Message-ID: <31149885.1075842457931.JavaMail.evans@thyme> Date: Sun, 14 May 2000 03:03:00 -0700 (PDT) From: drew.fossum@enron.com To: martha.benner@enron.com Subject: Re: Enron Gas Storage Deal Structure Working Notes for LRC Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Drew Fossum X-To: Martha benner X-cc: X-bcc: X-Folder: \Drew_Fossum_Dec2000_June2001_1\Notes Folders\Discussion threads X-Origin: FOSSUM-D X-FileName: dfossum.nsf pls print for my Tues. am mtg in Houston. thanks df ---------------------- Forwarded by Drew Fossum/ET&S/Enron on 05/14/2000 10:02 AM --------------------------- Gail Tholen@ECT 05/12/2000 01:24 PM To: John Allario/HOU/ECT@ECT cc: Paul Bieniawski/Corp/Enron@ENRON, Jin Guo/HOU/ECT@ECT, Garry D Wilson/HOU/ECT@ECT, Davis Thames/HOU/ECT@ECT, Drew Fossum/ET&S/Enron@ENRON, Steve Van Hooser/HOU/ECT@ECT, Roger Ondreko/HOU/ECT@ECT Subject: Re: Enron Gas Storage Deal Structure Working Notes for LRC I just wanted to clarify a few points mentioned in this diagram: 1. The reason that gain recognition may be precluded under the equity sell down if Enron maintains a guarantee is because guarantees are considered "continuing involvement" under FAS 66 : Sale of Real Estate. We would essentially own an interest in an asset which is considered real estate (per accounting rules). By maintaining a guarantee, Enron has not given up all of the risks and rewards of ownership and therefore true sale treatment would be precluded. 2. The lease versus executory contract debate is centered around the nature of the offtake agreement coupled with our involvement in the project. Involvement that requires us to take operational risk coupled with taking capacity leans toward a lease. However, each deal is different and there isn't a bright line test for determining lease vs. executory; although, it certainly looks better if our offtake is minimal. As well, LD language should not only be present but should be significant or market based. In addition, the contract should not mention the storage facility, only that capacity will be provided. Determining whether we are in a lease versus and executory contract is based on a preponderance of the evidence (more facts pointing toward executory contract versus lease). 3. In the General Notes section, you mention the Trust being funded by all debt and contribution to the project being considered equity. I'm unsure where this conclusion was reached. This is not something I believe we fully discussed. Whether of not it can be funded by all debt is something I will have to digest and get back to you about. How much money is coming in through the investment trust? From the diagram is looks like Enron ownership would be 30% instead of 12% if that piece is considered debt. 30% ownership does not necessarily lead to consolidation of Project Co. LLC. 4. Two more items of interest that we did not discuss are our Affiliate Rules and FAS 98 Sale Leaseback. Under our affiliate rules, if the capacity contract is deemed an executory contract and qualifies for MTM Accounting, we can only mark the portion of the contract we do not own. So long as we maintain a 12% interest, we could probably only MTM 88% of the contract. However, there is debate in this area depending on our level of "control". Affiliate rules normally cover greater than 20% ownership investments unless we exert significant influence. I believe we will be in control of the structure. This will require more discussion later. -FAS 98 Sale Leaseback is not a good place to be but is something to keep in mind. However, we can be proactive and work toward keeping ourselves out lease land and structure this as and executory contract. Per my request, please allow me sometime to digest this structure and consult with my colleagues. I will be in touch. From: John Allario 05/11/2000 06:54 PM To: Paul Bieniawski/Corp/Enron@ENRON, Jin Guo/HOU/ECT@ECT, Garry D Wilson/HOU/ECT@ECT cc: Gail Tholen/HOU/ECT@ECT, Davis Thames/HOU/ECT@ECT, Drew Fossom, Steve Van Hooser/HOU/ECT@ECT Subject: Enron Gas Storage Deal Structure Working Notes for LRC Team I have summarized in the margins of our DRAFT deal structure the "high level" issues that Gail Tholen, Jin and I discussed on Thursday. These are preliminary guidelines and as our deal evolves and our partner's desires change, we will have to potentially address completely different accounting, regulatory and tax issues. We hope to touch on some of the issues that this structure may raise from a Regulatory perspective with Drew Fossom when we meet next Tuesday at 10:00AM. Please comment and advise as you see fit. Thanks -John