Ann: UK Southern Gas Basin - Further Operational Update, page-12

There is an extraordinary amount of time being spent on tax planning for this project but this is the world that the JV exists in. The UK government keeps fiddling with the Energy Profits Levy and all HHR and RR can do is react to these changes. It feels a little like the old hustlers games of three cups with the project value and taxes constantly being moved to another cup.

HHR made the comment that moving CAPEX into OPEX would be positive in respect to whole project economics (assuming Labours proposed changes to the EPL) I did a simple example for myself of the effect but I though it worth sharing to illustrate just how big a difference it could make.

Current Scenario- $100m capex, GOP $300m.
Revised Scenario- $100m lease over 5years @15% and no residual, GOP $300m
Under the revised scenario net profit more than doubles from $12m to $25m.

It is another puzzling announcement from HHR in one hand saying we think we may have a way forward for the project but on the other we are cutting staff and costs. If HHR can successfully migrate Capex to Opex through a tariff or similar it would have a major effect on the project cashflows.

There may still be life in HHR after all.

		Current	Revised
1
2	Capex	($100)	($0)
3	Tax benefit 46%	$46	$0
4	NettCapex	($54)	$0
5
6	GOP	$300	$300
7	Lease Payments	$0	($185)
8	EPL (78%)	($234)	($90)
9	Net	$66	$25
10
11	Net Profit	$12	$25