Presentation on theme: "DRAFT - HPL Cushion Gas January 17, 2000 Strictly Confidential & Subject to Attorney Client Privilege."— Presentation transcript:
DRAFT - HPL Cushion Gas January 17, 2000 Strictly Confidential & Subject to Attorney Client Privilege
Confidential & Proprietary 2 HPL Transition - Pad Gas Obligation Enron to transfer 65.5 bcf of Cushion Gas to AEP at Closing: Treated as PP&E on the HPL balance sheet Specific obligation under the Purchase and Sale Agreement Uncertainty as to when Closing and transfer will occur: Best Case: 1 April 2001: indemnify AEP for A/S costs, quick HSR approval Expected Case: 1 June 2001: limited A/S repair required Worst Case: 1 September 2001: delay in HSR process Key Seller Conditions to Close: Receipt of 3rd party consents - banks for the monetizations Cost and impact of A/S line testing and repair known/agreed Key Buyer Conditions to Close: HSR approval - potential that AEP will have to sell power plant assets IT Systems operational - ENA IT department installing systems link Cost and impact of A/S line testing and repair known/agreed
Confidential & Proprietary 3 HPL Transition - How big is the obligation? As of 1/16, 5.5bcf x (April @$6.37, May@$5.97, June@$5.96) equals between $35MM to $33MM Cost of a call option at 1/16 strip price ~ $0.70 provides for a total option price of $3.85MM Hedge our 5.5 bcf obligation? If we do then, either: High Probability Outcome: Enron has to satisfy obligation: Option cost = $3.85MM, Gas purchase cost = $34MM, Total Cost = $38MM Low Probability Outcome: Enron’s obligation goes away: Option cost = $3.85MM (may be in the money on the day) Medium Probability Outcome: Obligation to deliver is extended Option cost = $3.85 (roll option to a later date), Gas purchase cost: ? Recommendation: Purchase a call option now: Probability that we can get out of our obligation is low. Option may be in the money or can be extended Cost of Pad Gas Obligation
Confidential & Proprietary 4 HPL Transition - Raise the issue now with AEP? Pros: The issue will come to light anyway and must be dealt with prior to Close. Addressing it now will not delay Closing. Con: As soon as we raise the issue, AEP will want us to resolve it. This will gives AEP trading leverage for items/changes that they want in the deal Recommended Strategy: First: Engage AEP to establish a bid/ask for items they are interested in from ENA: Allow AEP to purchase pad gas ENA agrees to raise its A/S liability by from $15MM up to $50MM Second: Make AEP aware of the 5.5 bcf shortfall as a 2007 liability that was mistakenly omitted from the HPL balance sheet. Enron agrees to inject 5.5 bcf of gas into Bammel at end of the Entex contract, or Enron agrees that AEP is only required to give us back the amount of Cushion Gas that is in Bammel upon Closing (60.5 bcf) Third: Settle by striking a compromise: Price that AEP purchases the pad gas Enron assuming a higher liability for the A/S refurbishment liability. Strategy for discussion with AEP
Confidential & Proprietary 5 HPL Transition - Potential Cushion Gas Sale Structure Current treatment of HPL Cushion Gas as PP&E: Monetized cushion gas:50.0 bcf @ $2.90 = $[ ]MM Non-monetized cushion gas:11.4 bcf @ $2.34 = $[ ]MM Unrecoverable cushion gas: 1.2 bcf @ $2.34 = $[ ]MM Total Cushion Gas65.5 bcf @ [ ] = $ [ ]MM Less: Swap Cost of Monetized gas50.0 bcf @ [ ] = $ [ ]MM Net PP&E Cushion Gas65.5 bcf @ [ ] = $[ ] MM Treatment of purchase of 5.5 bcf of Cushion Gas: May be able to reclassify 5.5 bcf of Cushion Gas from PP&E to long term asset: The 5.5 bcf of Cushion Gas would be written up from $2.34 to $6.00 to reflect the current market price of replacement gas Cost of replacing the 5.5 bcf of Cushion Gas ($38MM) would be depreciated over the initial term of the lease (38MM / 30 yrs = $1.3 MM/yr ) Default case is to depreciate ($38MM) over the term of the Entex Contract Reflects Enron’s obligation to replace the Cushion Gas had the transaction not occurred. Cost to Enron of $5.4MM / yr.
Confidential & Proprietary 6 HPL Transition - Potential Cushion Gas Sale Structure ENA and AEP share the benefits of re-monetizing the Cushion Gas at a higher basis. Enron sells the Cushion Gas to AEP and uses the proceeds to unwind monetization Enron receives a call option on 65.5 bcf gas in Bammel at the end of the lease at a pre-agreed strike price [assume $3.00] Enron’s call option is extended if AEP renews the lease. ENA sells 60.5 bcf of Cushion Gas to AEP at a price that will pay for replacing the 5.5 bcf shortfall of Cushion Gas without incurring a loss: Enron sells to AEP 65.5 bcf @ $2.67 = $174.6 MM Enron records a gain on the sale of 60.5 bcf of Cushion Gas to AEP [60.5 bcf x ($2.67 - $2.34) = $20.1MM] Enron records an offsetting loss on the replacement of 5.5 bcf of Cushion Gas [(5.5 bcf x ($2.34 - $6.00) = -$20.1 MM] Enron’s net gain/loss position is 0; AEP’s basis in the Cushion Gas is $2.67 AEP re-monetizes Cushion Gas subject to Enron’s [$3.00] call option at the end of the lease term (unless extended).
Confidential & Proprietary 7 HPL Transition - Potential A/S Liability Deal Enron/El Paso each bear 50% of associated A/S line costs: El Paso is operator and bears [ ] of initial cost Enron bears 50% of the costs above …. Line is currently back in service and additional work is being completed to meet Texas Rail Road Commission (TRRC) requirements. ENA absorbs up to $15MM with respect to its share of costs to test and repair the A/S line to meet TRRC requirements Upgrade 60 miles of pipe to allow for a smart pigging: $1.6MM Smart pig line (w/ associated loss of load): $[ ]MM Analyze data and make required repairs to pipeline: unknown cost - est. $5MM If cost to Enron is above $15MM, then: Enron can walk the deal, unless AEP forces Enron to close by bearing the additional cost above $15MM, or AEP can walk the deal, unless Enron forces AEP to close by bearing the additional cost above $15MM. Enron could agree to absorb up to $50MM of potential liability (est. of full replacement cost)