FW: Renegotiation thoughts

=09hmmm.

-----Original Message-----
From: =09Cline, Wade =20
Sent:=09Thursday, May 10, 2001 11:01 AM
To:=09McDonald, Rebecca; Hughes, James A.; Walls Jr., Rob; Lundstrom, Bruce
Cc:=09McGregor, Neil
Subject:=09Renegotiation thoughts

Below is an e-mail I worked up on my renegotiation thoughts for your readin=
g pleasure. Since this idea came up on our Thursday call, I will go ahead a=
nd send the e-mail out for feedback. We can discuss any thoughts you have o=
n this either Friday or on a subsequent call.

Regards,
Col. Travis

_____________________________________

The thoughts below are not for our meeting on Friday, but they represent so=
mething that I think we need to be prepared for at some point after Friday.=
I ask your patience in presenting some thoughts on a possible renegotiatio=
n strategy.

Background:

We are going down a termination path, which we are willing to go all the wa=
y on. We also are aiming for a buyout option at some point.=20

Lenders are concerned about the path, as we all are, and are taking some ti=
me to get comfortable with the steps. This has led to a delay in approval f=
or PTN and perhaps a delayed approval after PTN for a Transfer Notice. Whil=
e the lenders may know the ultimate resolution is a termination or buyout, =
the lenders are concerned that DPC has not done all in its power to find an=
amicable solution through negotiation. Given hundreds of published comment=
s, the Godbole Committee report, our understanding of GOM finances, politic=
al party differences, weak coalition gov'ts, etc., we know that renegotiati=
on is going to be almost impossible. But the lenders are not there yet, and=
in this period, we don't want to lose the lenders completely. We need lend=
ers and their approval for a buyout, as well as a termination. Plus we don'=
t want to upset lenders completely to a point they ask "what value is DPC (=
Enron/GE/Bechtel) bringing to the project?" and thus decide to cut the equi=
ty out and to seek some other solution without the current equity.=20

Government parties (MSEB, GOM, GOI) are concerned about this path as they d=
on't fully appreciate what it means for them or DPC. In addition, this hard=
ball tactic is not their normal style, although they are capable of being f=
airly rough when they get pinned down. This is especially true since our as=
sets and people are on their home turf. The hardball, while we are used to =
it and believe it is the proper strategy, is leading to hardening of positi=
ons by government, and will make subsequent discussions (whether on transfe=
r amount, buyout option or any renegotiation) more difficult. We also shoul=
d be thinking of keeping doors open, if only a slight bit, with government,=
as we will need some level of cooperation for buyout, transfer amount or a=
ny renegotiation.

I think we should develop a renegotiation option that is a combination of t=
hings. First, something that if our plans go out of control, we have someth=
ing we can fallback on as a last option. While renegotiation and the conseq=
uent reduction in equity returns might be an unattractive option, I think w=
e can make it more attractive than it currently is, as you can see from the=
list below. This provides some "face-saving" option for the government, if=
they choose to go this route. Second, it is something that shows the lende=
rs (who we have to care about) and the government (who we care less about, =
but still care somewhat due to need for their approvals and cooperation) th=
at we are not slamming the door shut on any further discussions. Third, it =
is something that will be very difficult for the government and perhaps the=
lenders, fuel supplier and shipowners to agree to, and thus we will probab=
ly get to the goal of termination regardless.

