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Enron Mail |
Mike and Jeff,
This note is to update you on information we have related to the GTL Methanol project in Darwin, Australia. Larry, John and I met with Chase/JP Morgan, specifically, the banker who led the financing of the Titan Methanol Plant in Trinidad. We wanted to get an independent opinion on the financeability of the current GTL structure and insights into the current market for project bank debt for commodity deals. The key opinion of Steve Nordaker, the Chase banker on the Titan deal, was that project banks do not take commodity price risk unless they have a very clear, supportable view of the long-term market price for that commodity. As for methanol, with the high level of uncertainty about the demand and price for methanol as tied to the future of MTBE, Steve said that Chase would need a profit margin contractually guaranteed by the project documents before lending to a project. Steve further suggested that if the gas supply contract had a floating price tied to methanol prices with a floor price, that floor should be around $0.50/ mmbtu to give the lenders comfort that the plant would remain competitive over the years required to repay the debt. GTL has agreed to a fixed price of $1.02/mmbtu with Phillips. Chase would not lend to the Darwin Methanol project as structured with a fixed price for the gas input and an index price for the methanol off take. Nordaker thought that it would be very hard to find even one bank to take the unhedged risk on the methanol margin. In fact, GTL will need at least ten banks to raise the full $250 million of senior project debt. Another key risk that Chase would not take is the strength of the Sponsor, in this case GTL. GTL has a total market cap of approx. $30 million. It will have to issue new shares equal in value to more than its current market cap to fund its portion of the project equity. If the project experiences cost overruns, the Lenders will expect someone with a high credit rating or demonstrable financial strength to invest whatever amount is needed to finish construction. I think that GTL is taking a big risk of wasting several months before finding out that its project is not financeable. In addition to the waste of time, GTL will have signed a gas supply agreement that will have to be renegotiated, and other key documents may need to be amended. EGM will not get the methanol it wants on time and may be faced with the choice of 1) taking on extra methanol price risk (by agreeing to buy more of the plant's output at a fixed price or by providing sponsor support) or 2) dropping out of the deal. If we have hedged some risk in anticipation of the project succeeding, then we will face pressure to take on more risk to cover the hedges. I think that GTL's deal is fixable, and John wants the methanol. I, therefore, recommend that we push GTL on several key structural elements so that GTL achieves a feasible project and so that EGM receives its methanol on time. Because EGM is only willing to buy 1/3 of the plant's production of methanol at a fixed price, the most important point is to get Phillips to agree to a floating gas price. Kevin Alexander of GTL says that they have tried, but that Phillips would not accept it. If necessary, we should offer to intervene with Phillips. We will, also, try to keep GTL realistic on the time it takes to negotiate project documents (six to nine months) and to issue public equity (no limit if the markets turn bad). John, Larry and I are developing a plan to move GTL to a realistic structure. We may need your help with Phillips. We will keep you apprised. Jim
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