looks good to me.




Sean Boyle@ENRON
02/26/2001 05:36 PM
To: Scott Neal/HOU/ECT@ECT
cc:  
Subject: Guaranteeing Index Minus Gas  

Scott,
I am talking to DTI (CNGT) regarding an Index minus sale for April-01 
through  June-01 of up to 4 Bcf.  
I wanted to send my contact a brief description of how we would go about 
achieving an Index minus baseload price by imbedding an option.  I am not 
supposed to know about DTI's potential purchase requirements, so I changed 
the quantities and months in the example below, since the plan is to take 
this to her boss.
Please let me know if this sounds OK or give me pointers on making it better.

Tammi,
As promised I wanted to send you a simplified example of how we can guarantee 
you IF-FOM Index Gas you can take to Michelle.

Example:  Note: All prices are notional non-transactable numbers.  
DTI requires a total of 610,000 DT in April and May as a 10,000 DT/d baseload 
purchase.

ENA Proposal would guarantee DTI IF-FOM Index Minus Gas by embedding an 
option (Put or Call) into the deal for say 5,000 DT/d.
Therefore if DTI has the flexibility to take up to 915,000 DT (in the case of 
the put) or as little as 305,000 DT (in the case of a call) then ENA can take 
the value of the option and imbed that into the price of the gas.

Let us say; ENA is currently offered at IF - CNG App Index for  April and May 
@ Index +2 cents, and agrees to sell DTI Index  -2 cents; ENA has lost 4 
cents or $0.04 * 610,000 = $24,400.
However, if we price in the value of a call option with a strike price of the 
FOM Index, then that would generate $0.10 * 5,000 * 61 days= $30,500. ENA 
would use this value to offset the Index loss and make a small margin on the 
sale.  Therefore DTI is guaranteed Index minus gas, however must have the 
flexibility to potentially take more or less gas than the baseload quantity.  
Remember, if the option is out of the money for the entire period, DTI will 
receive only the baseload quantity.  If ENA exercises the option everyday 
then DTI will receive the quantities mentioned above still at a price of 
Index -2 cents.

This can work if you need a quantity of gas over say four months we can imbed 
the option in three of the months and buy or sell the remainder in the fourth 
month at Index flat to achieve the desired quantity over the four month 
period.  Obviously the more flexibility you give the more premium the option 
will generate and hence the greater the discount to Index we can guarantee. 

Please let me know if you have any questions.  If you would like me to do a 
conference call with Michelle just let me know.

Thanks,
Sean