hmmm.

 -----Original Message-----
From: 	Cline, Wade  
Sent:	Thursday, May 10, 2001 11:01 AM
To:	McDonald, Rebecca; Hughes, James A.; Walls Jr., Rob; Lundstrom, Bruce
Cc:	McGregor, Neil
Subject:	Renegotiation thoughts

Below is an e-mail I worked up on my renegotiation thoughts for your reading pleasure. Since this idea came up on our Thursday call, I will go ahead and send the e-mail out for feedback. We can discuss any thoughts you have on this either Friday or on a subsequent call.

Regards,
Col. Travis

_____________________________________

The thoughts below are not for our meeting on Friday, but they represent something that I think we need to be prepared for at some point after Friday. I ask your patience in presenting some thoughts on a possible renegotiation strategy.

Background:

We are going down a termination path, which we are willing to go all the way on. We also are aiming for a buyout option at some point. 

Lenders are concerned about the path, as we all are, and are taking some time to get comfortable with the steps. This has led to a delay in approval for PTN and perhaps a delayed approval after PTN for a Transfer Notice. While the lenders may know the ultimate resolution is a termination or buyout, the lenders are concerned that DPC has not done all in its power to find an amicable solution through negotiation. Given hundreds of published comments, the Godbole Committee report, our understanding of GOM finances, political party differences, weak coalition gov'ts, etc., we know that renegotiation is going to be almost impossible. But the lenders are not there yet, and in this period, we don't want to lose the lenders completely. We need lenders and their approval for a buyout, as well as a termination. Plus we don't want to upset lenders completely to a point they ask "what value is DPC (Enron/GE/Bechtel) bringing to the project?" and thus decide to cut the equity out and to seek some other solution without the current equity. 

Government parties (MSEB, GOM, GOI) are concerned about this path as they don't fully appreciate what it means for them or DPC. In addition, this hardball tactic is not their normal style, although they are capable of being fairly rough when they get pinned down. This is especially true since our assets and people are on their home turf. The hardball, while we are used to it and believe it is the proper strategy, is leading to hardening of positions by government, and will make subsequent discussions (whether on transfer amount, buyout option or any renegotiation) more difficult. We also should be thinking of keeping doors open, if only a slight bit, with government, as we will need some level of cooperation for buyout, transfer amount or any renegotiation.

I think we should develop a renegotiation option that is a combination of things. First, something that if our plans go out of control, we have something we can fallback on as a last option. While renegotiation and the consequent reduction in equity returns might be an unattractive option, I think we can make it more attractive than it currently is, as you can see from the list below. This provides some "face-saving" option for the government, if they choose to go this route. Second, it is something that shows the lenders (who we have to care about) and the government (who we care less about, but still care somewhat due to need for their approvals and cooperation) that we are not slamming the door shut on any further discussions. Third, it is something that will be very difficult for the government and perhaps the lenders, fuel supplier and shipowners to agree to, and thus we will probably get to the goal of termination regardless.

Right now, the lenders are our immediate hurdle with the challenge of getting them over the hump of a quick PTN and a simultaneous or shortly thereafter Transfer Notice. So I would recommend we discuss the plan below internally and modify it as needed. Before we would show it to anyone, we would decide what is our minimum (I propose the attached be our minimum) and we will beef it up as needed. If required, we will have it ready to show to lenders at an appropriate time, or to have a senior Enron executive such as Ken or Rebecca or a Houston-approved emissary get it to GOI. We would say this is what we are willing to do to avoid final termination (we still will proceed with PTN and Transfer Notice, as soon as lender consent obtained), but government and other counterparties must agree to obligations contained in the list. This shows the lenders that we are willing to at least play the renegotiation game. 

Here's the Dabhol Wishlist in short bulletpoints. These need work and further scrubbing, but before spending significant time on this, I want to get input from management if this is something they would want us to explore. Again, I think these are our minimum, worst case things, so we could beef it up accordingly.

1. Dabhol agrees to not terminate project. [In light of recent events and high level concerns meetings being held in Maharashtra and Delhi, we should not understimate the value this concession provides to GOI and GOM.]

2. Dabhol agrees to tariff reduction from ECS of Phase II on LNG of 50 paise for 1st 10 years, up to Rs. 1.00 for the remaining 10 years. This is done primarily through a debt reschedulement, granting liquidity relief in first 3 years to MSEB and recovery through GOM bonds, and ROE reduction by converting to 2 part tariff. Equity reduction by eliminating MSEB's equity in project. 

3. GOI agrees to backstop (purchase or credit support) 2 power blocks and GOM/MSEB takes one.  [Note: I think we should ask for GOI to backstop all 3, but I think 2 is the most possible.]

4. GOI or GOM or Indian Financial Institutions (IFIs) (or combination thereof) takes enough equity at par to reduce Enron to 50%.

5. All additional funding requirements for the project, including additional funds for development cost recovery, cost overruns for capital costs, working capital, customs, commissioning fuel, etc. to be funded by additional loans or equity to DPC from IFIs. This also includes any cost overruns due to construction stoppage and delay we are currently facing. We should even ask to eliminate existing Phase II sponsor Project Completion Support and replace it with IFI loans. That last point may be a bit much since we have already committed to this, but if the option is that we will walk from this project, the IFIs with appropriate pressure from government could support this.

6. Negotiate to eliminate liquidity L/C obligation, LNG Supply L/C obligation and ship L/C obligation. If funding support is needed to cover these shortfalls, it will come from IFIs.

Recall that this project has significant cashflow in later years, and the IFI debt raised in #5 and 6 above could be repaid during that time.

7. All equity hold restrictions on Enron, GE and Bechtel are lifted, included those in project documents (for example, GOI guarantee and PPA) and loan documents. Enron's internal plans would be to exit after deal signed up.

8. MSEB to drop existing misdeclaration claims, and take steps in PPA to ensure this is not an issue going forward. 

There are many other items that can be included, including approvals from RBI to recover all sponsors development costs, which would be funded by IFIs under #5 above, fuel hedging ability for MSEB, clearances for Metgas to maximize value we can get in sale of the Metgas TARA, etc. Alternatively, we could give Metgas contractual rights and existing permits and contracts to GOI in exchange for their agreeing to items above. However, I wanted to focus on the bigger picture and have a discussion with management first on the concept before we put the extensive list together.

I know it's a wish list, but if parties (government, IFIs, other counterparties) do not want this deal to terminate and equity to pull out and if they agree to points above, the sponsors would get the project done with limited additional funding by sponsors. This could be only transactional costs associated with restructuring, which while significant, do not approach cost of going forward as is. And it may include existing $233MM Project Completion Support, although we would negotiate hard to replace that with IFI debt or equity.

We should still continue down PTN and Transfer Notice path, but we should also consider how we give lenders and gov't some indication that we are still adding value to the deal by showing some willingness to talk on changes to deal. 

Wade