Memo
To:	OPIC	
From:	Rob Gay	
Date:	January 30, 2001	
Subject:	Issues requiring response	

Enron and Shell (collectively “Sponsors”) are requesting that OPIC and KFW consent  in advance (as required under the CTA) to a potential re-negotiation of the YPF Gas Supply Agreement (“GSA”) and/or termination of the GSA (but only in accordance with its terms) and establishment of a new supply with Bolivian producers.  The Sponsors also request for the Lenders to consider agreeing to fund the loans prior to any new arrangements being developed or finalized (either with YPF or other providers) by relying on the Back-up Fuel Supply arrangements provided by Enron which were previously negotiated. 

Timing and structure of Back-up Fuel Supply Agreement, put to Enron (Agreement and Guarantee), and Replacement Fuel Contract.

a)	If the YPF contract is terminated Enron will be the interim fuel supplier under the “Back-up Agreement” from the Funding Date until March 31, 2002. This is a financial obligation and no demonstration of physical reserves or delivery capability is required. However, Enron pays LD’s for failure to provide gas with virtually identical performance terms to the YPF contract except Non-cover LD’s increased to US$12MM max (vs only $4MM under the YPF contract).

b)	Jan 1, 2002 – Enron required to submit documentation evidencing satisfactory arrangement for physical delivery under a “Replacement Fuel Agreement” including details of reserves, transportation, and supplier creditworthiness.   This is essentially an obligation to establish a new long-term gas supply arrangement similar to the YPF arrangement.

c)	By March 31, 2002 Lenders to complete evaluation of Replacement arrangements and indicate acceptance or rejection.

d)	If Replacement arrangements rejected, Enron debt guarantee is triggered and if acceptable Replacement arrangements not developed and submitted by Jan 1, 2003, then the Lenders may put the debt to Enron on March 31, 2003.

Current status of YPF CP’s

Under the GSA the project has a unilateral right to terminate if:
1.	YPF fails to meet it’s CP’s [remaining CP is Consent to Assignment and Opinion of Counsel
2.	Failure of Plant to achieve Substantial Completion (480 MW on gas) by May 4, 2001
3.	Failure of project to close non-recourse project financing by May 4, 2001

Proposed Modifications to GSA

The Sponsors would like to address the following in the re-negotiation or new arrangements:

1.	lower price  (current market is approximately US$1.00 per mmcf vs contract price of US$1.30)
2.	eliminate WTI/CPI basis risk (& GPDA) ; the GSA adjusts based on shifts in WTI whereas the PPA adjusts based on shifts in the US CPI. Enron & Shell have shouldered this 
3.	5 year make-up period; The YPF contract obligates the supplier to deliver gas for up to one year if a TOP payment is made but gas not taken.  The obligation to Furnas is a 5 year make-up period which was required by the Central Bank

Potential Bolivian Supplies 

Vintage Cuiaba II transaction with Vintage

As an example of what can be accomplished in the market place,  Enron successfully negotiated a contract last year with Vintage with the following terms.

In addition, the Sponsors request that the Lenders consider an alternate approach to the Furnas Consent to assignment and the Eletrobras Guarantee confirmation.  

Currently, the lenders are awaiting Furnas’ execution of a heavily negotiated Consent and a confirmation from Eletrobras that their guarantee would remain effective in the event of the privatization of Furnas.

The alternate approach to getting comfortable would consist of the following:

Step 1:

1.	Attempt to get Eletrobras to confirm their guarantee without involving Furnas.  

2.	Attempt to get Furnas to sign the original Consent from Assumption Agreement and if they refuse rely on Eletrobras’ performance guarantee under section [    ]   of the PPA in lieu of the Furnas consent.  

3.	Utilize the legal process reviewed by Felsberg involving registered notification to Furnas of the fact that lender consent is required for EPE to revise documents.  Such notification followed by a legal filing similar to filing security documentation prevents Furnas from asserting in court that they believed that they could rely solely on a signature of a representative of the company with respect to any changes to the PPA.  Lenders can also rely on the Golden Quota to insure that their vote is required in order for the board to issue a resolution allowing a change to a Project Document.

Step 2: (If Step 1 fails)

1.	Consider  3rd Party Professor’s Legal Brief on the sustainability of the Eletrobras Guarantee  obligations following a Furnas privatization.  Enron has engaged a respected legal academician to review the integrity of the Eletrobras Guarantee in light of the legislation which Maria Apericida claims has impacted their obligations. The conclusion was that legislation subsequent would not be able to impair the obligations.  If Felsberg and other Lenders counsel can get comfortable that the courts would concur, then perhaps the seriousness of the concerns are greatly diminished. 

2.	(review similarities of situation for EXIM & IADB in Mexico in CFE transactions)

3.	Rely on Eletrobras’ performance guarantee under section [    ]   of the PPA in lieu of the Furnas consent.

4.	Utilize legal process involving registered notification to Furnas of lender consent required for EPE to revise documents and Golden Quota in lieu of Consent.

Siemens Changes

We are nearing the final agreement with Siemens as follows:

In order to provide the lenders an adequate warranty period on gas (if there are additional delays on the P/L) our Insurance group has  indicated that we will have no problem obtaining 12 months renewable business interruption insurance when we go operational on gas.  This should solve the issue over the revised warranty with Siemens because it covers defects, design, and workmanship on the turbines and includes lost profits, etc.  Incidentally, for insurance purposes the turbines are designated DE3 which is not a new technology designation.   The duration of BI coverage is 18 months per event with US$150,000 deductible.
Typically we will always have this coverage in place but if their is a supplier warranty then the party providing the warranty pays ahead of the insurer.  In the case where the supplier does not pay or the warranty has ended then the insurer is the primary.