This is more than you ever wanted to know about Catalytica!  If there is any point to regurgitating it, that point would be that this deal didn't make a dime for Enron, GE got a "gift" (as I would see it) of $10 million from Enron, and Catalytica got off scot-free.

The December 1999 DASH summarized the eight agreements associated with the transactions to "permit the following:  (1) sale and repurchase of the spark spread option; (2) funding XONON development in an amount equal to the proceeds of the option sale; (3) funding the turbine prepayment at the Pastoria project with the same option sale proceeds; (4) obtaining the right of first refusal on the first five commercial 7FAs equipped with XONON; and (5) purchase of the turbines on an off=balance sheet basis"  Enhancing the value of the equity investment in Catalytica was mentioned as a strategic benefit and potential upside.  Turbine overpricing was not mentioned in the DASH or the RISK MATRIX.

When Dave added his comments to the May 2000 DASH I understood that the $10 million cost was intended to be offset by $10 million in turbine credits.  Doing an allocation of the cost seemed logically to mean allocation of the credits once they were recognised.  Outside of the slim chance that something blew up, the allocated cost would be offset with a subsequently allocated credit, i.e. a wash.

From an ENA perspective the issue is moot.  If the decision is to allocate a portion of the turbine overpricing to the merchant portfolio but none of the credits, that clearly was not accounted for in 1999 or 2000 and certainly was not provided for in the 2001 Merchant Asset Management Plan.

---------------------- Forwarded by Richard Lydecker/Corp/Enron on 03/23/2001 11:58 AM ---------------------------


Richard Lydecker
03/23/2001 08:53 AM
To:	Christopher F Calger/PDX/ECT@ECT
cc:	 

Subject:	Re: out of interest   

Chris, thanks for the clarification.  Pat did confirm with Sheila that the turbines were overpriced...which seems to mean that Enron ended up giving GE a gift of $10 million.  That seems strange.  It also still seems to me that the December 1999 DASH did not accurately reflect the deal.  Unless I missed it, I did not find any reference to turbine overpricing.

My understanding of Dave's comment on the May 2000 DASH was to account for the acceleration period between May and September 30 and the risk that the Pastoria project would be cancelled and/or the technology development fail in that period.  In May ENA gave up the opportunity to stick Catalytica with "credits" as payment for the repurchase of the SSO rather than cash if either of these events occured before September 30 and thereby lost the optionality of the four months.  The May 2000 transaction did not change the economics of the deal in any other way than this acceleration.   If the comment was intended to allocate the turbine overpricing which was part of the 1999 original transaction, I agree with you that this should have been handled at that time.

My concern has been that Enron retain the "benefit" of the credits referenced in the XTIA which apparently has occurred.  However, the fact apparently is that the credits had been rendered valueless from the start by the turbine overpricing.

My framework had been that as long as Enron received the credits in some form, the May 2000 transaction was a wash as far as I was concerned.

Dick.


 



Christopher F Calger@ECT
03/22/2001 07:58 PM
To:	Richard Lydecker/Corp/Enron@ENRON
cc:	 

Subject:	Re: out of interest   

Dick,,

Sounds as though this caught you by surprise - sorry for that.  Your chronology seems correct.  This thing makes my head hurt every time it is brought up!  I believe the obligation was incurred Dec 1999, but not properly recognized/accounted for until the May,2000 DASH.  Delainey's hand-written note was the end result of people dissecting the deals with the realization that the West Power turbines were overpriced by the $9.9MM and the Catalytica equity account did not properly account for that in Dec 1999.  

The turbine contract refers to a credit of $9.9MM but the gross turbine price was increased by twice that amount so that the net increase was $9.9MM.  ENA agreed to it because Piper wanted to help Catalytica.  Despite much protest from Dave Parquet, I agreed with Delainey and Ray Bowen that West Power would be on the hook for $3.3MM of the $9.9MM because the project got some benefit from Catalytica.   Delainey wanted the payment triggered on sale of Pastoria because he did not want my group to recognize any income until the project closed.  This was communicated to and acknowledged by accounting and I reminded them of it every month or two since mid-year.    

I understand Pat called Sheila Tweed - I dont think she (or anyone) remembers the details, but she should be able to validate the point about turbine overpricing and the Delainey fix in May, 2000.  

Regards,

Chris





Richard Lydecker@ENRON
03/22/2001 05:19 PM
To:	Christopher F Calger/PDX/ECT@ECT
cc:	 
Subject:	Re: out of interest

Chris, I couldn't agree more about the confusing history of the Catalytica XTIA and spark spread derivative transactions.  My understanding is slightly different from what you outline but you may have better sources.  Neither of us were present at the creation.

