Message-ID: <2607236.1075846356831.JavaMail.evans@thyme> Date: Tue, 14 Nov 2000 06:57:00 -0800 (PST) From: mark.schroeder@enron.com To: steven.kean@enron.com Subject: Regulatory Issues in For SK-Enron Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Mark Schroeder X-To: Steven J Kean X-cc: X-bcc: X-Folder: \Steven_Kean_Dec2000_1\Notes Folders\Korea X-Origin: KEAN-S X-FileName: skean.nsf Maybe now that Joe Sutton is gone, you will not be asked this anymore, but here is an update (two e-mails) on the two key issues regarding SK JV in Korea, being Return on Equity and Stranded Cash. Let me know if you need more. mcs ---------------------- Forwarded by Mark Schroeder/LON/ECT on 14/11/2000 14:59 --------------------------- From: Mike Dahlke@ENRON_DEVELOPMENT on 14/11/2000 08:40 CST To: Mark Schroeder@ECT cc: Subject: Regulatory Issues in For SK-Enron Mark, This write up will give you a quick update on the status of the two key issues related to Enron's gas distribution business in Korea. Darrell's current strategy is to maximize dividends in order to generate cash for Enron to pay its obligation under the "SK Securities" provisions of the purchase agreement. It is expected that SK will direct the sale of those securities during the coming year and the resulting obligation will be between US$ 15 - 20 million. One tax issue has emerged that is related to the form of corporation used in Korea (there are two alternatives). After considerable negotiation with SK, it was determined in 1998 that the Joint Venture was limited to one particular form. To use the alternative, which positions Enron better for US taxes, would have required de-listing three of the operating companies. Hence, if Enron directs dividends to be paid from the JV, or otherwise distributes cash out of the business (deamed dividend), the amount paid will be subject to US tax. This result will occur, according to the Tax Department, even if Korean withholding tax can be eliminated by taking advantage of a "tax treaty" country such as Labuon. Some additional advise will be sought on the matter but considerable work was done prior to the formation of the JV and few degrees of freedom were found. See you in San Antonio ----- Forwarded by Mike Dahlke/ENRON_DEVELOPMENT on 11/14/2000 08:31 AM ----- Mike Dahlke 11/14/2000 08:26 AM To: Michael Gantt/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT cc: Susan Musch/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Bonnie Nelson/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Anne S Yao/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT Subject: Regulatory Issues in Project Gecko As Enron considers how to substantially increase the dividends to be paid by SK-Enron's operating companies, the following Regulatory issues should be considered: Change in the Dividend Limit for CGCs. MOCIE has proposed that the limitation of the payment of dividends by a City Gas Company be eliminated if the firm has a debt-to-equity ratio below 200% (debt-to-total-capital ration of less that 67%). Hence, the ability of SK-Enron's gas distribution subsidiaries to pay "unrestricted" dividends will depend on the level of debt of each company and not the consolidated debt of the joint venture. The language of the limitation amendment does not specify any "effective time". Reports from MOCIE's "working group" which has been considering this and other changes to CGC regulations indicate the new standard will take effect on January 1, 2001. Presumably at that point, a CGC with a qualifying debt ratio could pay any amount of dividend allowed under applicable law or securities regulations. In considering an "interim" dividend, the impact on each CGC's debt ratio of the "regular" dividend needs to be considered. If retained earnings are reduced to the extent that the debt test is not met after the "regular" dividend, then the payment of an "interim" dividend would be a violation of the new limitation rule. Change in the "allowed ROE". Another rule change that MOCIE will reportedly implement shortly will be one that establishes the ROE used in computing distribution rates (supply cost). The best information is that CGCs serving "high penetration" areas (expected to be 70% or more) will have to use the "one-year bank deposit rate", which is currently about 8%. Other CGCs will continue to use the current "fixed rate" of 10%. For SK-Enron, this appears to mean that Daehan, which serves Seoul, will be subject to the new standard while the remaining 8 CGCs would continue to use 10% when computing their rates. The Seoul City Government has an annual rate filing process; therefore, Daehan will be impacted almost immediately by this change. Several other CGCs (Kumi City, Chonju, and Choognam) have rate cases or rate case requests pending. Processing these changes has been held up pending the issuance of MOCIE's new rules and are likely to proceed promptly once the rule are issued (presumed to be December 1st at this point). The final "order" from MOCIE is not expected to contain any change in the standard time allowed for a given set of rates - one to three years at the discretion of the local government. Hence, no change is expected to the "scheduled" time for other CGCs to file.