We've recently discovered a new method to distribute our power. The Wall Street Journal reported on May 30th that Enron
,s Chief Executive Ken Lay persuaded a joint meeting of the company
,s big lenders to forgive $1.2 billion worth of debt, and is close to getting the rest to go along. Ken Lay spoke to members of the bank syndicate that is financing the $3.5 billion Dabhol project. According to the report, Lay stressed that it is in the investors
, interest to complete the project. He reportedly assured the lenders that there is plenty of liquidity to complete the project. We intend to use the project
,s equity to establish our first line of defense. Our first two lines of defense are the project equity and the cash flow hedge. The original equity of $1.2 billion is now increased by the $1 billion from the initial loan to $1.3 billion. However, if the project does not prove out as planned, it
,s quite possible that the project equity will be worth zero, and the power project will be on its way to a troubled fate, very much like California
,s long-term contracts with PG&E. If the banks accept Mr. Lay's arguments, this will be our first written confirmation that they think Enron can pull it off. If our assumptions prove to be correct, we will be able to protect ourselves in a manner that will result in a big gain for our investors. The second line of defense is that Dabhol will be used to hedge our exposure to the rupee and the INR interest rates. As an example, assume we have $1 million in a bank account in India earning 3%. If we lock in the rate, it could give us another $.30. If we have Dabhol generating $50/mwh at an Exchange rate of 46.49, then 46.49 * 50 = $2350. If 46.49 * 46.36 = $22,400. Therefore $2350 * .3 = $700. The result of locking in Dabhol is an increase of $900, or $700 plus interest. Therefore Dabhol gives us 2 lines of defense, and we should make sure the lenders know we intend to use both. There is obviously no guarantee Dabhol will do the job, but it does give us a good negotiating position in Dabhol's favor. We have always had a difficult time with foreign lenders, because they want more collateral for risk. If we can get more collateral for risk, then they will be more willing to negotiate a good deal. If we do use Enron Credit Inc. to provide a credit line on the project, then we have to consider whether we will need a full guarantee from Enron Corp. Inc. or if a partial guarantee will suffice. However, we need to make sure the lending bank is comfortable with the underlying assets in our portfolio. One way of doing this is to provide for an audit of our off-balance sheet subsidiaries, in a manner similar to what we did with respect to the LJM partnerships. If we use outside counsel, it would be very useful for them to get up to speed on these issues. If we need to get outside counsel, then we should do so as soon as possible. We might consider using V&E to handle the equity participation and the related regulatory issues. Please let me know how you wish for me to proceed in these matters. I look forward to hearing from you. Regards, Alan