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Enron North America

Enron North America. ENA Proposed Base Gas Transaction Structures June 2001. Contents. Law Firm Deliverables Market Status ENA Proposal Gas in Storage Analysis Model 1 – Abandonment Model 2 – Replacement with Non-Current Working Gas (NCWG) ENA Model 3 – Compression

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Enron North America

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  1. Enron North America ENA Proposed Base Gas Transaction Structures June 2001

  2. Contents • Law Firm Deliverables • Market Status • ENA Proposal • Gas in Storage Analysis • Model 1 – Abandonment • Model 2 – Replacement with Non-Current Working Gas (NCWG) • ENA Model 3 – Compression • ENA Model 4 – Monetization • Commercial Constraints • Gas Sale • Monetization • Structure Review

  3. Law Firm Deliverables • After analyzing the examples provided in the presentation, (a) render an opinion on whether the structures therein are legally feasible and (b) discuss the legal risks associated with each structure while addressing the questions outlined through out the presentation. • Which elements/parts of the structures are critical (sine qua non) for the structure as a whole to work? That is, the removal of which elements would cause the legal opinion to change from feasible to non-feasible? • From a legal perspective, how can our structures be improved while keeping within the accounting and financial constraints detailed in the presentation?

  4. Market Status • Required pipeline infrastructure will be enormous over next 20 years • EIA forecasts 20 Bcf/day will be added by 20201 • CERA forecasts 16-22 Bcf/day will be added by 20152 • VP Cheney stated 38,000 miles of natural gas pipeline must be added in US3 • Based on our estimates, the costs of these projects will run up to $30 billion • Traditional capital markets financing may be constrained by volume of investment needs 1. EIA, Natural Gas Monthly,October 2000. 2. CERA, Toward New Frontiers: The Future of Gas Supply in North America, Table 5. 3. V.P. Cheney, D., National Energy Plan, May 2001. Overview p. ix

  5. ENA Proposal Enhance value of existing assets and provide financing for facility expansion through sale of base gas and base gas backed off-balance sheet financing. • ENA has identified over 1.3 trillion cubic feet of base gas in storage facilities at book values below $1.00/MMBtu • Current gas prices are hovering in a range of $3.50 - $4.00/MMBtu • The value of this price differential can be reinvested in other investments or infrastructure • The ENA financing product is structured to achieve off-balance sheet status for the client ENA is seeking legal advice to overcome the regulatory risks associated with this transaction structure for assets within FERC jurisdiction.

  6. Gas in Storage Analysis Working Gas Non-current Working Gas Working gas that is seldom utilized, thereby eliminating the need for an equivalent amount of base gas (See Model 2) Base gas that can be pulled out and replaced by compression and other enhancements (See Model 3) All gas that can physically be removed is sold as part of an abandonment (See Model 1) Base Gas Base gas that may not be replaced by compression, but which is needed for pressure for some days of the year (See Model 4) Base gas that is needed all the time (includes non-recoverable base gas)

  7. Working Gas Working Gas Base Gas Base Gas Sale of all gas that can be physically removed ENA Model 1 – Abandonment Gas In Storage Analysis Transaction Overview Gas Purchaser Pipeline $ @ BV Difference between Mkt and BV Service • How does FERC address the sharing of profits (or BV) from the sale of base gas? • Is the pipeline allowed to sell the base gas at book value and capture premium through service agreement?

  8. Model 1 – Abandonment • Description • Pipeline wants to close a storage facility because it is no longer necessary for operations or because its yield is much lower than the potential value that could be extracted from the sale of the base gas (and the abandoned field’s service can be replicated somewhere else in the system) • Storage facility ceases operation and base gas is sold • The following bundle of services will assist the Pipeline with blowdown • A fixed price for gas withdrawn from the facility • A lump sum payment or stream of cash flows as the gas is pulled out • Cash flows back to the Pipeline as recurring earnings as, for example, through the purchase of services along the system

  9. ENA Model 2 – Replacement with NCWG Gas In Storage Analysis Transaction Overview Gas Purchaser Pipeline $ @ BV Difference between Mkt and BV Service • Is a 7(b) filing required? • What filings, if any, are required for reclassification of base gas to working gas? • Can we sell volumes under 284.284? • Is there a reporting requirement?

  10. Model 2 – Replacement with NCWG • Description • Pipeline wants to sell base gas that may be replaced with Non Current Working Gas (NCWG) • Pipeline identifies NCWG • Pipeline sells an amount of base gas that is equivalent to its NCWG • The following bundle of services will assist the Pipeline with removal of gas • Determining which portion of working gas is non-current • A fixed price for gas withdrawn from the facility • A lump sum payment or stream of cash flows as the gas is pulled out • Cash flows back to the Pipeline as recurring earnings as, for example, through the purchase of services along the system

  11. ENA Model 3 – Compression Gas In Storage Analysis • Is a 7(b) filing required? • What filings, if any, are required for reclassification of base gas to working gas? • Can we sell volumes under 284.284? • What filing is necessary to install compression, whether it is owned by Pipeline or ECS? • What is the impact on revenue sharing under filed settlement if no physical activity takes place?

