Message-ID: <33256990.1075845839593.JavaMail.evans@thyme> Date: Tue, 24 Apr 2001 07:39:00 -0700 (PDT) From: ben.jacoby@enron.com To: kay.mann@enron.com, chris.booth@enron.com, w.duran@enron.com Subject: Re: Northwestern Deal Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Ben Jacoby X-To: Kay Mann, Chris Booth, W David Duran X-cc: X-bcc: X-Folder: \Kay_Mann_June2001_2\Notes Folders\Discussion threads X-Origin: MANN-K X-FileName: kmann.nsf FYI ---------------------- Forwarded by Ben Jacoby/HOU/ECT on 04/24/2001 02:39 PM --------------------------- Christopher F Calger 04/24/2001 01:59 PM To: Ben Jacoby/HOU/ECT@ECT cc: Subject: Re: Northwestern Deal Sounds great. Enron North America Corp. From: Ben F Jacoby 04/24/2001 09:38 AM Sent by: Ben Jacoby To: Christopher F Calger/PDX/ECT@ECT cc: Kay Mann/Corp/Enron@Enron, W David Duran/HOU/ECT@ECT, Chris Booth/NA/Enron@Enron Subject: Re: Northwestern Deal Chris: 1. I have not analyzed the TurboPark deal to determine what would constitute an event of default in that deal and at the same time preclude our ability to exercise our call option. Finance / Accounting have not provided specific guidance on this. 2. We have spoke to GE. We have advised them of the deal with Northwestern. We do not believe the acknowledgement and consent will be a problem, and that it will follow the same discussion process as has been going on regarding Pastoria. 3. NW does not have negotiating rights on the acknowledgement and consent. They must accept it to the extent the one we receive for this deal is substantially the same as the one for Pastoria (we've attached the Pastoria form to the letter agreement). 4. If NW flakes, we keep the $8 million, can sue them to close, and can resell the units. This remote scenario would likely provide us with additional upside. 5. The only scenario that we don't get paid are the two scenarios outlined in my previous e-mail: we cannot obtain the GE acknowledgement and consent, or we otherwise cannot effect the assignment because of a default in E Next. NW does not have any other outs. 6. The income from the deal is expected to be at least $8 million, but could be as high as $10 million depending on the exact closing date, and potential LDs we may receive from GE. I've attached the DASH which contains an income analysis. Regards, Ben Christopher F Calger 04/24/2001 10:28 AM To: Ben Jacoby/HOU/ECT@ECT, Kay Mann/Corp/Enron@Enron cc: W David Duran/HOU/ECT@ECT, Chris Booth/NA/Enron@Enron Subject: Re: Northwestern Deal Ben and Kay, What is our performance obligation to E;Next? Have we spoken to GE re consents? Is GE going to be difficult because this is the Frame division, not the Lee J and the LM6000 team? Does NW have any discretion / approval rights / negotiating rights w/ respect to the assignment to the LLC? If NW flakes, can we keep the $8MM or do we have to resell and sue for any shortfall? In what scenario(s) would we not get fully paid? Assuming Sep 1, what is the income from this deal? Regards, Chris Enron North America Corp. From: Ben F Jacoby 04/24/2001 08:25 AM Sent by: Ben Jacoby To: W David Duran/HOU/ECT@ECT, Christopher F Calger/PDX/ECT@ECT cc: Kay Mann/Corp/Enron@Enron, Chris Booth/NA/Enron@Enron Subject: Northwestern Deal Dave / Chris: I wanted to give you both a heads up that the Northwestern (NW) GE 7EA deal should close today or tomorrow, and advise you of a related earnings recognition issue. The deal that we are on the path of closing is consistent with the executed DASH and works as follows: at the signing of the letter agreement, NW pays ENA $3 million, with another $5 million paid on July 15 (the Turbine Deposits). The balance of $40 million is paid by NW at such time as the assignment of the turbine contract is made to the LLC, and ENA sells the LLC member interests to NW. The outside date for this to occur, via a notice provided by NW, is Sept. 1. The $8 million paid by NW, and the obligation to purchase the member interests is a firm commitment guaranteed by Northwestern Corp. The only condition to NW's obligation to purchase the member interests is that ENA effect the assignment of the turbine contract into the LLC. If ENA does not effect the assignment, then NW would also be entitled to a return of the $8 million in Turbine Deposits. This structure is the same we followed for the Intergen deal which closed in January, except the Intergen deal did not have an extended period between the date of execution of the letter agreement, and the turbine contract assignment. In the Intergen deal, ENA did not receive any payments prior to the assignment and sale of the member interests. The earnings issue raised by accounting (Herman Manis) is that, notwithstanding NW's firm commitment to purchase, ENA has two (albeit very minor) performance obligations. First, ENA has to obtain an Acknowledgement and Consent from GE prior to or concurrent with exercising its purchase option with E Next and assigning the turbine contract to the LLC (we have had to do this for every turbine transaction). Second, ENA has to perform under its agreement with E Next in that if there is an event of default prior to the time we effect the assignment, we theoretically could loose our purchase option right with E Next and be unable to perform under our agreement with NW. We have suggested to Herman that both of these items are perfunctory in nature, and that all income from this transaction should be recognized upon execution of the letter agreement, We have further stated that we could obtain a letter from GE solving the first issue, but there is no solution to the second issue. Herman advised us that to the extent we receive a letter from GE on the first issue, and can convince Arthur Anderson that the second item is perfunctory in nature, we could recognize all income upon execution of the letter agreement (prior to the actual assignment of the turbine contract to the LLC). He did not think we had a good case relative to the second issue, and is reluctant to approach Arthur Anderson. Thus, based on the above, in a worst case we may not be able to recognize any income form this transaction until Q3. While we think we have a shot at getting accounting to change their position, we do not think that this outcome should change our position on the deal as the underlying profitability is significant. The deal is also consistent with the approved DASH. We therefore recommend that we proceed with the execution of the letter agreement, and then decide as to how we should proceed on the income recognition issue depending on your views regarding income being recognized in Q2 vs. Q3. Please advise me if you are OK with us closing on the deal as scheduled, or if you have any other questions. Regards, Ben