Right now, the lenders are our immediate hurdle with the challenge of getti=
ng them over the hump of a quick PTN and a simultaneous or shortly thereaft=
er Transfer Notice. So I would recommend we discuss the plan below internal=
ly and modify it as needed. Before we would show it to anyone, we would dec=
ide what is our minimum (I propose the attached be our minimum) and we will=
beef it up as needed. If required, we will have it ready to show to lender=
s at an appropriate time, or to have a senior Enron executive such as Ken o=
r Rebecca or a Houston-approved emissary get it to GOI. We would say this i=
s what we are willing to do to avoid final termination (we still will proce=
ed with PTN and Transfer Notice, as soon as lender consent obtained), but g=
overnment and other counterparties must agree to obligations contained in t=
he list. This shows the lenders that we are willing to at least play the re=
negotiation game.=20

Here's the Dabhol Wishlist in short bulletpoints. These need work and furth=
er scrubbing, but before spending significant time on this, I want to get i=
nput from management if this is something they would want us to explore. Ag=
ain, I think these are our minimum, worst case things, so we could beef it =
up accordingly.

1. Dabhol agrees to not terminate project. [In light of recent events and h=
igh level concerns meetings being held in Maharashtra and Delhi, we should =
not understimate the value this concession provides to GOI and GOM.]

2. Dabhol agrees to tariff reduction from ECS of Phase II on LNG of 50 pais=
e for 1st 10 years, up to Rs. 1.00 for the remaining 10 years. This is done=
primarily through a debt reschedulement, granting liquidity relief in firs=
t 3 years to MSEB and recovery through GOM bonds, and ROE reduction by conv=
erting to 2 part tariff. Equity reduction by eliminating MSEB's equity in p=
roject.=20

3. GOI agrees to backstop (purchase or credit support) 2 power blocks and G=
OM/MSEB takes one. [Note: I think we should ask for GOI to backstop all 3,=
but I think 2 is the most possible.]

4. GOI or GOM or Indian Financial Institutions (IFIs) (or combination there=
of) takes enough equity at par to reduce Enron to 50%.

5. All additional funding requirements for the project, including additiona=
l funds for development cost recovery, cost overruns for capital costs, wor=
king capital, customs, commissioning fuel, etc. to be funded by additional =
loans or equity to DPC from IFIs. This also includes any cost overruns due =
to construction stoppage and delay we are currently facing. We should even =
ask to eliminate existing Phase II sponsor Project Completion Support and r=
eplace it with IFI loans. That last point may be a bit much since we have a=
lready committed to this, but if the option is that we will walk from this =
project, the IFIs with appropriate pressure from government could support t=
his.

6. Negotiate to eliminate liquidity L/C obligation, LNG Supply L/C obligati=
on and ship L/C obligation. If funding support is needed to cover these sho=
rtfalls, it will come from IFIs.

Recall that this project has significant cashflow in later years, and the I=
FI debt raised in #5 and 6 above could be repaid during that time.

7. All equity hold restrictions on Enron, GE and Bechtel are lifted, includ=
ed those in project documents (for example, GOI guarantee and PPA) and loan=
documents. Enron's internal plans would be to exit after deal signed up.

8. MSEB to drop existing misdeclaration claims, and take steps in PPA to en=
sure this is not an issue going forward.=20

There are many other items that can be included, including approvals from R=
BI to recover all sponsors development costs, which would be funded by IFIs=
under #5 above, fuel hedging ability for MSEB, clearances for Metgas to ma=
ximize value we can get in sale of the Metgas TARA, etc. Alternatively, we =
could give Metgas contractual rights and existing permits and contracts to =
GOI in exchange for their agreeing to items above. However, I wanted to foc=
us on the bigger picture and have a discussion with management first on the=
concept before we put the extensive list together.

I know it's a wish list, but if parties (government, IFIs, other counterpar=
ties) do not want this deal to terminate and equity to pull out and if they=
agree to points above, the sponsors would get the project done with limite=
d additional funding by sponsors. This could be only transactional costs as=
sociated with restructuring, which while significant, do not approach cost =
of going forward as is. And it may include existing $233MM Project Completi=
on Support, although we would negotiate hard to replace that with IFI debt =
or equity.

We should still continue down PTN and Transfer Notice path, but we should a=
lso consider how we give lenders and gov't some indication that we are stil=
l adding value to the deal by showing some willingness to talk on changes t=
o deal.=20

Wade