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Enron Mail |
Further to the information feedback provided to you below:
Item 3. I've updated page 2 of the attached to illustrate pricing that was presented to Brazos and its advisor (Merril Lynch) during the period of time leading up to the PPA's signing on November 1, 1993. You'll see that actual results to date have been in line with were costs were expected to be under the contract. We have a one page document that appears to be part of a larger Brazos document that indicates that Brazos looked at 10 competing alternatives to the Tenaska IV plant (including one Enron alternative). The document is date-stamped December 28, 1993 and may be part of an "integrated resource plan" or another regulatory filing required in the State of Texas. Robin Kittel in our Austin, TX office is looking into its source and is trying to find any other regulatory filings in which Brazos represented that it viewed Tenaska IV as its "least cost alternative" at the point in time it entered into the contract. I don't expect we'll have this information prior to Friday. These points aside, there is nothing in the contract that ties pricing or performance to returns realized by Tenaska IV. The issue of "fairness" is one that Brazos seems to be emotionally attached to without basis under the contract. One item to note in the "fraudulent inducement" arena, the last commercial exchanges made between Tenaska IV and Brazos prior to the June 30 transaction indicate that Brazos may have raised some concerns over "incentives" that may have been provided to the Brazos staff closest to the transaction. After discussions with Tenaska, Inc. and review of the facilitation material, we've identified the source of these concerns to be a dove hunting trip that was planned during the summer of 1993 and taken November 9 through 11, 1993, just after the PPA's signing. The point person for Brazos and Tenaska's CEO, lead developer and another Tenaska employee took the trip with their spouses. Rick Hill Generation Investments Group ---------------------- Forwarded by Garrick Hill/HOU/ECT on 11/08/2000 12:12 PM --------------------------- Enron North America Corp. From: Garrick Hill 11/07/2000 06:01 PM To: dharvin@velaw.com cc: Dan Lyons/HOU/ECT@ECT, Carl Tricoli/Corp/Enron@Enron, Richard B Sanders/HOU/ECT@ECT, tmoore@llgm.com, kstern@velaw.com, John King/HOU/ECT@ECT Subject: BRAZOS - PREPARED AT THE REQUEST OF COUNSEL Some initial reactions to your questions... The implied enterprise value at June 30 based on PPE/ENA's net purchase price and outstanding project-level debt was $1,457/kW; this value reflects fully-contracted cash flow under the terms of the existing PPA. As a pure merchant plant, the value might range from $50/kW (i.e., the "scrap value" based on a view that the margins realized from running the plant are insufficient to warrant keeping the doors open) to $350/kW (based on a view that the plant runs 7x24 and achieves prices at levels forecasted by Pace Global Energy (Pace) in a study that we had completed to facilitate commercial discussions with Brazos earlier this year). The attached slide will give you a feel for where PPA prices are relative to market prices, again using Pace's numbers to illustrate "market". ENA's ERCOT 7x24 curve is probably higher at the front end and lower on the back end than what we see from Pace, reflecting (1) at the front end, what we're seeing in today's gas forward markets (i.e., higher prices than Pace predicts from an "econometrics" point of view) and (2) at the back end, lower overall inflation. In general, I think it's safe to say that we see the spread between PPA and market prices widening, especially in light of the fact that current gas market conditions narrow the spread considerably during the period of time in which a Brazos breach is most likely. Based on the facilitation material we've seen, it appears that Brazos will argue that its staff was lead to believe that Tenaska IV would earn no more than 20% return on equity. However, we've always viewed this as a somewhat disingenuous line of argument because Brazos has gone on public record as saying that it looked at a number of competing solutions to meet its members' needs and chose the least cost alternative in contracting with Tenaska IV. In fact, the all-in price projections we've seen in correspondence between Tenaska IV and Brazos in the contracting process appear to be in line with actual results. To the extent the project has earned a return in excess of 20%, this can generally be attributed to the cost savings realized in construction and strict enforcement of the contract. It's also important to note that Tenaska IV took on all of the development risk in this project; it could have easily underbudgeted costs and found itself earning significantly less. See the historical perspective that follows the forward projections contained in the attached. We generally agree that Brazos has not been harmed by the current contract to date, but is in an above-market contract on a going forward basis. Brazos appears to have three options at the end of the primary term (1) walk away, (2) purchase the plant for PV5 of future capacity payments, or (3) live with the contract by paying scheduled contract prices (i.e., capacity charges and gas agency fees) plus operating costs. If Brazos selects options (2) or (3), Tenaska IV has certain "put-back" rights, but the plant is generally Brazos' for the taking. These provisions of the PPA should yield prices that are below prevailing market prices in most years (i.e., other than those in which major maintenance will occur) as illustrated in the attached. Accordingly, we view the contract as more of an "accelerated payment plant" that front end loads capital recovery to Tenaska IV. Patton Boggs' argument puts a new "spin" on the contract structure, one that we've not heard up to this point. If you have any questions or need additional information, please call me at 713-853-6027. Rick Hill Generation Investments Group ---------------------- Forwarded by Garrick Hill/HOU/ECT on 11/07/2000 03:01 PM --------------------------- Dan Lyons 11/07/2000 11:00 AM To: Garrick Hill/HOU/ECT@ECT cc: Subject: Brazos More Grist ----- Forwarded by Dan Lyons/HOU/ECT on 11/07/2000 10:59 AM ----- "Harvin, David" <dharvin@velaw.com< 11/06/2000 02:58 PM To: "Lyons, Dan (Enron)" <dan.lyons@enron.com<, "Richard Sanders (E-mail)" <richard.b.sanders@enron.com< cc: "Stern, Karl" <kstern@velaw.com<, "Thomas J. Moore (E-mail)" <TMOORE@LLGM.COM< Subject: Brazos There are some factual assertions in Brazos' memo that caught my eye. I wondered what information we have on these points: 1) at the bottom of p. 2 is a reference to a March 10, 1994 memo in which someone claimed Tenaska planned to develop this site irrespective of Brazos. The suggestion is that Tenaska would have an adequate remedy by selling power elsewhere. What is our reaction to that? 2) at the bottom of p. 5 is an assertion that we must be predicting that the difference between market and contract prices will increase over time. Is that our position? If we apply a contract v. market measure, I know we seek to base the contract portion on the escalated contract prices, but what do we use for market? (Their piece of course does not address what is the market.) 3) in the middle of p. 6 is the claim that representations were made to Brazos that Tenaska would earn a modest profit under the PPA. Do we know what that refers to? 4) at the bottom of p. 6 is a statement that under present market conditions Brazos cannot even exercise this buyout option (presumably because its payments under the PPA do not cause Brazos to be non-competitive). That is interesting. If so, what is Brazos's complaint? 5) at the bottom of p. 7 is a claim that the option period was designed as an alternative to Brazos's owning the plant at the end of the primary term. What do we know about that? What would be the effect of the pricing in the renewal term? ++++++CONFIDENTIALITY NOTICE+++++ The information in this email may be confidential and/or privileged. This email is intended to be reviewed by only the individual or organization named above. If you are not the intended recipient or an authorized representative of the intended recipient, you are hereby notified that any review, dissemination or copying of this email and its attachments, if any, or the information contained herein is prohibited. If you have received this email in error, please immediately notify the sender by return email and delete this email from your system. Thank You
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