Message-ID: <2225012.1075843922700.JavaMail.evans@thyme> Date: Tue, 8 Aug 2000 02:28:00 -0700 (PDT) From: mike.mcconnell@enron.com To: daniel.reck@enron.com Subject: Re: draft Cc: jeffrey.shankman@enron.com, george.mcclellan@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: jeffrey.shankman@enron.com, george.mcclellan@enron.com X-From: Mike McConnell X-To: Daniel Reck X-cc: Jeffrey A Shankman, George McClellan X-bcc: X-Folder: \Mark_McConnell_June2001\Notes Folders\All documents X-Origin: MCCONNELL-M X-FileName: mmcconn.nsf Dan, Thanks for the email and quick response. I am in the process of discussing this with various people. A couple of observations that have become clear and I want to pass them on to you. Overall, the size of the transaction is not going to fly. If we brought in other players and significantly reduced our exposure and the other players validated the technology and overall play, it would increase the odds that we are interested in this type of deal. Rick Buy stated firmly that Jeff will not be interested in taking this type of deal to the board especially with what just happened with Ecogas and Kafus. I called George last night and touched on these topics but they have been reconfirmed this morning. I understand that the deal is very active and needs to move forward now, but I think we should inform Pacificorp that we will not take the entire deal. Last night George stated that he may not want to tell them that and I agreed. But upon reflection, I think that needs to be re-addressed. The original deal size is DOA and if I really believe that, then not passing that information could hurt us in getting any size deal potentially closed with these guys. Also having them assist in bringing others to the table might be beneficial. I'll keep you informed as i move forward and learn more. Mike Daniel Reck 08/07/2000 06:34 PM To: Mike McConnell/HOU/ECT@ECT, Jeffrey A Shankman/HOU/ECT@ECT cc: George McClellan/HOU/ECT@ECT Subject: draft Mike and Jeff: Attached is a copy of the Pacificorp presentation from last week. To reiterate, the key commercial risk issues are: 1) Tax--Jordan Mintz has a high degree of confidence regarding the qualifications of the Pacificorp machines. Thorough due dilligence will be required to investigate the representations made in the private letter ruling applications. 2) Syndication--Joe Deffner and Tim Proffitt are working to find monetizers. Ideally, the monetizers would close when we do. Realistically, we have to assume that we will bridge the deal and wear equity risk until we can shed our ownership. Pacificorp has expressed an interest in staying in as 25% owner, which should reduce the bridge risk, since we can show the former owner staying in the game. 3) Operations--The risk of operations will lie with the holders of the equity. Post-syndication, the new owners can contract directly with an operator. For tax purposes the owner needs to have some risk. We will guide the monetizers to this risk. If we have to indemnify them in this area, we will need to better understand the available insurance products. 4) Marketing--This is the risk the coal desk is trying to acquire. The desk believes that the coal/synfuel spread risk will decrease dramatically over the next 12-18 months. We have put $6.00/ton into the model, and the desk will buy $3.00/ton today for seven years. The current market is anywhere from $1.00-3.00/ton. We have also developed a list of strong sites that are looking for machines, three of which we control, either through options or marketing agreements. The economics of the deal are compelling. We put out $100mm to Pacificorp as an equity bridge (maybe less if they stay in as 25% owner). We collect $30-50mm in commodity spread origination, and another $30-50mm in equity origination. Commercially, the deal makes sense, and I am confident that we can structure around the risks. The decision we need from senior management is whether this is a game we want to play. The machines fit into the letter of the law. Big companies (AIG, Florida Progress, Detroit Edison, etc.) have joined in the reindeer games. We can put on the position we want by bridging this deal. On the flip side, people have heartburn over "spirit of the law" issues and those are questions that senior management has to decide. We have a chance to move on these machines, but need to make up our mind by the end of this week whether to put resources on it. We can back out later (our commitment so far is non-binding), but we can't get back in. Please let me know your thoughts. Regards, Dan