Subject: FYI: TW Expansion Overhead Rate
From: [email-masked]
To: [email-masked]
Cc: [email-masked]
Date: Thu, 8 Mar 2001 11:40:47 -0800 (PST)

FYI

 -----Original Message-----
From: 	Saunders, James  
Sent:	Thursday, March 08, 2001 9:53 AM
To:	Miller, Mary Kay; Hayslett, Rod; Harris, Steven; Martin, Jerry D.
Cc:	Cobb, John
Subject:	TW Expansion Overhead Rate
Sensitivity:	Confidential

For your consideration:

The proposed TW expansion is using a 2% construction overhead rate. The rate was based on an earlier analysis I did on the impact on the overhead rate at various levels of capital expenditure -using a constant 2001 TW Overhead Plan.   

Rate Background
The 2001 TW Overhead Plan is $1.4million, and the 2001 Capital Budget eligible for Overheads is $9.9 million, resulting in a Overhead rate of 14.1%; which has been rounded to 15% for use on TW routine capital for 2001.

The analysis that resulted in the 2% rate was based on an expansion estimate of $60 million. Holding the overhead estimate at $1.4 million, and using a revised capital budget (including a $60mm expansion estimate), resulted in total capital eligible for overheads 
of approx. $70 million.  This them imputes to the 2% rate (Overheads/Capital; $1.4mm/$70mm).

Subsequently, a $90+ million expansion estimate was developed, and the above 2% rate stayed in place. With a $90 million expansion, total TW capital eligible for overheads would be approximately $100mm. Applying the 2% rate would result in imputed overheads of $1.8mm; $.4mm higher than plan, and reasonable given the magnitude of the most recent expansion estimate.

Overhead Background
FYI- The level of expense charged to TW overheads in 2000 was $4 million (if applied to the above capital budget and $90 million expansion the effective rate would be 4%). 
But, as stated above the 2001 Plan was $1.4 million. January and February charges to the overhead are tracking close to Plan.

FGT's incremental facilities, Phase IV ($250mm)and V($450mm) expansions are using a 3% rate.

"Bottom Line" - to me - an Overhead rate in the range of 2% to 4% is reasonable.