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Enron Mail |
Jeff, Dan, & Alan:
Please see the discussion below regarding the physical contracts. Please call me to discuss as soon as possible. This transaction is to close this week and these contracts are conditions to closing. Thanks for your assistance. Teresa Teresa G. Bushman Enron North America Corp. 1400 Smith Street, EB 3835A Houston, TX 77002 (713) 853-7895 fax (713) 646-3393 teresa.g.bushman@enron.com ----- Forwarded by Teresa G Bushman/HOU/ECT on 12/19/2000 01:11 PM ----- rainj@tklaw.com 12/19/2000 11:16 AM To: nora.dobin@enron.com, Tim.Proffitt@enron.com, Chris.Herron@enron.com, Stanley.Farmer@enron.com, Kevin.Liss@enron.com, Teresa.G.Bushman@enron.com, mary.cook@enron.com cc: shearerr@tklaw.com, hardiet@tklaw.com Subject: Brazos VPP - Open issues Tax Issues I have spoken with my tax partner, T. Hardie, about a couple of issues. First is whether we should increase the general partner's share from .0001% to .0025% in order to reduce a possible risk that Brazos VPP Limited Partnership might somehow not be treated as a partnership for tax purposes. T. does not feel strongly about this (in part because the consequences should not be adverse) and, unless Kevin desires otherwise, I think we should leave the percentage at .0001%. (Any tax law with respect to the minimum .0025% level is probably obsolete now that we have "check-the-box" elections for tax treatment as a partnership.) Nora advises me that Stan is fine with this from an accounting perspective. The second tax issue is whether Agave, as depositor under the Trust Agreement, can be tax matters partner for the Trust (which will also elect to be taxed as a partnership). Since only a partner can be tax matters partner, it appears that one of the Class B Certificateholders -- i.e., Bank of America -- must be the tax matters partner. The Servicer can of course assist with preparation of income tax filings. Balancing Agreement Attached below is a revised Balancing Agreement, with the changes discussed on Monday night by Nora, Tim, Teresa, Bob and me. The principal change is to add an indemnity section to this Agreement in place of the indemnity we want to delete from the Participation Agreement that Bracewell Patterson has prepared. This indemnity is based on the Term Sheet and is considerably narrower, but since we did not discuss it specifically, please review it carefully. Please pay attention to the note following the definition of "Servicer Fee" that suggests that the LIBOR breakage costs and capital adequacy costs be moved to the new indemnity section. Nora and I think that this would be more appealing to the Banks, but Stan may prefer to have this built into the Servicing Fee. (See attached file: Balancing Agreement Ver 5 from 4.doc) Physical Sales Contracts One of our biggest challenges to a quick closing is getting everyone to agree on some important features of the master gas and oil purchase/sale agreements. The term sheet given to the Banks says the following: A. With respect to each Production Payment under which Brazos expects to receive deliveries of natural gas in kind, Brazos shall enter into a confirmation under the NGPSA with ENA whereby ENA or ERAC shall (1) purchase all gas or oil delivered to the Company in kind under such Production Payment and (2) pay floating prices for such gas or oil. The floating prices will be swapped into pre-determined fixed prices via an Energy Price Swap Agreement. B. Brazos will dedicate to ENA or ERAC all Production Payment gas or oil which is delivered under the Production Payments documents. C. The quantities of gas or oil purchased each month shall consist of all gas or oilactually delivered in kind to Brazos during such month under the Production Payment. ENA and ERAC will be notified monthly in advance of the amount of gas or oil expected to be delivered at each delivery point. D. If the actual quantity of Production Payment hydrocarbons delivered to Brazos is less than the scheduled quantity of hydrocarbons to be delivered (the "Scheduled Volumes"), and the producer has not delivered adjustment quantities of Production Payment hydrocarbons to satisfy such deficiency, the Servicer (i.e., Agave, the new Enron subsidiary guaranteed by Enron Corp.) will make a mandatory advance equal to the value of such deficiency at the applicable ENA or ERAC price. E. As consideration for the mandatory advance, Brazos will assign to the Servicer the right to receive the Adjustment Quantities (or cash) that Brazos is entitled to receive under the Production Payment documents