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Christopher -- Re-sending this memo. Received an error message, so not sure
if first memo got through to you. -- David ---------------------- Forwarded by David L Fairley/HOU/ECT on 08/20/99 01:14 PM --------------------------- Enron Capital & Trade Resources Corp. From: David L Fairley 08/20/99 01:12 PM To: Christopher Smith/HOU/ECT@ECT cc: Subject: Re: City of Lakeland ("Lakeland") Credit Reserve Christopher -- It was my understanding that Structuring had responded to your questions early in the week. Apparently, your requests were not satisfied, so we do need to get together. Are there any other questions besides those from earlier? Do you have the latest model from Structuring, contracts from Legal, and term sheet from Origination? Please let me know what else you need. -- David To: David L Fairley/HOU/ECT@ECT, Janet R Dietrich/HOU/ECT@ECT, Evan Betzer/HOU/ECT@ECT cc: William S Bradford/HOU/ECT@ECT Subject: Re: City of Lakeland ("Lakeland") Credit Reserve David and Janet, I am re-sending this e-mail that outlines RAC's view of the transaction, follow-up needed through the drafting of the documentation and RAC's required involvement, and the credit reserve tied to the value based on the latest transaction value and structure RAC has seen. The "Comments/Questions" section of the attached e-mail outlines RAC's open issues, however, we have provided the appropriate credit reserve based on the value that we understand will be marked-to-market. As the deal evolves and the value tied to the transaction changes so will RAC's valuation and credit reserve. It is very important that we are copied on the documentation supporting the transaction so that we can understand the intricacies of the deal as well as Enron's obligations and remedies. I have advised Dan Hyvle of RAC's need to be copied on the documentation. If someone else in legal is running with this transaction during Dan's absence please let me know. I have scheduled a meeting at 5:00 PM, in Bill Bradford's office to discuss the content of the attached e-mail and any changes in the valuation of the transaction. Christopher Manager, RAC Ext. 33565 From: Christopher Smith 08/13/99 07:27 AM To: David L Fairley/HOU/ECT@ECT, William S Bradford/HOU/ECT@ECT cc: Evan Betzer/HOU/ECT@ECT, Janet R Dietrich/HOU/ECT@ECT Subject: City of Lakeland ("Lakeland") Credit Reserve Dave and Bill, I wanted to touch base with both of you on the status of my analysis for the Lakeland transaction. I have been working very closely with Evan Betzer (ext. 34399) of the Structuring group as it relates to: (i) the value of the transaction and the key assumptions thereof: (ii) valuing the transaction in accordance with ECT's proposal to Lakeland versus valuing the transaction as though ECT only holds 50% of the position with the other 50% held by Sonat; and (iii) pondering determining if the transportation "Max Rate" used to value a portion of ECT's transportation obligation to Lakeland is a fixed rate or a variable rate - the Structuring Group's model assumes that the Max Rate is fixed for the 15 year term, and the delta between the transport curve and the Max Rate multiplied by the associated transportation volumes is the primary source of value of the Lakeland transaction; and (iv) determining why we would not value all transport volumes in a like manner as (iii) above. Separately, a considerable portion of the value tied to this transaction is tied to an "Accelerated Payment" feature, i.e.: gas payments are made on the 20th of the delivery month versus the standard payment date of 25th of the following month whereas transport payments are made on the 10th of the delivery month versus the standard payment date of the 25th of the following month. I have not placed any value on this portion of the deal and thus no credit reserve has been assigned to this portion of the deal. Valuation: I have valued the Lakeland transaction at approximately $3.4MM (in-line with the Structuring group's valuation for the like scenario) with an associated credit reserve of $237M. This valuation is based on the following key assumptions. ECT is the Seller and no obligations are assumed by Sonat - the purpose of this approach is to value the transaction in accordance with the term sheet in front of Lakeland. Lakeland will pay ECT Index minus $0.06/MMBtu on approximately 157,232,934 MMBtu (45%) of the Firm MaxDQ - plus $0.0168/MMBtu paid to the desk, and Index minus $0.09/MMBtu on 192,971,190 MMBtu (55%) of the Firm MaxDQ - plus $0.0142/MMBtu paid to the desk. The total PV loss tied to this index minus sale, on the Firm MaxDQ, is approximately $17.4MM. FYI, I have included this associated monthly loss to ECT as an annuity in the credit reserve valuation process. Transport is valued using the "Transport" curve (mid-market price of $0.2177), provided in the Structuring group's model against an assumed Max Rate of $0.75/MMBtu on real volumes of 68,908,381 MMBtu. Based on the aforementioned, the AA value of transport is approximately $20.8MM. Comments/Questions: I need to obtain the appropriate forward volatilities for the transport curve. I am temporarily using NYMEX vols. I need to better understand why we are assigning value to some of the transport and not all of ECT's transport obligation. In that light, I need to clarify what ECT's remedies and obligations are, as it relates to the transport that is being assigned to ECT from Lakeland, in a Lakeland default scenario. The same questions surround the additional firm transport that is being purchased by ECT to support Lakeland's remaining Firm MaxDQ gas volumes (approximately 124 Bcf). Has an agreement with Sonat been drafted that affords them the opportunity to fulfil a portion of ECT's obligations under its proposal to Lakeland? If so, this transaction may need to be valued separately and based on such agreement's respective terms. Lastly, based on both the Structuring group's model and my analysis it would appear that the value of the Lakeland transaction resides with the desk. The Origination group's value is tied to the value associated with its share of the Accelerated Payment feature of the transaction which RAC has not included in its valuation.
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