Some initial reactions to your questions...

The implied enterprise value at June 30 based on PPE/ENA's net purchase price 
and outstanding project-level debt was $1,457/kW; this value reflects 
fully-contracted cash flow under the terms of the existing PPA.  As a pure 
merchant plant, the value might range from $50/kW (i.e., the "scrap value" 
based on a view that the margins realized from running the plant are 
insufficient to warrant keeping the doors open) to $350/kW (based on a view 
that the plant runs 7x24 and achieves prices at levels forecasted by Pace 
Global Energy (Pace) in a study that we had completed to facilitate 
commercial discussions with Brazos earlier this year).

The attached slide will give you a feel for where PPA prices are relative to 
market prices, again using Pace's numbers to illustrate "market".  ENA's 
ERCOT 7x24 curve is probably higher at the front end and lower on the back 
end than what we see from Pace, reflecting (1) at the front end, what we're 
seeing in today's gas forward markets (i.e., higher prices than Pace predicts 
from an "econometrics" point of view) and (2) at the back end, lower overall 
inflation.  In general, I think it's safe to say that we see the spread 
between PPA and market prices widening, especially in light of the fact that 
current gas market conditions narrow the spread considerably during the 
period of time in which a Brazos breach is most likely.

Based on the facilitation material we've seen, it appears that Brazos will 
argue that its staff was lead to believe that Tenaska IV would earn no more 
than 20% return on equity.  However, we've always viewed this as a somewhat 
disingenuous line of argument because Brazos has gone on public record as 
saying that it looked at a number of competing solutions to meet its members' 
needs and chose the least cost alternative in contracting with Tenaska IV.  
In fact, the all-in price projections we've seen in correspondence between 
Tenaska IV and Brazos in the contracting process appear to be in line with 
actual results.  To the extent the project has earned a return in excess of 
20%, this can generally be attributed to the cost savings realized in 
construction and strict enforcement of the contract.  It's also important to 
note that Tenaska IV took on all of the development risk in this project; it 
could have easily underbudgeted costs and found itself earning significantly 
less.

See the historical perspective that follows the forward projections contained 
in the attached.  We generally agree that Brazos has not been harmed by the 
current contract to date, but is in an above-market contract on a going 
forward basis.

Brazos appears to have three options at the end of the primary term (1) walk 
away, (2) purchase the plant for PV5 of future capacity payments, or (3) live 
with the contract by paying scheduled contract prices (i.e., capacity charges 
and gas agency fees) plus operating costs.  If Brazos selects options (2) or 
(3), Tenaska IV has certain "put-back" rights, but the plant is generally 
Brazos' for the taking.  These provisions of the PPA should yield prices that 
are below prevailing market prices in most years (i.e., other than those in 
which major maintenance will occur) as illustrated in the attached.  
Accordingly, we view the contract as more of an "accelerated payment plant" 
that front end loads capital recovery to Tenaska IV.  Patton Boggs' argument 
puts a new "spin" on the contract structure, one that we've not heard up to 
this point.

If you have any questions or need additional information, please call me at 
713-853-6027.

Rick Hill
Generation Investments Group





---------------------- Forwarded by Garrick Hill/HOU/ECT on 11/07/2000 03:01 
PM ---------------------------


Dan Lyons
11/07/2000 11:00 AM
To: Garrick Hill/HOU/ECT@ECT
cc:  
Subject: Brazos

More Grist
----- Forwarded by Dan Lyons/HOU/ECT on 11/07/2000 10:59 AM -----

	"Harvin, David" <dharvin@velaw.com>
	11/06/2000 02:58 PM
		 
		 To: "Lyons, Dan (Enron)" <dan.lyons@enron.com>, "Richard Sanders (E-mail)" 
<richard.b.sanders@enron.com>
		 cc: "Stern, Karl" <kstern@velaw.com>, "Thomas J. Moore (E-mail)" 
<TMOORE@LLGM.COM>
		 Subject: Brazos


There are some factual assertions in Brazos' memo that caught my eye.  I
wondered what information we have on these points:

1) at the bottom of p. 2 is a reference to a March 10, 1994 memo in which
someone claimed Tenaska planned to develop this site irrespective of Brazos.
The suggestion is that Tenaska would have an adequate remedy by selling
power elsewhere.  What is our reaction to that?

2) at the bottom of p. 5 is an assertion that we must be predicting that the
difference between market and contract prices will increase over time.  Is
that our position?  If we apply a contract v. market measure, I know we seek
to base the contract portion on the escalated contract prices, but what do
we use for market?  (Their piece of course does not address what is the
market.)

3)  in the middle of p. 6 is the claim that representations were made to
Brazos that Tenaska would earn a modest profit under the PPA.  Do we know
what that refers to?

4) at the bottom of p. 6 is a statement that under present market conditions
Brazos cannot even exercise this buyout option (presumably because its
payments under the PPA do not cause Brazos to be non-competitive).  That is
interesting.  If so, what is Brazos's complaint?

5) at the bottom of p. 7 is a claim that the option period was designed as
an alternative to Brazos's owning the plant at the end of the primary term.
What do we know about that?   What would be the effect of the pricing in the
renewal term?


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