It sounds like the costs will come down some but I have a few comments. First, I'm not sure that lowering the amount of compression to California since those shippers are not willing to pay the full rate is a good thing. I believe the California piece may actually be needed to carry the whole project. They may not pay the rate calculated as part of this project but I do believe if our timing is right we can do 300,000/d from San Juan to the border for the PG&E deal at more economic rates. Second, my understanding is that the ROW costs for the Navajo will be taken out of the project in return for giving the Navajo equity interest in the project. Centilli needs to make sure that he reduces the revenue back to ETS by this amount (he may not know this yet). Also, giving the Navajo an equity interest sets a very difficult precedent with regard to future expansions or ROW extensions (we tried to stay away from something like that this last round because we knew it would cost us more in the end).

 -----Original Message-----
From: 	McCarty, Danny  
Sent:	Tuesday, October 09, 2001 11:25 AM
To:	Harris, Steven
Subject:	FW: Sun Devil



 -----Original Message-----
From: 	Gadd, Eric  
Sent:	Monday, October 08, 2001 6:04 PM
To:	McCarty, Danny
Subject:	Sun Devil

Danny,

I met with Phil Lowry, Jerry Martin, John Keller, and Kevin Hyatt to discuss the revised cost estimates for Sun Devil.  My blood pressure has eased somewhat.  I'm hopeful that the estimate will be revised downward to a level more consistent with the original by the end of the week.  The engineers want to make this project work and have taken some actions away to further squeeze the cost bundle.
  
Here's a quick recap-

$580 MM was the Total Project Excl. Int., O/H, etc. used for the open season.
$667 MM was the Total Project Incl. Int., O/H, etc used for the open season.
$912 MM is the latest Total Project Incl. Int, O/H, etc

The difference between $912 MM and $667 MM is $245 MM.  

Of this, $218 MM relates to-

-$65 MM for the Panda lateral (not in original scope)
-[$44] MM for 36" pipe vs 30" pipe (not in original scope).  This amount to be confirmed by the engineers.
-$48 MM for escalation (not broken out per se in the original scope)
-$33.2 MM additional cost for Navajo land acquisition
-$13.2 MM additional cost for Navajo labor on Navajo lands (not included in original estimate)
-$14.5 MM additional cost for gross receipts tax (not accounted for in the original scope)

We can reduce the estimate by $109 MM just by returning to the original project scope.  Panda will have to pay for the lateral to their plant.  We won't overbuild with 36" pipe to provide hourly swing capability unless shippers pay a higher rate (or we are content to hold excess capacity for future shippers). Some additional savings will accrue as a result of reducing the amount of compression (California shippers have shown no interest in paying anything close to full rate).  Finally, the engineers haven't given up on finding other potential savings.

The remaining $109 MM comes under the category of "identified risks".  Estimates are provided in current dollars and the "escalation" component highlights the risk of inflation.  The reality is that ETS has had very little recent experience pricing pipelines in the southwest.  The additional costs for Navajo land and labor can only be bottomed out through bilateral discussions with the Navajos.  I'm still checking the gross receipts tax cost - - - seems that it was not included in the original estimate, which is a bust.