Message-ID: <27887814.1075843939737.JavaMail.evans@thyme> Date: Thu, 28 Dec 2000 03:05:00 -0800 (PST) From: mike.mcconnell@enron.com To: brent.price@enron.com Subject: Re: First Gas Writedown Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Mike McConnell X-To: Brent A Price X-cc: X-bcc: X-Folder: \Mark_McConnell_June2001\Notes Folders\Discussion threads X-Origin: MCCONNELL-M X-FileName: mmcconn.nsf Brent, Excellent update. I would like to see the breakdown by pieces for a potential write-down especially volume difference only and look at a 1 year adjustment to begin. Thanks, Mike Brent A Price 12/27/2000 11:21 AM To: Jeffrey A Shankman/HOU/ECT@ECT, Greg Whalley/HOU/ECT@ECT, Mike McConnell/HOU/ECT@ECT cc: Subject: First Gas Writedown ---------------------- Forwarded by Brent A Price/HOU/ECT on 12/27/2000 10:16 AM --------------------------- Brent A Price 12/20/2000 10:17 AM To: Jeffrey A Shankman/HOU/ECT@ECT, Mike McConnell/HOU/ECT@ECT cc: John L Nowlan/HOU/ECT@ECT, Scott Earnest/HOU/ECT@ECT, Thomas Myers/HOU/ECT@ECT Subject: First Gas Writedown First Gas is a liquid fuel supply deal executed in May, 1997 that is linked to a power plant in the Phillipines. Volumes were booked at 31,000 barrels per day with delivery starting June, 1999 through Dec., 2002. Fuel deliveries did not begin until April, 2000 and have averaged between 10,000-12,000 barrels per day, well below the volumetric level that was booked. This deficiency is due to delayed plant start-up and reduced consumption and has resulted in approximately $1 million per month in accrual losses to the Global Products group since April, 2000. To make matters worse, the power purchaser from First Gas has recently announced that they are going to minimally dispatch the power plant to which this transaction is linked through the end of 2001. To properly reflect the current volumetric levels associated with First Gas, we need to take volumes from the 31,000 barrels per day level that was originally booked to approximately 6,000 barrels per day for the remainder of the deal. In addition, freight charges related to this deal have doubled since April, 2000 increasing from the $.70 originally booked to the current $1.45. Per conversations with John Chismar he expects freight to remain at this level for the foreseeable future. To properly reflect the current costs of this deal, we need to increase the Dubai spread to which this deal was booked from $2.91 to approximately $3.65. Initial estimates of the loss resulting from both the volumetric and cost proposed write-down of First Gas is $30 million. We are continuing to refine this number and will update you when we get a final amount. On a final note, Arthur Andersen has repeatedly reviewed First Gas throughout 2000 and to this point we have been able to spin enough of an argument to justify delaying a writedown. Given the current market conditions discussed above (which are publicly known), the size of the writedown and the fact that their next review will be for year-end earnings, I believe Arthur Andersen is going to require us to write down at least a substantial portion of First Gas before they will sign-off on earnings. Obviously, I have not recently discussed this with AA&Co. but I do anticipate this being an earnings issue. Please call me if you wish to discuss further. I appreciate any help you can give us in this matter.