exmar purchase decision fyi - - - - - - - - - - - - - - - - - - - - - - forwarded by rick buy / hou / ect on 05 / 22 / 2000 01 : 34 pm - - - - - - - - - - - - - - - - - - - - - - - - - - - john sherriff 05 / 22 / 2000 01 : 21 pm to : rick buy / hou / ect @ ect , joe gold / lon / ect @ ect , david haug / enron _ development @ enron _ development , doug rotenberg / enron _ development @ enron _ development , rick bergsieker / enron _ development @ enron _ development , vince j kaminski / hou / ect @ ect cc : subject : exmar purchase decision i just got off the phone with jeff skilling to make my pitch for doing the exmar deal . he said that he generally understands the logic of the deal but simply wants the risk management discipine applied to analzing the position ( a reiteration of what rick buy had said in our meeting today ) . i would simply ask vince ' s team to take a quick look tommorow at valuing the ships as stand alone positions with a guess at the volatility based on historical price movements . this would be much easier than the rainbow option approach and would allow us to roughly look at the value of the options on the other two ships . in other words we could look at two ship long positions with some implied volatilities and also estimate daily vars on the ships as if they were mark to market ( although i agree with david that we will not likely be able to mark the ships because they will be treated as leases ) . john john - - - - - - - - - - - - - - - - - - - - - - forwarded by john sherriff / lon / ect on 22 / 05 / 2000 19 : 05 - - - - - - - - - - - - - - - - - - - - - - - - - - - joe gold 22 / 05 / 2000 18 : 58 to : john sherriff / lon / ect @ ect cc : subject : exmar purchase decision john , after spending a few minutes with our shipping experts in the coal and oil groups , i have a slightly different angle on the exmar lng vessel decision . i would ideally like to spend the time to analyse this purchase as we do power and gas positions . unfortunately , we do not have that luxury and sometimes , in absence of true analytics , the most rudimentary measures can provide the best decision tools . here is how we would make the decision : 1 ) our shipping expert confirms that $ 140 million for a 135 , 000 ton ship represents a good price relative to new build costs over the last three years and that quotes have been trending up past that number recently . he also confirms that the current trough is the result of the default of several far east buyers and that new lng orders and other ship building ( cruise liners ) have reduced the over capacity . his experience and historic analysis has suggested that the pricing cycle for lng ships lasts for a significant period . new efficiency measures should reduce new build prices ( and allow for a lower trough ) , but not by an extreme amount versus the $ 140 million cost of this vessel . pierre normally likes to roll time charters ; however , this is difficult in an illiquid shipping market like lng . he would purchase this ship if the lng shipping book were his to manage . he estimates the ship could be sold in a distressed sale for $ 110 million and could be potentially time chartered on a long term basis at a value of up to $ 200 million . 2 ) our development teams in spain , italy and turkey have been trying to solve the big question - gas . in each country , the key to developing a merchant plant is securing gas flexibility or at least securing negotiating leverage with the monopoly gas supplier . it is questionable whether or not this decision will have an immediate impact on arcos . the plant ' s time line and the realities of the lng supply market may require that we commit to gas natural before any source of 3 to 5 year gas can be secured . the shear threat of being able to bring spot or term lng to these markets will improve our negotiating leverage and / or allow us to create flexibility . going forward , however , other potential plant opportunities in spain , and elsewhere in the med region , may have the capacity to utilise these vessels . i think that this flexibility is worth at least $ 25 million to me . 3 ) i would summarise : upside $ 60 + $ 25 = $ 85 million downside ( $ 30 ) + $ 25 = ( $ 5 ) million i would do it . i will leave the rest to you . joe