Rob is the deal actually signed.


 -----Original Message-----
From: 	Milnthorp, Rob  
Sent:	Friday, February 23, 2001 6:15 PM
To:	Lavorato, John
Cc:	LeDain, Eric
Subject:	Extension of Petro-Canada Wholesale Gas Services Arrangement for 5 more years


John, as requested, please see the attached summary regarding the pcog extension. Eric did an excellent job at moving this forward through the "petro-can machine" and demonstrated a lot of patience and perserverance.

Regards
Milnthorp
---------------------- Forwarded by Rob Milnthorp/CAL/ECT on 02/23/2001 05:11 PM ---------------------------
From:	Eric LeDain on 02/23/2001 09:11 AM
To:	Rob Milnthorp/CAL/ECT@ECT
cc:	 
Subject:	Extension of Petro-Canada Wholesale Gas Services Arrangement for 5 more years

On Wednesday the President of Petro-Canada approved the extension of our Wholesale Gas Services Agreement after the first term expires November 1, 2002, for an incremental 5 years.  This has taken me a a while to get closed (and while doing so we have had to keep up a consistently high level of service), but keep in mind it's not easy to renew something half way through the first term.

This extension is very significant for the following reasons:
1. It creates a MTM income of $2.9 MM CDN, net of directly attributable costs to provide the back-office services;
2. It supports further deal flow and potential incentive arrangement income (along with all the production information etc.);
3. Of even greater importance it provides a very critical and frequently used marketing tool as we continue to build our gas and power businesses across Canada.  As you know, we have used the Petro-Canada arrangement as an example of the services we can provide, not only when marketing in Canada but also in the US and Europe.  Now we can tell potential customers that we not only have provided services to this customer for 3 years, but they've liked it so much they've already extended the agreement for five more years after the first term - the message has to be that we are providing a good quality of service. 

Obviously this is a great credit to our Commercial staff and the Operations, Accounting and IT staff that work with Petro-Canada.   I will separately advise each of the individuals who works on this account about the renewal and congratulate them.  It takes alot of effort to "enchant" the customer day after day, year after year.  In fact it's incredibly difficult to be effectively on trial day in and day out as a service provider.


The numbers:
Under the extension, we have provided Petro-Canada with a rebate applied to the remaining term of the agreement from our original base fee.
Original base fee is $1.75 MM CDN per year, payable monthly.

Rebate offered:
Jan/01 - Nov/01				($458,300) CDN
Nov/01 - Nov/02			($517,000) CDN
Fee charged for extension term:
Nov/02 - Nov/03			$1,366,000 CDN
Nov/03 - Nov/04			$1,400,000 CDN
Nov/04 - Nov/05			$1,435,000 CDN
Nov/05 - Nov/06			$1,470,000 CDN
Nov/06 - Nov/07			$1,510,000 CDN	

We have thoroughly defined our back-office costs required to provide these services at $428,700 CDN/yr (2000$), and have 3 years of operating history to support this as a projection (with escalation at 2% per year) for the second five year term.  These costs include back-office staff allocations (salaries and benefits), and rent/infrastructure allocation.  We have checked on the allocation of Houston costs, and on a per transaction basis these are insignificant compared to our base business transaction levels.  We do not include commercial staff costs in the above as they are covered by the incentive arrangement and ongoing transaction deal flow.
In discussions with Wes, this definition of the costs and certainty about the arrangement scope, will allow us to MTM this income.  The MTM income of $2.9 MM CDN includes the rebate offered for the last two years of the current term, and has been reduced by the above annual costs.

Notes:
1.  We have not defined the incentive fee for the second five year period yet as we are doing some work at the moment with PCOG on what our benchmark should be, given that much of the intermediate Producers in the group of 40 have disappeared.  We will revise the agreement to reflect the fact that there will be a further revision once the incentive fee is agreed to.
2. If Petro-Canada's sales volumes fall to 60% of last years levels, there will be a price reopener for the remaining term because we have defined the fee as an absolute cost rather than per unit rate.  We also have a reopener on price if the volumes grow to about 140% of today's levels.  Petro-Canada has a growth strategy for gas so this is not at all expected.  Volumes over the last 6 months have increased by about 7-8% year on year.
3. Peter and I should have the amended agreement out next week.