-----Original Message-----
From: 	Belden, Tim  
Sent:	Thursday, December 20, 2001 3:27 PM
To:	Lavorato, John; Whalley, Greg
Subject:	Getting A Deal Done

I recognize that we are in a very fluid process right now.  However, I feel that I currently don't possess the information that I would need to make a decision about what structure and compensation would work for me and people on my team in NewCo.  I will attemp to lay out the issues that concern me and provide thoughts on what I have heard about structures so far.  Excuse me if I am off on any (or all) of my facts.  I am currently receiving mostly second-hand information from gas and power traders in Houston.

Here is the Citibank deal as I understand it:
Requirement to retain between 5 and 15 employees to do the deal.
Fund (at some unknown level) a retention pool to be distributed in some unknown manner to an unknown subset of the 800 NewCo people.
800 employees
$30 million of 1-Day 95% VAR
Total 2002 costs of approximately $300 million.
Bonus pool equals 20% of EBIT
Bonus paid out 75% in cash and 25% in restricted stock with a 3-year cliff vest.

Here are my concerns
The cost structure appears to be well above what a $30 million VAR trading operation can support.
My recollection from west power ROVAR is roughly 90% in 1998, 120% in 1999, and close to 200% in 2000 and 2001.  I'm not sure how to handicap expected future ROVAR, but without additional information from the two of you I have a hard time expecting more than 100% in a lower-priced commodity market.  Given that assumption, the $30 million one-day VAR becomes $480 million annualized VAR gives you gross margin of $480 million.  I don't know what the capital and credit charges will be, for arguments sake let's call it $30 million.  Bonus pool equals $480-$30-$300=$150*20%=$30 million of which $22.5 is cash and $7.5 equity.  I can't sign up for that math.  Please help me understand how/why my math is wrong.
I need to understand our cost structure in great detail.  We need to figure out a way to allocate costs to the desk level.  If I look at West Power (everyone in Portland) assume that we have 80 people with an average of $200,000 for base salary and benefits giving us total personnel costs of $16 million.  Add on another $4 million for rent, parking, travel and entertainment ... and call it $20 million of direct expenses here.  I figure that we can make $100 million in 2002 with lower VAR and starting up later in the year.  How much of the $280 million remaining costs should I expect to be allocated to the West Power desk.  With an EBIT of $80 million times 20% I can sell.  If we have another $50 million of allocated costs then I can sell this.
I recognize that the potential buyer is unlikely to fund a desk by desk EBIT.  However, I think that our goal should be to split the pie based on a desk by desk EBIT and would like to see a proforma that accomplishes that.

Proposed Retention Structure for Three People in Portland
A dollar amount paid in cash over one year and equity over two years.  Price tag tbd.
Create certainty around the bonus/retention payments.
Indemnify against payback of deferred comp.
Clarify total retention dollars for the rest of the desk.
15% of gross margin for 2002.  20% of EBIT going forward.

Other Gripes
Labor has not been invited to the negotiating table.
Labor doesn't get to see the pro forma.
We are supposed to get paid based on EBIT yet I have no control over the expense side or the allocation side.
Labor is getting accused of holding up a deal that labor had no part in negotiating.
Labor is the most important driver of the value of this deal and doesn't appear to have any rights other than to accept or reject a poorly defined structure.

I want to make this thing work.  I am not trying to be greedy.  I am finding it very difficult to navigate through this process given the very limited information that I have been given.

Tim