Message-ID: <6025720.1075845099134.JavaMail.evans@thyme> Date: Thu, 10 May 2001 11:54:45 -0700 (PDT) From: rob.walls@enron.com To: james.derrick@enron.com Subject: FW: Renegotiation thoughts Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable X-From: Walls Jr., Rob X-To: Derrick Jr., James X-cc: X-bcc: X-Folder: \Derrick Jr., James\Derrick Jr., James\Inbox X-Origin: DERRICK-J X-FileName: Derrick Jr., James.pst =09hmmm. -----Original Message----- From: =09Cline, Wade =20 Sent:=09Thursday, May 10, 2001 11:01 AM To:=09McDonald, Rebecca; Hughes, James A.; Walls Jr., Rob; Lundstrom, Bruce Cc:=09McGregor, Neil Subject:=09Renegotiation thoughts Below is an e-mail I worked up on my renegotiation thoughts for your readin= g pleasure. Since this idea came up on our Thursday call, I will go ahead a= nd send the e-mail out for feedback. We can discuss any thoughts you have o= n this either Friday or on a subsequent call. Regards, Col. Travis _____________________________________ The thoughts below are not for our meeting on Friday, but they represent so= mething that I think we need to be prepared for at some point after Friday.= I ask your patience in presenting some thoughts on a possible renegotiatio= n strategy. Background: We are going down a termination path, which we are willing to go all the wa= y on. We also are aiming for a buyout option at some point.=20 Lenders are concerned about the path, as we all are, and are taking some ti= me to get comfortable with the steps. This has led to a delay in approval f= or PTN and perhaps a delayed approval after PTN for a Transfer Notice. Whil= e the lenders may know the ultimate resolution is a termination or buyout, = the lenders are concerned that DPC has not done all in its power to find an= amicable solution through negotiation. Given hundreds of published comment= s, the Godbole Committee report, our understanding of GOM finances, politic= al party differences, weak coalition gov'ts, etc., we know that renegotiati= on is going to be almost impossible. But the lenders are not there yet, and= in this period, we don't want to lose the lenders completely. We need lend= ers and their approval for a buyout, as well as a termination. Plus we don'= t want to upset lenders completely to a point they ask "what value is DPC (= Enron/GE/Bechtel) bringing to the project?" and thus decide to cut the equi= ty out and to seek some other solution without the current equity.=20 Government parties (MSEB, GOM, GOI) are concerned about this path as they d= on't fully appreciate what it means for them or DPC. In addition, this hard= ball tactic is not their normal style, although they are capable of being f= airly rough when they get pinned down. This is especially true since our as= sets and people are on their home turf. The hardball, while we are used to = it and believe it is the proper strategy, is leading to hardening of positi= ons by government, and will make subsequent discussions (whether on transfe= r amount, buyout option or any renegotiation) more difficult. We also shoul= d be thinking of keeping doors open, if only a slight bit, with government,= as we will need some level of cooperation for buyout, transfer amount or a= ny renegotiation. I think we should develop a renegotiation option that is a combination of t= hings. First, something that if our plans go out of control, we have someth= ing we can fallback on as a last option. While renegotiation and the conseq= uent reduction in equity returns might be an unattractive option, I think w= e can make it more attractive than it currently is, as you can see from the= list below. This provides some "face-saving" option for the government, if= they choose to go this route. Second, it is something that shows the lende= rs (who we have to care about) and the government (who we care less about, = but still care somewhat due to need for their approvals and cooperation) th= at we are not slamming the door shut on any further discussions. Third, it = is something that will be very difficult for the government and perhaps the= lenders, fuel supplier and shipowners to agree to, and thus we will probab= ly get to the goal of termination regardless. Right now, the lenders are our immediate hurdle with the challenge of getti= ng them over the hump of a quick PTN and a simultaneous or shortly thereaft= er Transfer Notice. So I would recommend we discuss the plan below internal= ly and modify it as needed. Before we would show it to anyone, we would dec= ide what is our minimum (I propose the attached be our minimum) and we will= beef it up as needed. If required, we will have it ready to show to lender= s at an appropriate time, or to have a senior Enron executive such as Ken o= r Rebecca or a Houston-approved emissary get it to GOI. We would say this i= s what we are willing to do to avoid final termination (we still will proce= ed with PTN and Transfer Notice, as soon as lender consent obtained), but g= overnment and other counterparties must agree to obligations contained in t= he list. This shows the lenders that we are willing to at least play the re= negotiation game.