Message-ID: <18454639.1075843952494.JavaMail.evans@thyme>
Date: Sun, 3 Jun 2001 15:31:00 -0700 (PDT)
From: james.lewis@enron.com
To: mike.mcconnell@enron.com, jeffrey.shankman@enron.com
Subject: Chase/JP Morgan Meeting on Financing Methanol Project
Cc: john.nowlan@enron.com, larry.lawyer@enron.com
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Mike and Jeff,

This note is to update you on information we have related to the GTL Methanol 
project in Darwin, Australia.

Larry, John and I met with Chase/JP Morgan, specifically, the banker who led 
the financing of the Titan Methanol Plant in Trinidad. We wanted to get an 
independent opinion on the financeability of the current GTL structure and 
insights into the current market for project bank debt for commodity deals.

The key opinion of Steve Nordaker, the Chase banker on the Titan deal, was 
that project banks do not take commodity price risk unless they have a very 
clear, supportable view of the long-term market price for that commodity. As 
for methanol, with the high level of uncertainty about the demand and price 
for methanol as tied to the future of MTBE, Steve said that Chase would need 
a profit margin contractually guaranteed by the project documents before 
lending to a project. Steve further suggested that if the gas supply contract 
had a floating price tied to methanol prices with a floor price, that floor 
should be around $0.50/ mmbtu to give the lenders comfort that the plant 
would remain competitive over the years required to repay the debt. GTL has 
agreed to a fixed price of $1.02/mmbtu with Phillips. Chase would not lend to 
the Darwin Methanol project as structured with a fixed price for the gas 
input and an index price for the methanol off take. Nordaker thought that it 
would be very hard to find even one bank to take the unhedged risk on the 
methanol margin. In fact, GTL will need at least ten banks to raise the full 
$250 million of senior project debt.

Another key risk that Chase would not take is the strength of the Sponsor, in 
this case GTL. GTL has a total market cap of approx. $30 million. It will 
have to issue new shares equal in value to more than its current market cap 
to fund its portion of the project equity. If the project experiences cost 
overruns, the Lenders will expect someone with a high credit rating or 
demonstrable financial strength to invest whatever amount is needed to finish 
construction. 

I think that GTL is taking a big risk of wasting several months before 
finding out that its project is not financeable. In addition to the waste of 
time, GTL will have signed a gas supply agreement that will have to be 
renegotiated, and other key documents may need to be amended. EGM will not 
get the methanol it wants on time and may be faced with the choice of 1) 
taking on extra methanol price risk (by agreeing to buy more of the plant's 
output at a fixed price or by providing sponsor support) or 2) dropping out 
of the deal. If we have hedged some risk in anticipation of the project 
succeeding, then we will face pressure to take on more risk to cover the 
hedges.

I think that GTL's deal is fixable, and John wants the methanol. I, 
therefore, recommend that we push GTL on several key structural elements so 
that GTL achieves a feasible project and so that EGM receives its methanol on 
time. Because EGM is only willing to buy 1/3 of the plant's production of 
methanol at a fixed price, the most important point is to get Phillips to 
agree to a floating gas price. Kevin Alexander of GTL says that they have 
tried, but that Phillips would not accept it. If necessary, we should offer 
to intervene with Phillips. We will, also, try to keep GTL realistic on the 
time it takes to negotiate project documents (six to nine months) and to 
issue public equity (no limit if the markets turn bad).

John, Larry and I are developing a plan to move GTL to a realistic structure. 
We may need your help with Phillips. We will keep you apprised. 

Jim