I am familiar with Dave Delainey's hand-written note on the May 22, 2000 DASH.  That DASH authorised accelerating repurchase of the SSO by three months.  My view is that Dave could allocate within ENA at his discretion.  I did not understand the rationale, however, since it was the December 14, 1999 DASH  which established the obligation for Enron to fund the $9.9 million.  All the May 22, 2000 DASH did was unwind a financing arrangement three months early.  It did not have anything to do with the incurrence of the obligation itself.

The objective of the complex series of agreements was for Enron to finance GE's development of the Xonon technology and in return receive credits on turbine purchases either at Pastoria or for other xonon-equiped turbines if Pastoria were cancelled.  

Original Deal

1.  Catalytica agreed to purchase a spark spread option (SSO) from Enron for $9.9 million payable in four instalments.  These instalments exactly matched the funding obligation to GE under the XTIA.  

2.  Catalytica actually paid Enron $3 million which represented the first two instalments.

3.  West LB made $3 million milestone payments to GE.  The Enron/West LP arrangement was an off balance sheet financing deal.  At the end of the day, Enron was paying GE.

4.  By September 30, 2000 Enron was obligated to repurchase the SSO from Catalytica for the amount Catalytica had paid Enron or for turbine credits if Pastoria were cancelled.

May 2000 SSO Repurchase

1.  Enron bought back the SSO from Catalytica for $3 million.  The three-month acceleration of repurchase was supposed to facilitate an IPO.  It did not impact at all           Enron's ultimate obligation which had always been for the full $9.9 million.

	Catalytica was now out of the chain and had no further payment obligations or credit entitlements.

December 2000 Final Milestone payment to GE

1.  Enron has paid GE $9.9 million  through the West LB financing arrangement (now Turbo Park)


I am uncertain whether GE increased the price of the Pastoria turbines by $9.9 million as part of these transactions.  My understanding was that there was concern about this when the turbine contract was negotiated, but I had thought this concern was to be guarded against in contract negotiation with GE.   If in fact GE did increase the cost of the Pastoria turbines by $9.9 million the entire purpose and benefit to Enron from these incredibly complex and non-intuitive documents was totally obviated.  Net, net Enron would have paid GE to develop a technology application with no compensatory value.  Why Enron would have done this kind of deal I don't know.

I'm not sure what internal income transfer would apply.  I understand that GE has applied the $9.9 million credit against a progress payment billing late last year.  Wouldn't this mean that the full credit was taken by Pastoria?  It is unclear to me why the sale of Pastoria should trigger anything.  

At the end of the day  ENA did the deal in 1999 and how we account for the consequences now is irrelevant.  If the turbines were overpriced, the December 14, 1999 DASH seems to me to be misleading in not disclosing that fact when approval was requested.  The DASH actually states that the $9.9 million would "serve as a down payment for the Pastoria turbine package."

My summary may not be correct but this is the best I have been able to piece together on what happened.  Dick.



---------------------- Forwarded by Richard Lydecker/Corp/Enron on 03/22/2001 04:54 PM ---------------------------


Louise Kitchen@ECT
03/22/2001 03:13 PM
To:	Richard Lydecker/Corp/Enron@Enron
cc:	 

Subject:	Re: out of interest


---------------------- Forwarded by Louise Kitchen/HOU/ECT on 03/22/2001 03:10 PM ---------------------------


Christopher F Calger
03/22/2001 02:56 PM
To:	Louise Kitchen/HOU/ECT@ECT
cc:	 

Subject:	Re: out of interest   

Calpine reduced their purchase price because the turbine contract for Pastoria was overpriced by $9.9MM, the amount of the Catalytica credit.  

A brief confusing history as I understand it...ENA East and West jointly owned the Catalytica equity account in 1999.  It was written up based on expectations of an IPO value.  At 12/99 it transferred to West Power because Catalytica entered into an agreement with Pastoria to provide the Project with its Zonon technology.  This agreement included a commitment from GE to do research/work in order to use the Catalytica technology on GE turbines.  The cost of this ($9.9MM) was added to the Pastoria turbine contract.  

In Feb 2000,  when I arrived in Portland, I had the Catalytica account transferred to the Portfolio because I thought it was overvalued with little synergies with ENA West Power.  In mid-2000 the agreement was restructured in order to "clean up" Catalytica so it could IPO.  At that time, Enron was credited back the $9.9MM from Catalytica and it was decided by Delainey that that amount should be split 2/3-Pastoria and 1/3Catalytica Equity, with the 2/3 going to ENA West Power upon the sale of Pastoria.  Pastoria did not get the full $9.9MM back because we benefited somewhat from favourable publicity and some interest savings.   

At this time, since there is no funds transfer, I believe it simply becomes an internal income transfer from the Merchant Portfolio to ENA West Power.  





Louise Kitchen
03/22/2001 08:33 AM
To:	Christopher F Calger/PDX/ECT@ECT
cc:	 
Subject:	out of interest

what happens under the Pastoria deal to the Catalytica credit - did it go to Calpine or are you using it in the other turbine purchases?
















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