  12. ENA Model 3 – Compression • Description • Pipeline sells base gas and uses part or all of proceeds for compression • As a result, additional working gas capacity is liberated • Cost of compression is less than cash flows assumed from sale of base gas • Compression may be purchased as fully bundled horsepower at the shaft. Enron Compression Services (ECS) may provide this service

  13. ENA Model 3 – Compression Gas purchaser Identified base gas $MM Compressor $MM Pipeline

  14. ENA Model 4 – Monetization Gas In Storage Analysis • Is a 7(b) filing required? If it is, what kind of timing would be necessary to get one? • What filings, if any, are required for reclassification of base gas to working gas? • Can we sell volumes under 284.284? • What filing is necessary to install compression? • What is the impact on revenue sharing under filed settlement if no physical activity takes place? • What certificate authority do we need for the PSA? • What will be FERC’s perception of the hedging program (Pipeline not hedging buy back gas)? • How do we get full volumes back into the rate base at market price at expiration of PSA?

  15. ENA Model 4 – Monetization: First Steps In the initial period, • Pipeline sells the identified base gas to Purchaser for current market price (principal borrowed) • Purchaser agrees to a physical sale, with a withdrawal schedule within a 5 year period (5-year term of the loan) • Pipeline enters into a PSA to cover the physical pressure requirements of the storage (payment under PSA representsinterest payment on the loan; also satisfies FASB constraints for true physical sale) • Before 5 years have expired, Pipeline and Purchaser agree that, at expiration, they will exchange the physical gas due in storage for a financial settlement or for physical gas elsewhere on the pipeline (bullet repayment)

  16. ENA Model 4 – Monetization Initial Period Pressure Co.* Gas purchaser* Identified base gas $ Capacity payment Pressurization Services Agreement $MM Pipeline *Both Gas Purchaser and Pressure Company are entities brought into the process by ENA.

  17. Pressurization Services Agreement* The Pressurization Services Agreement (PSA) replaces the functionality of the base gas by providing pressure in place of the monetized gas: • Under the PSA, gas bought from the pipeline is kept in the storage facility by the Purchaser • Pressure fee paid by Pipeline represents interest on the loan • Gas must be withdrawn the gas at the end of the PSA; however, an exchange agreement may be established in some period after the initial sale has been concluded. This agreement would allow the gas to remain in the storage facility and be replaced by a cash or physical settlement • The PSA and the ensuing exchange agreement enable the Pipeline to keep the structure financial * Because each transaction is unique, there is no guarantee that meeting these conditions will ensure successful accounting treatment; these points are only a guideline

  18. ENA Model 4 – Monetization: Final Steps At the end of the loan period, Pipeline faces several alternatives: • Refinance through a bank loan - gas is returned to the balance sheet at a higher cost relative to the book value of the sold gas • Renew the PSA (reflecting current market conditions: interest rate, gas curve) • Repayment through Pipeline equity funds Key Value Drivers – repay financing at reduced principal through: • Risk management tools to repurchase gas at lower price • Physical enhancements that reduce amount of gas needed • Base gas back on balance sheet at higher book value

  19. ENA Model 4 - Monetization New Source of Financing P & I Pipeline $MM Pressurization Services Agreement expired $mm Keep gas in facility Pressure Co. Original Purchaser End of Loan Period

  20. ENA Model 4 – Constraints The structure must reflect the following limitations: • Commercial constraints • The ENA monetization must achieve off balance sheet treatment and be differentiated from FASB sale/leaseback structure • Regulatory constraints • Clients have shown keen interest in this monetization concept. Their primary concern relates to the regulatory risks associated with this structure • Key Issues: • Making sure that the Pipeline can keep the cash flows and earnings from the sale • Identify under what circumstances the base gas can be reintroduced into rate base

  21. Commercial Constraints—Gas Sale* • To avoid sale/leaseback treatment under FASB guidelines, the sale of gas must be a true sale to a third party • To achieve a true sale on the monetized gas, the following conditions should be met: • The gas can be physically withdrawn from the facility based on an engineering study • The gas subject to withdrawal at the end of the transaction does not compromise the engineering integrity of the facility • The gas is shown to be redundant for adequate pressure • A Pressurization Services Agreement (PSA) is deemed to provide sufficient replacement pressure for the monetized gas • The Purchaser of the gas must show, on the day of the sale, intent to remove the gas physically (i.e., contractually designated withdrawal schedule) * Because each transaction is unique, there is no guarantee that meeting these conditions will ensure successful accounting treatment; these points are only a guideline

  22. Structure Review

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