LGS Storage

Scott asked for some assistance on the booking of the LGS deal and the impact
it would have if we unwound certain hedges. To help me better understand the
impact this would have, I need to understand the way we originally booked the
deal. David, you and I have talked about this some, but I still don't have
all the info I need. (Let me know if Scott, Craig and Farzad have already
figured all this out and I'll drop it, but to my knowledge they still need
help figuring this all out). Hopefully my thoughts outlined below will help
you understand what I'm looking for and why.

As I understand the LGS deal, ENA pays an annual $1.35 MM to utilize the
assets, including storage; ENA gets to keep value generated (including
summer/winter spread) up to $1.5MM, then it is shared 50/50; however, LGS has
to know about and agree with any hedges we put on to lock in a particular
spread. When Structuring booked this deal in January, summer/winter spreads
were locked in for the entire period we have the deal (through 2003);
however, it is my understanding that LGS has only been made aware of the
front year hedges (which I understand have been changed around a bit since
the beginning and that's o.k.).

What I need to know is--how was this deal booked? When the $1.35 MM payment
goes to LGS, is that covered through the hedges that were put on? How
exactly do the dollars flow between books?

I think this will help us figure out what would fall out If Scott removes
certain forward hedges and what risk he would take on. It seems to me that
he would be at risk for whatever spread we had locked in originally, but I'm
not sure exactly how this would show up. Basically, it seems as if Scott is
at risk with the hedges on, that if the actual spread is wider by the time
LGS is informed of the injection/withdrawal schedule (or LGS begins pushing
us to put on hedges), he would lose; likewise, it seems that if he takes the
hedges off and the actual spread comes in tighter, he would lose.
Conversely, if he takes the hedges off and the actual spread comes in wider,
I think he would win. Anyway, I want to get together on Monday and go over
this with the three of you and figure this all out. Please let me know if
10:00 Monday morning (7/31) works for you, then I'll ask Kim to get a
conference room.