fyi
---------------------- Forwarded by Rick Buy/HOU/ECT on 05/22/2000 01:34 PM 
---------------------------


John Sherriff
05/22/2000 01:21 PM
To: Rick Buy/HOU/ECT@ECT, Joe Gold/LON/ECT@ECT, David 
Haug/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Doug 
Rotenberg/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Rick 
Bergsieker/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Vince J Kaminski/HOU/ECT@ECT
cc:  
Subject: Exmar Purchase Decision


I just got off the phone with Jeff Skilling to make my pitch for doing the 
Exmar deal.  He said that he generally understands the logic of the deal but 
simply
wants the risk management discipine applied to analzing the position (a 
reiteration of what Rick Buy had said in our meeting today).  I would simply 
ask Vince's team to take a quick look tommorow at valuing the ships as stand 
alone positions with a guess at the volatility based on historical price 
movements.   This would
be much easier than the Rainbow option approach and would allow us to roughly 
look at the value of the options on the other two ships.  In other words we 
could look at two ship  long positions with some implied volatilities and 
also estimate daily VARs on the ships as if they were mark to market 
(although I agree with David that we will not likely be able to mark the 
ships because they will be treated as leases).

John


John
---------------------- Forwarded by John Sherriff/LON/ECT on 22/05/2000 19:05 
---------------------------


Joe Gold
22/05/2000 18:58
To: John Sherriff/LON/ECT@ECT
cc:  

Subject: Exmar Purchase Decision


John,

After spending a few minutes with our shipping experts in the coal and oil 
groups, I have a slightly different angle on the Exmar LNG vessel decision.  
I would ideally like to spend the time to analyse this purchase as we do 
power and gas positions.  Unfortunately, we do not have that luxury and 
sometimes, in absence of true analytics, the most rudimentary measures can 
provide the best decision tools.  Here is how we would make the decision:

1)  Our shipping expert confirms that $140 million for a 135,000 ton ship 
represents a good price relative to new build costs over the last three years 
and that quotes have been trending up past that number recently.  He also 
confirms that the current trough is the result of the default of several Far 
East buyers and that new LNG orders and other ship building (cruise liners) 
have reduced the over capacity.  His experience and historic analysis has 
suggested that the pricing cycle for LNG ships lasts for a significant 
period.  New efficiency measures should reduce new build prices (and allow 
for a lower trough), but not by an extreme amount versus the $140 million 
cost of this vessel.   

Pierre normally likes to roll time charters; however, this is difficult in an 
illiquid shipping market like LNG.  He would purchase this ship if the LNG 
shipping book were his to manage.  He estimates the ship could be sold in a 
distressed sale for $110 million and could be potentially time chartered on a 
long term basis at a value of up to $200 million.  

2)  Our development teams in Spain, Italy and Turkey have been trying to 
solve the big question - gas.  In each country, the key to developing a 
merchant plant is securing gas flexibility or at least securing negotiating 
leverage with the monopoly gas supplier.  It is questionable whether or not 
this decision will have an immediate impact on Arcos.  The plant's time line 
and the realities of the LNG supply market may require that we commit to Gas 
Natural before any source of 3 to 5 year gas can be secured.   The shear 
threat of being able to bring spot or term LNG to these markets will improve 
our negotiating leverage and/or allow us to create flexibility.  Going 
forward, however, other potential plant opportunities in Spain, and elsewhere 
in the Med region, may have the capacity to utilise these vessels.   I think 
that this flexibility is worth at least $25 million to me.

3)  I would summarise:   Upside   $60 + $25 = $85 million
     Downside           ($30) + $25 =             ($5)  million

I would do it.

I will leave the rest to you.

Joe