Message-ID: <25683180.1075852173624.JavaMail.evans@thyme> Date: Wed, 17 Oct 2001 15:20:07 -0700 (PDT) From: james.saunders@enron.com To: rod.hayslett@enron.com, dave.waymire@enron.com, steve.gilbert@enron.com Subject: RE: Redfield Deliverability Project Cc: james.centilli@enron.com, danny.mccarty@enron.com, dave.neubauer@enron.com, morris.brassfield@enron.com, bob.chandler@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable Bcc: james.centilli@enron.com, danny.mccarty@enron.com, dave.neubauer@enron.com, morris.brassfield@enron.com, bob.chandler@enron.com X-From: Saunders, James X-To: Hayslett, Rod , Waymire, Dave , Gilbert, Steve X-cc: Centilli, James , McCarty, Danny , Neubauer, Dave , Brassfield, Morris , Chandler, Bob X-bcc: X-Folder: \DMCCARTY (Non-Privileged)\McCarty, Danny\Inbox\NNG X-Origin: MCCARTY-D X-FileName: DMCCARTY (Non-Privileged).pst I have not been included in discussions of this transaction. FYI, to me, a = prepayment for a service contract would generally be amortized over the lif= e of the contract. I do see that Bob was referenced in Dave's response.=20 Bob - comments? -----Original Message----- From: =09Hayslett, Rod =20 Sent:=09Wednesday, October 17, 2001 2:27 PM To:=09Waymire, Dave; Gilbert, Steve; Saunders, James Cc:=09Centilli, James; McCarty, Danny; Neubauer, Dave; Brassfield, Morris Subject:=09RE: Redfield Deliverability Project I would appear to me that there may be some misconceptions here. Why do= we assume that by entering into a financing deal we will be any better off= ? I would tell you that to the extent there was any risk in the deal, that= we should probably charge someone else about 25-30% as well. Think abo= ut it, 25% is only 15% after tax. Has some one enumerated the risks and v= alued them on this deal? I haven't seen any of that work, if it has been = done. =20 I think I understand the concept proposed and I understand the proposed goa= l line, return with little or no expense up front. I would assume that = we would be willing to enter into a fixed price service agreement for a num= ber of years? Is Halliburton willing to take any risks whatsoever? Alternatively, why don't we go through GSS (Global Strategic Sourcing) to l= ook for a better deal?=09 Jim: Have you looked at this for ideas on the accounting side? Why can= 't I do a prepayment of a service contract fee and recognize the expense ov= er the life of the deal? -----Original Message----- From: =09Waymire, Dave =20 Sent:=09Wednesday, October 17, 2001 9:17 AM To:=09Hayslett, Rod; Gilbert, Steve Cc:=09Centilli, James Subject:=09RE: Redfield Deliverability Project Rod, Below is some background on the Redfield Deliverability Project. Halliburton initiated the contact with NNG to provide work over on selected= wells based on software modeling in order to return deliverability to thei= r original levels. The work overs are planned over a 2-3 year period and a= re expected to have a lasting effect of at least 10 years. The cost to mod= el and rework these wells is estimated to be $5.73MM. A test program would= be conducted in the first year to determine the feasibility of continuing = the program at a cost of $768,000. If the test program did not prove out t= he project would be terminated at this point. The original proposal was to= treat the costs of the program as expense as the costs were incurred. Bob = Chandler confirmed this accounting treatment. This would result as Kent ha= s indicated negative EBIT for the first 2-3 years.=20 As an alternative it was proposed to Halliburton that NNG would enter into = a 10 year service agreement with Halliburton to model and rework the wells = and provide guidance on proposed well work overs for the Redfield storage f= ield. Halliburton would agree to perform the test program and if test resu= lts indicate that further work overs would be economically feasible would s= pend an additional $4.96MM on a total of 60 well workovers in the first 3 y= ears of the contract. NNG currently budgets $300,000 per year for Redfield= well maintenance with minimal increase in deliverability. Operations has c= ommitted $300,000 per year in well maintenance over the next 5 years to thi= s project for a total of $1.5MM. Halliburton has not formalized their counter offer, but has indicated that = they would require a 25% to 30% return for assuming the financing. Hallibu= rton indicated that this is a non-standard deal for them and that is the re= ason for high return requirement. =20 The objective is to structure the deal as a service agreement either with a= n Enron Entity who would then contract with Halliburton or some other third= party at a more reasonable rate. Even at an estimated 30% return, prelimi= nary incremental EBIT estimates for the Halliburton service agreement are b= etween $400,000 to $500,000 the first 5 years and $250,00 to $275,000 for = the out years. =20 -----Original Message----- From: =09Hayslett, Rod =20 Sent:=09Friday, October 12, 2001 7:05 AM To:=09Gilbert, Steve Cc:=09Waymire, Dave Subject:=09RE: Redfield Deliverability Project Couple of quick comments. Prepaying as an expense would require coming u= p with some income to offset, and generally doesn't make economic sense. = An Enron company can't help because it consolidates, and therefore ends up = with the same accounting results as we do. What accountants have revi= ewed the proposal? -----Original Message----- From: =09Miller, Kent =20 Sent:=09Thursday, October 11, 2001 9:52 AM To:=09Hayslett, Rod; McCarty, Danny Cc:=09Waymire, Dave; Neubauer, Dave; Neville, Sue; Thomas, Steve Subject:=09Redfield Deliverability Project Rod, We looking for your help on some ideas on how to implement a good long term= project that has negative short term cash flow. We have been working with Halliburton to identify deliverability improvemen= ts at Redfield through the use of improved technology related to identifyi= ng poor performing wells and implementing down hole remediation. This proj= ect has costs and revenues as shown below that are great from a long term s= tandpoint. Steve Thomas and Maurice Gilbert have done an excellent job of = identifying the benefits to NNG and the upsides in revenue that are expecte= d. Dave Waymire has also been very helpful in analyzing alternative and ec= onomics and have shown that the project has a great return (in excess of 30= %). Our problem is that the cost for the workovers at Redfield are all O&M= expenses and not capital and we have a negative IBIT for the first 2 - 3 y= ears of the project. We have proposed that Halliburton structure the expen= ses such that they come in over a 5 - 10 year period so we don't have this = negative IBIT flow in the first years, however, Halliburton has not been in= terested and has proposed a 30% finance charge for this structure. What would be the appetite for possibly pre-paying a majority of these cost= s in '01 to avoid the negative '02 and '03 earnings impact or is there an E= nron company that would finance/extend the expense payments. This is a gre= at project that we should do, however, it is difficult given the negative e= arnings impacts in the first couple of years. Got any ideas to handle this= financial hurdle?????? Year=09=09Expense=09=09Revenue=09=09Net=20 '01=09=09 ($173,000)=09=09 -0-=09=09=09 ($173,000) '02=09=09($2,420,000)=09=09 $300,000=09=09($2,120,000) '03=09=09($2,250,000)=09=09$1,290,000=09=09 ($960,000) '04 and=09=09 -0-=09=09=09$2,055,000/yr=09=09 $2,055,000/yr forward Thanks, Kent