Message-ID: <21548779.1075852824560.JavaMail.evans@thyme> Date: Thu, 18 Oct 2001 06:49:53 -0700 (PDT) From: rogers.herndon@enron.com To: m..presto@enron.com Subject: FW: City of Houston Cc: joseph.wagner@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable Bcc: joseph.wagner@enron.com X-From: Herndon, Rogers X-To: Presto, Kevin M. X-cc: Wagner, Joseph X-bcc: X-Folder: \KPRESTO (Non-Privileged)\Deleted Items X-Origin: Presto-K X-FileName: KPRESTO (Non-Privileged).pst FYI - I agree with Joe. Doesn't it make things much more cleaner to have t= heir projects set up specific LLC LSE's? -----Original Message----- From: =09Wagner, Joseph =20 Sent:=09Thursday, October 18, 2001 8:32 AM To:=09Herndon, Rogers Subject:=09RE: City of Houston The word from Ader was that we can set up LLC LSE's. This would mean that = we would set up say EES1, LLC and we would have 3 sub LSE's with that LLC. = Why Ader did not go ahead and do this instead of just taking the ones we h= ad, I have no idea. In his words, you do not need to change anything on th= e contracts to account for the LLC being the LSE. It is all very confusing= and I will get to the bottom of it. If there is not reason to change cont= ract language, why can't they establish the LLC? It should not matter to t= hem. That was my whole point of the email. -----Original Message----- From: =09Herndon, Rogers =20 Sent:=09Thursday, October 18, 2001 8:14 AM To:=09Wagner, Joseph Subject:=09RE: City of Houston Joe -=20 If we don't get those LSE's what else can we do. Can we get a separate LSE= , abandon the one we have, and get our own? Also, explain to me again all = of the reasons we need these. Thanks, RH -----Original Message----- From: =09Wagner, Joseph =20 Sent:=09Wednesday, October 17, 2001 5:05 PM To:=09Herndon, Rogers Subject:=09RE: City of Houston I am not saying that we wear it, I am saying we help them mitigate their ri= sk. I have no intention of wearing appropriations risk. If orig sells it,= its theirs. But from a company perspective, we could hedge it somehow for= them and pass any costs on to them. Also, one more idea for pricing. I would like to quote the deal at the mid= , and bury the mid offer into the DSM and othe structures they are doing. = That way our energy price looks great and we still keep the mid offer sprea= d. -Joe -----Original Message----- From: =09Herndon, Rogers =20 Sent:=09Wednesday, October 17, 2001 4:27 PM To:=09Wagner, Joseph Subject:=09RE: City of Houston 1) I like your idea of weighting our bid to gas price moves - we can update= them daily on the change. 2) I agree with all but your last suggestion on appropriations. EES or cre= dit will have to wear appropriations (as in Central Ohio Schools). If they= want us to wear it they will not like our price. -----Original Message----- From: =09Wagner, Joseph =20 Sent:=09Wednesday, October 17, 2001 9:31 AM To:=09Herndon, Rogers Subject:=09City of Houston Rogers, I want to run a few ideas past you for the City of Houston. There are a co= uple of issues we need to address for the RFP. I will list them out, give = you my suggestions and then please comment and send back. 1) The City is asking for a possible 30 day holding period for pricing so t= hey can get together and vote on the award of the contract I think we can do one of two things: we can say pricing is indicative and = will be set once the bid is awarded. Or we can say that we will hold price= s, however, for every X% move in gas our power price will move accordingly,= given a stated correlation, and our price will only move up and not down. = Or we could do a % move in MW Daily Index, but I think that index can be a= poor indicator of forward curve fluctuations. 2) Appropriations Risk - There is not much we can do here except keep it to= a one year deal. However, I am having them look into a possible costless = collar for the City. They are, by definition, short going forward and left= exposed to higher prices. If wholesale prices are say 35, we sell them a = higher priced call and we buy a lower price put at offsetting option premiu= ms for say cal 03. That way they can hedge their risk costlessly. The wor= st case scenarios for them are 1) they buy say $40 power (if that is the ca= ll strike), or 2) they buy $30 power (if that is our put strike). If I was= a city, this is what I would do to hedge if I could not do a longer term d= eal. There are some issues here though. If they do not get appropriated t= he money, we might not be able to exercise our put. If EES management deci= des they are comfortable with appropriations risk, I think an option premiu= m is better risk than out right hedging against a possible phantom position= . Second alternative is that we can sell the fixed retail gen past the app= ropriations date and we, as a desk, can collar it to hedge out our marked t= o market risk. This of course would only hedge our wholesale risk but that= should be about 80-90% of the risk. Right now these are the major issues facing the desk on this deal. Please = let me know your thoughts. Thanks. By the way, you missed a good dinner l= ast night. Lavo was hilarious. -Joe