-----Original Message-----
From: 	Hill, Garrick  
Sent:	Monday, June 17, 2002 5:51 PM
To:	McMichael Jr., Ed
Cc:	Bills, Lisa; Lyons, Dan; Ward, Charles; Barbe, Robin
Subject:	Ponderosa Pine Energy Partners, Ltd ("PPEP")

After I learned that Robin was preparing a summary to bring you up to speed with where we are gas-wise w/PPEP, I offered to draft something that might help put us all on the same page and allow her to work on other things important to your group.

PPEP owns a 263 MW plant located in Cleburne, TX.  The plant has three gas-related agreements that require daily management:  (1) a gas transportation agreement w/Lone Star, (2) a gas supply agreement w/Apache (which is being managed by Cinergy), and (3) a gas supply agreement w/Williams.  Prior to June 30, 2000, these agreements were administered under a service agreement between PPEP (f/k/a Tenaska IV Texas Partners, Ltd., or "TIVTP") and Tenaska Gas Co.  Under that agreement, Tenaska Gas Co. ("TGC") provided scheduling services, reconciled gas activity to invoices, and bought and sold gas on behalf of TIVTP.  As consideration for services provided, TGC received a per unit fee that (if the agreement were still in effect) would have amounted to approximately $0.0513/Dth in 2002.  That fee is prevalent in the PPA as it relates to Brazos' gas purchase options and electric pricing after 2006, the year the gas supply agreements expire.

The TGC gas agreement was terminated on June 30, 2000 at which time Ponderosa Pine Energy, LLC ("PPE"), a wholly-owned subsidiary of Delta Power Co., LLC ("DPC"), acquired all of the entities that own general partnership interests (90%) in TIVTP (whose name changed to PPEP one year later).  Just prior to PPE's acquisition, ENA acquired the only limited partnership interest (10%) from LG&E.  In conjunction with PPE's acquisition, ENA entered into two service agreements with PPE:  (1) a Consulting Services Agreement, under which either party receives cost plus 5% for services rendered (there has been no business conducted under this agreement, and (2) a Corporate Services Agreement, under which ENA is entitled to receive cost plus 5% for accounting, tax, finance, legal, and HR services it provides to PPE.

PPE's purchase agreement provided for a transition of gas services to ENA over 90 days.  In conjunction with the transition, ENA and PPE developed (but never executed) a gas agency agreement under which the ENA Texas Desk provided services similar to those provided under the TGC gas service agreement.  Per Weil, course of performance is sufficient to consider that agreement binding as a "verbal arrangement".  Under that verbal arrangement, the ENA Texas Desk received a fee of $0.0400/Dth in 2001; by our calculations, that fee has increased to $0.0406/Dth in 2002.  PPE is current through November 2001 on the payment of these fees.

In addition to the status of the PPE-ENA gas agency agreement, two issues were raised to a consciousness level shortly after the filing of our petition  

In what appears to be related to the sale of HPL to AEP, payments that were made by PPEP to ENA for further payment to Lone Star between April and November 2001 were never remitted by ENA to Lone Star.  In order to prevent the Lone Star agreement from going into default, PPEP was forced to pay Lone Star directly (effectively causing PPEP to "double pay" its transportation costs for the period).  

Revenue that was received by ENA for the resale of gas on behalf of PPEP (i.e., due to an electric production schedule that didn't utilize full contract entitlements) for the month of November was never remitted to PPEP.

Taken together, these two items create a $1.3 MM claim against ENA by PPEP.  Additionally, we learned shortly after the bankruptcy that the electric production schedule had lead to the development of a large imbalance on the Lone Star pipeline.  Given ENA's limited capability to transact on physical gas (and Lone Star's physical limitations), it has been difficult to work off this imbalance.  However, the fact that the plant is generally short gas in summer production months (i.e., the plant utilizes approximately 48,000 Dth/d at full production vs. its 45,000 Dth daily contract entitlements), the imbalance should start to reverse this summer.  It's my understanding that the facility has fairly liberal balancing provisions w/Lone Star.

An invoice for gas agency services since the filing of the bankruptcy was presented to PPE today.  Based on conversations that I had w/DPC earlier this year, we suspect (due to the limited capacity in which ENA can perform and the claim described above) that PPE will decline to pay the invoice.  ENA, at DPC's request, developed an RFP to solicit bids for a new gas agency service provider earlier this year.  While we have received no indications that the RFP has been issued, it is my understanding that DPC has had conversations with one or more parties that may be willing to provide gas agency services.  While not crucial to ENA's decision-making, we have no way of knowing how these conversations have progressed or if DPC is presently in a position to assume the role of gas portfolio manager.  

However, this is deal falls into the "SPE category" by virtue of a total return swap between ENE and KBC bank, which loaned PPE 97% of the total funds needed to acquire the entities that own general partnership interests in PPEP.  The total return swap was entered into contemporaneously with PPE's acquisition in June 2000.  The total return swap agreement appears to be in default; ENE has not performed under that agreement since the bankruptcy filing.  Likewise, the KBC-PPE loan agreement also appears to be in default.  We are aware that DPC attempted to put its equity interests in PPE back to KBC in December under the loan agreement, and that its exercise lead to the filing of a lawsuit by KBC.  We are also aware that KBC and DPC are in discussions concerning a resolution of their differences and a possible restructuring of the investment, but we have not (to date) been party to those discussions.  Lisa Bills is responsible for the total return swap and bank the bank relationship on this deal.  She is presently developing a strategy document for dealing with this investment (which appears to the deal team to be a net liability due to the current market for power plant investments and the relationship with Brazos).  

Because the SPE status (and outright ownership of the limited partnership interest), we intend to continue in our collective service roles (i.e., relying on DPC for authorization of our decisions) until such time that the strategy can be advanced through the approval process.   Lisa views DPC's reaction to the gas agency service fee invoice to be a key part of this process.

I hope this helps...please let me know if you need more.