=20 Here's the Dabhol Wishlist in short bulletpoints. These need work and furth= er scrubbing, but before spending significant time on this, I want to get i= nput from management if this is something they would want us to explore. Ag= ain, I think these are our minimum, worst case things, so we could beef it = up accordingly. 1. Dabhol agrees to not terminate project. [In light of recent events and h= igh level concerns meetings being held in Maharashtra and Delhi, we should = not understimate the value this concession provides to GOI and GOM.] 2. Dabhol agrees to tariff reduction from ECS of Phase II on LNG of 50 pais= e for 1st 10 years, up to Rs. 1.00 for the remaining 10 years. This is done= primarily through a debt reschedulement, granting liquidity relief in firs= t 3 years to MSEB and recovery through GOM bonds, and ROE reduction by conv= erting to 2 part tariff. Equity reduction by eliminating MSEB's equity in p= roject.=20 3. GOI agrees to backstop (purchase or credit support) 2 power blocks and G= OM/MSEB takes one. [Note: I think we should ask for GOI to backstop all 3,= but I think 2 is the most possible.] 4. GOI or GOM or Indian Financial Institutions (IFIs) (or combination there= of) takes enough equity at par to reduce Enron to 50%. 5. All additional funding requirements for the project, including additiona= l funds for development cost recovery, cost overruns for capital costs, wor= king capital, customs, commissioning fuel, etc. to be funded by additional = loans or equity to DPC from IFIs. This also includes any cost overruns due = to construction stoppage and delay we are currently facing. We should even = ask to eliminate existing Phase II sponsor Project Completion Support and r= eplace it with IFI loans. That last point may be a bit much since we have a= lready committed to this, but if the option is that we will walk from this = project, the IFIs with appropriate pressure from government could support t= his. 6. Negotiate to eliminate liquidity L/C obligation, LNG Supply L/C obligati= on and ship L/C obligation. If funding support is needed to cover these sho= rtfalls, it will come from IFIs. Recall that this project has significant cashflow in later years, and the I= FI debt raised in #5 and 6 above could be repaid during that time. 7. All equity hold restrictions on Enron, GE and Bechtel are lifted, includ= ed those in project documents (for example, GOI guarantee and PPA) and loan= documents. Enron's internal plans would be to exit after deal signed up. 8. MSEB to drop existing misdeclaration claims, and take steps in PPA to en= sure this is not an issue going forward.=20 There are many other items that can be included, including approvals from R= BI to recover all sponsors development costs, which would be funded by IFIs= under #5 above, fuel hedging ability for MSEB, clearances for Metgas to ma= ximize value we can get in sale of the Metgas TARA, etc. Alternatively, we = could give Metgas contractual rights and existing permits and contracts to = GOI in exchange for their agreeing to items above. However, I wanted to foc= us on the bigger picture and have a discussion with management first on the= concept before we put the extensive list together. I know it's a wish list, but if parties (government, IFIs, other counterpar= ties) do not want this deal to terminate and equity to pull out and if they= agree to points above, the sponsors would get the project done with limite= d additional funding by sponsors. This could be only transactional costs as= sociated with restructuring, which while significant, do not approach cost = of going forward as is. And it may include existing $233MM Project Completi= on Support, although we would negotiate hard to replace that with IFI debt = or equity. We should still continue down PTN and Transfer Notice path, but we should a= lso consider how we give lenders and gov't some indication that we are stil= l adding value to the deal by showing some willingness to talk on changes t= o deal.=20 Wade