Message-ID: <15293678.1075844952484.JavaMail.evans@thyme> Date: Fri, 7 Jul 2000 04:20:00 -0700 (PDT) From: robert.hill@enron.com To: brian.bierbach@enron.com Subject: Purchase & Sale Agreement - Outline of relationships section Cc: stanley.horton@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: stanley.horton@enron.com X-From: Robert Hill X-To: Brian Bierbach X-cc: Stanley Horton X-bcc: X-Folder: \Stanley_Horton_1\Notes Folders\Discussion threads X-Origin: HORTON-S X-FileName: shorton.nsf Brian, I am attempting to outline some of the topics we have discussed in order that the points can be reviewed by our respective counsel and management. Upon agreement, this Outline (with the exception of #2) could then serve as a guide for the attorneys to incorporate into the Purchase & Sale Agreement. Brian, please consider this a draft reflecting my ideas, as I am in the process of seeking comments from Stan Horton and the NPNG officers. 1. NEWCO, an LLC, should be owned 100% by NBILP, an affiliate of the Northern Border MLP. (Question for Janet - should NEWCO be the existing NBP Energy Pipelines LLC ? 2. We would agree on the following personnel points: (i) ENA employees who transfer from ENA are not to be disadvantaged from their present compensation and benefits package. (ii) An incentive structure at the NEWCO level needs to be formed as a part of the compensation package. This incentive should recognize the performance of (a) NBP LP, (b) NEWCO's bottom line contribution to the MLP and (c) the growth of assets being managed by NEWCO. Our experience with personnel dedicated to MLP businesses leads us to recommend that the Denver employees who transfer become employees of Northern Plains Natural Gas Company (NPNG), thus ensuring that the Enron compensation package (specifically stock options and bonus program) covers the ENA employees without interruption. Our proposal is that Brian Bierbach would head the Rocky Mountain Division of NPNG, as a Vice President of Northern Plains. In addition, Brian would serve as an officer of NEWCO. Finally, Brian would report to the President of NPNG and to the CEO of NBP LP. 3. Business focus/charter of NEWCO. The scope of permissible investments for publicly traded partnerships is set forth at Section 7704 (d) of the Internal Revenue Code. Under Section 7704(d), qualifying income includes income and gains derived from the exploration, development, mining, production, processing, refining, transportation (including pipelines transporting gas, oil or products thereof), or the marketing of any mineral or natural resource (including fertilizer, geothermal energy, and timber. It also includes interest, dividends, real property rents and gain from the sale of real property, as well as a gain from the sale of a capital asset held for the production of other qualifying income. Section 7704 (d) goes on to define "mineral or natural resource" to mean any product of a character with respect to which a deduction for depletion is allowable under Section 611." During its 7 year history NBP LP has attempted to avoid exposure to commodity risk inherent in trading the natural resources that it has transported. NBP wishes to continue this policy and is not interested in assuming such exposure in any degree which might be considered material to our financial reporting. Over the years a limited body of precedent (IRS Rulings) has grown up, clarifying what constitutes "qualifying income" for an MLP. For example, investment in assets used to generate electricity is not permitted for an MLP, although a pipeline to deliver natural gas to such generating assets could qualify. Furthermore, NBP is not restricted to investments in the USA, and does actively pursue investments in Canada. NBP believes that the restrictions on qualifying investments for an MLP further decreases the potential for conflict with ENA's much broader objectives. 4. Area of Mutual Interest between ENA and NEWCO. NBP proposes that the state of Wyoming and the Eastern one half of the state of Montana be defined as an area of mutual interest (AMI) in which NEWCO will have the first right to invest in ENA project assets producing "qualifying income" . Within such defined AMI, ENA would have the first right to participate in the commodity and trading opportunities of such projects. Outside the defined AMI, (everywhere else in North America) ENA and NEWCO will work together under the Cooperative Strategy described in the next paragraph, but without first rights of participation for either party. 5. Cooperative Strategy. NBP believes that a strong and dynamic partnership can be created by combining ENA's expertise in commodity trading, use of financial derivatives and creative financial structures, together with NBP's financing capabilities and its investment objective of owning an infrastructure of hard energy assets which produce qualifying MLP income. To that end we should agree to cooperate in the pursuit of project investments meeting the objectives of ENA and NBP throughout the North American continent.