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Enron Mail |
Chris, sounds good - a) Wes will work with you on earnings recognition issues
for Pastoria and b) selling the LM's and the LV Cogen asset is a good call regardless of the hit. Some accounting flexibility on the LV hit may be worthwhile. Value protected counts just as much as new value created - you are doing the right thing. Regards Delainey ---------------------- Forwarded by David W Delainey/HOU/ECT on 11/20/2000 11:31 AM --------------------------- Christopher F Calger 11/19/2000 01:35 PM To: David W Delainey/HOU/ECT@ECT cc: Subject: Update on Pastoria and Las Vegas Sale Dave, We made good progress last week on the sale of Pastoria and Las Vegas. Kelemen is doing a great job. In general, Calpine is more agressive and can move quicker than AES - AES has one small team on both deals and is slower at turning docs. Without giving up any rights or discouraging AES from pursuing Pastoria, we are trying to position AES on LV and keep Calpine's value for Pastoria close to their original bid. Calpine - Pastoria Early in the week, Calpine clawed back about $12 million from their bid primarily by claiming that the turbine contract is overpriced by $10 million, and their bid assumed "market" for the turbines. While they are correct (the extra $10 million for Catalytica), we have gotten most of that back. There bid now is $37MM (vs. $41) plus up to $5MM if the contingency is not used between signing and closing. Calpine also wanted to include other permits (other than CEC) as conditions precedent and they wanted us to rep that the scheduled permits are the only ones required to construct and operate. This is far too onerous and we are pushing back on this. Our plan is to get a PSA that only has HSR and CEC permit as conditions precedent. The other negotiating item is with respect to mechanics of continuing the development between signing and closing, and who pays for it and who is at risk. This is relevant if you think of the scenario where incremental costs are necessary in order to get the Non-appealable CEC Permit. AES - Pastoria Same PSA issues as above, but AES seems more skiddish about the development risks (other than CEC). They want to change some of the EPC contract terms, they want a more-involved transition team and they want us to take more risk on post-signing/pre-closing development. Their bid was $27million plus upside for the 250MW expansion and a services agreement for fuel supply and schedule coordination services. We have given them term sheets that provide for an extra $10 million for the 250MW expansion and approximately $750,000 per year of risk-free service revenues. They have not yet responded. By contrast, Calpine does not want to use NEPCO, and they dont want our services or any material ongoing involvement (cleaner). CEC Process: On Thursday night we received the Presiding Members Proposed Decision (PMPD), recommending approval of the Project. By statute, this is one month early and the quickest in California to date. This is a 400 page document and we are combing through it to determine any material changes from our original filing and the original staff assessment - none detected yet. The stated process is that we would receive our CEC permit on December 20, after which their is a 30 day appeal period. If there is no appeal, the process is done Jan 19. For purposes of handicapping the risk, we have already gone through the public hearing process. While there was some intervention, our remote site is not in the environmental/NIMBY crosshairs like other projects. In order for the appeal process to derail the timing, someone needs to show that (i) a law was broken or (ii) the CEC analysis is seriously flawed. In the past two years five plants were approved and only one was appealed - this was due to a resident that was not notified and therefore the project broke the law. This caused a 4 month delay. The two bidders will not take the risk on the CEC permit getting appealed. In Calpine's words, it would look pretty bad on Wall Street if they had to write off a $40MM development fee paid to Enron for nothing! AES-Las Vegas They seem genuinely interested in the asset - more the expansion than the QF. They like LM6000's and think they are great resource for the location. We told them they are behind the other bidders both on time and value. They have reviewed the EPC contract and understand the quality of the LD's, liability limits and the consortium EPC group. They indicated that they have no problem with getting incremental insurance in order to protect the value of hitting June, 2002. They want to meet with the EPC group and provide input to the notice to proceed. Closing for them on this deal is a little cleaner than Pastoria because we have the permits in hand, and it is not as big a bet (smaller asset, existing operation, less political risk, etc.). Our plan is to turn the PSA one more time (Monday) and then tell them that if they get their bid up a few million ($26MM to say $30MM), we will focus on them for a week or so to try to get it closed. Deal Timing - Pastoria: Firm up Calpine on value and risk allocation during the next week and aim for signing and HSR filing on December 1. Sometime before December 1 we need to finalize our plans with respect to earnings recognition. We have been talking with Deffner, Westfall and lawyers about different structures involving either (i) LJM; (ii) AIG; or (iii) selling to Calpine with liquidated damages relating to CEC Permit. As you can imagine, there are pros and cons to each approach. We expect to know more on this by Wednesday of this week and will update you at that time. Deal Timing - Las Vegas: The only condition precedent should be the HSR. If they can move quicker, we will target December 1 to sign and late Dec to close. The urgency relates to schedule - the longer we wait, the greater the risk of missing June 2002 COD. With respect to QIV earnings, AES' bid results in a $6MM hit. Signing the deal to sell reduces fair market valuation. Two possibilities we are exploring: If AES increases its bid, the hit may be neglibible; alternatively we may be able to discount the LM6000's being sold to them, which may not show up as a hit since the LM6000 pool is accrual and being sold into Turbopark. Like the Pastoria analysis, we will know more this week and will update you when we know. Regards, Chris
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