upheld US District Judge Gladys Kessler's verdict in the suit that cigarette makers violated Federal anti-racketeering laws and conspired to lie about the dangers of smoking. On the same day, the Obama administration also filed an appeal in the US Supreme Court, challenging US District Judge Cladys Kessler and the appeal court's rejection of the attempt to force cigarette makers to fund smoking cessation and public education programs I Engle Progeny. On January 26, 2010, Engle Progeny plaintiffs requested that a panel of judges from the 1 1th Circuit Court of Appeals not force them to prove liability on the part of cigarette makers. The cigarette makers, in turn, have requested that the appellate court block Federal trial courts from applying the 2006 Florida Supreme Court decision that allowed Engle plaintiffs to use the original ?ndings that the companies sold defective products and conspired to hide information about the side effects of smoking Additionally, cigarette makers are offering plaintiffs to settle individual progeny suits and to discourage them from going to trial. Florida law states that if a plaintiff ultimately obtains a judgment 25% less than the rejected settlement offer, the plaintiff must pay the defendant's legal fees. Thus far, one plaintiff who rejected the offer was ordered to pay legal fees of $1 00,000 after loosing the case 13 of the 15 progeny cases that have reached a full jury verdict since February 2009 have been in favor of the plaintiff, and although awards so far have been in the range of a few millions, which cigarette makers have not paid and could be thrown out on appeal, the payouts could start to add up if verdicts keep going against the industry, and the long-running cases could add to the companies' overall cost of litigation In June 2009, Florida set a bond cap of $200 million that applies to all the Engle Progeny cases and established individual caps for individual suits Cl. BARCLAYS Other Active Litigation I General Tobacco. On January 14, 2010, General Tobacco raised its challenges to the MSA in papers ?led in opposition to an action brought by the State of Arkansas. Arkansas is the only State that has brought litigation against General Tobacco. A day earlier, General Tobacco ?led a notice in the US. Court of Appeals for the Sixth Circuit appealing a decision of a Kentucky District Court in a case challenging the MSA brought by General Tobacco against all of the Settling States and the Participating Manufacturers. On January 27, 2010, General Tobacco announced that it will comply with recent notices regarding the removal of its cigarette brands from certain state directories of approved brands for sale. The company has allegedly failed to pay approximately $284.5 million in MSA payments to these states as of that date In February 2010, Kansas sued General Tobacco for failing to pay 2009 payments In March 2010, the Court granted Arkansas Summary Judgment on all claims In April 2010, General Tobacco defaulted on $86.9 mil of 201 0 MSA payments General Tobacco is going out of business BARCLAYS Disclaimer This document has been prepared by Barclays Capital, the investment banking division of Barclays Bank PLC ("Barclays"), for information purposes only. This document is an indicative summary of the terms and conditions of the securities/transaction described herein and may be amended, superseded or replaced by subsequent summaries. The final terms and conditions of the securities/transaction will be set out in full in the applicable offering document(s) or binding transaction document(s). This document shall not constitute an underwriting commitment, an offer of financing, an offer to sell, or the solicitation of an offer to buy any securities described herein, which shall be subject to Barclays' internal approvals. No transaction or service related thereto is contemplated without Barclays' subsequent formal agreement. Barclays is acting solely as principal and not as advisor or fiduciary. Accordingly you must independently determine, with your own advisors, the appropriateness for you of the securities/transaction before investing or transacting. Barclays accepts no liability whatsoever for any consequential losses arising from the use of this document or reliance on the information contained herein. Barclays does not guarantee the accuracy or completeness of information which is contained in this document and which is stated to have been obtained from or is based upon trade and statistical services or other third party sources. Any data on past performance, modeling or back-testing contained herein is no indication as to future performance. No representation is made as to the reasonableness of the assumptions made within or the accuracy or completeness of any modeling or back-testing. All opinions and estimates are given as of the date hereof and are subject to change. The value of any investment may ?uctuate as a result of market changes. The information in this document is not intended to predict actual results and no assurances are given with respect thereto. Any price provided herein is non-binding and is subject to change. The receipt by you of such price shall not constitute a binding transaction at such price. Barclays does not make any representation or warranty, regarding the adequacy or reasonableness of the pricing information herein and accepts no responsibility or liability for any losses or expenses arising out of the use of or reliance on this information. Pricing information is as of April 6, 2010. Barclays, its affiliates and the individuals associated therewith may (in various capacities) have positions or deal in transactions or securities (or related derivatives) identical or similar to those described herein. We do not represent that this information is accurate or complete after the date of this document and it should not be relied upon as such. Opinions expressed herein are subject to change without notice. The products mentioned in this document may not be eligible for sale in some states or countries, nor suitable for all types of investors; their value and the income they produce may ?uctuate and/ or be adversely affected by exchange rates, interest rates, or other factors. IRS Circular 230 Disclosure: Barclays Capital and its affiliates do not provide tax advice. Please note that any discussion of US. tax matters contained in this communication (including any attachments) cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and you should seek advice based on your particular circumstances from an independent tax advisor. Barclays Bank PLC (?Barclays?), conducts its US. underwriting and broker-dealer activities through its wholly-owned indirect subsidiary, a registered broker-dealer, Barclays Capital Inc. BCI is a member SIPC. Registered Office: 745 Seventh Avenue, New York, NY 10019. Copyright Barclays Bank PLC, 2010 (all rights reserved). This document is confidential, and no part of it may be reproduced, distributed or transmitted without the prior written permission of Barclays Capital. BARCLAYS 10