related to such delivery under the Production Payment. In analyzing the physical contracts, and all other components of this deal, it is important to remember that one purpose of the deal is to lock in, for at least the 97% debt component of the total financing, a cash flow stream that amortizes the debt over the entire term of each Production Payment. The pieces of the deal -- the oil and gas accruing to the Production Payment, the physical sales contracts, and the swaps -- have to fit together for the entire life of each Production Payment. It is also important to remember that if there is a mismatch in cash flows, it will most likely be made up by payments from Enron Corp. under its guaranty of Agave's mandatory "balancing" advances. So it behooves Enron, as well as the Banks, to make sure that the pieces of the deal fit together. It therefore seems to me that the physical contracts need to have the following features: 1. the physical contracts need to cover all of the production accruing to each Production Payment during the life of that Production Payment, including both scheduled quantities and adjustment quantities. Therefore there can be no minimum or maximum limits on quantities taken, and the right to terminate the physical contracts must be limited to a real melt-down situation. It is probably misleading to talk about the scheduled amounts being on a firm basis. 2. the physical contracts need to match the commodity price swaps that ENA will be providing for the scheduled amounts of production, with floating prices for these scheduled amounts that are identical to the floating swap prices. Therefore the Contract Prices for the scheduled amounts of gas need to key off of Inside FERC and the Contract Prices for the scheduled amounts of oil need to key off of NYMEX WTI, in each case with any agreed basis differentials. 3. the physical contracts need to price the adjustment quantities in a way that causes the adjustment quantities to generate enough cash to repay Agave/Enron for any mandatory balancing advances. The way to do this is to price any deliveries in excess of the scheduled amounts at the Index Prices contained in the production payment conveyances. The Index Prices for gas in the two existing deals are Gas Daily prices and for oil are NYMEX WTI less differentials. 4. the physical contracts need to match the timing of the conveyances for adjustment quantities. This is daily for gas deliveries and monthly for oil deliveries. 5. the physical contracts need to have a cover formula that protects both ENA/ERAC and Agave/Enron. The present formula in the Enfolio contract says that ENA pays the Contract Price for the scheduled quantities that are delivered and that Brazos pays the product of the shortfall in scheduled quantities times the positive remainder, if any, of the Index Price minus the Contract Price. We need to change this last feature to say that Brazos pays this remainder, if positive, but that Brazos also gets a credit is this remainder is negative. Tim Proffitt can explain the math to anyone that wants to understand it, but the basic idea is that if there is a shortfall, Brazos buys gas from ENA at the Index Price to cover the shortfall and then ENA pays the Contract Price for the full scheduled amount. 6. the contracts need to do away with any concept of frequent trading over the phone. Each Production Payment should generate only one written confirmation. 7. the contracts need to be clear that netting occurs over all transactions. This should protect ENA and ERAC against Brazos owing them money for one Production Payment where production has substantially shut down and not having the ability to pay. In light of the above, we also need to consider whether we are better off starting with the modern Enfolio form that is designed for true commercial transactions or whether it makes more sense to add the points described above to the old Cactus form. John W. Rain Thompson & Knight L.L.P. 1700 Pacific Ave. Dallas, Texas 75201 Phone: 214.969.1644 (Dallas) Phone: 713.653.8887 (Houston) Fax: 214.880.3150 This email and any attachments to it may contain legally privileged information or confidential information, which are not intended to be disclosed. If you are not the intended recipient of this email, please do not read or print any attachments or forward or copy this email or any attachments. Instead, please permanently delete this email and any attachments and notify the sender of his mistake. Thank you very much. - Balancing Agreement Ver 5 from 4.doc
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