============= Page 1 of 208 ============= r i I 3ENTIAL -XH006-01196 Finance Committee Meeting April 30, 2001 Committee Members Mr. Herbert S. Winokur, Jr., Chairman Mr. Robert A. Belfer Mr. Norman P. Blake, Jr. Mr. Ronnie C. Chan Mr. Jerome J. Meyer Mr. Paulo V. Ferraz Pereira Mr. Frank Savage Mr. John A. Urquhart, E0004403740 Endless possibilities:- GOVERNMENT EXHIBIT 310 Crim. No. H-04-25 (S-2) ============= Page 2 of 208 ============= Agenda m n 0 0 p 0 w EXH006-01197 ============= Page 3 of 208 ============= AGENDA Meeting of the Finance Committee of the Board of Directors of Enron Corp. 4:00 p.m. (CDT), April 30, 2001 50th Floor Boardroom, Enron Building Houston, Texas ,; 1. Approval of February 12, 2001 Finance Minutes subject to final legal review Mr. Winokur ti 2. Financial Reports A) Chief Financial Officer Report Mr. Fastow B) Deputy Treasurer Nomination Discussion L~J 3. Treasurer Report Mr. Glisan 11 4. Chief Risk Officer Report Mr. Buy Quarterly Risk Update Enron's Assets - Trade Credit Update -~ - Investment Portfolio - Enron Energy Services - Market Risk Update 5. Projects and Amendments A) Revision to the Risk Management Policy Mr. Buy Approve for Recommendation to the Board B) Revision to the Transaction Approval Process Mr. Buy Approve for Recommendation to the Board C) Minority Financing Vehicle Mr. Causey - Approve for Recommendation to the Board D) Las Vegas Cogen II Mr. Calger - Approve for Recommendation to the Board t E) Cuiaba Integrated Energy Project Ms. McDonald l ~" - Approve for Recommendation to the Board F) CEG Rio Divestiture Mr. Stabler t - Approve for Recommendation to the Board j G) Project Red Rock Mr. Horton Approve for Recommendation to the Board 6. Other Business 9 J 7. Adjourn T'ข i) E0004403742 i See Addendum for Deal Approval Sheets approved between Board meetings Page 1-1 2-1 2A-1 2B-1 3-1 4-1 4-2 4-3 4-11 4-16 4-23 5-1 5A-1 5B-1 5C-1 5D-1 5E-1 5F-1 5G-1 6-1 7-1 XH006-01198 ============= Page 4 of 208 ============= Agenda Item I m n 0 0 .A -t, 0 w w EXH006-01199 ============= Page 5 of 208 ============= MOM, zz Enron Corp Finance Committee Minutes from February 12, 2001 meeting m C) 0 0 0 w .p 1-1 EXH006-01200 ============= Page 6 of 208 ============= MINUTES MEETING OF THE FINANCE COMMITTEE OF THE BOARD OF DIRECTORS ENRON CORP. FEBRUARY 12, 2001 DRAFT Minutes of a meeting of the Finance Committee ("Committee") of the Board of Directors of Enron Corp. ("Company"), noticed to begin at 4:00 p.m. C.S.T., but actually begun at 4:05 p.m., C.S.T., at the Enron Building, Houston, Texas. The following Committee members were present constituting a quorum: Mr. Herbert S. Winokur, Jr., Chairman Mr. Robert A. Belfer Mr. Ronnie C. Chan Mr. Jerome J. Meyer Mr. Paulo V. Ferraz Pereira Mr. Frank Savage Mr. John A. Urquhart Committee member Blake was absent from the meeting. Directors Wendy L. Gramm, Ken L. Harrison, Kenneth L. Lay, John Mendelsohn, and Jeffrey K. Skilling, Messrs. William S. Bradford, Richard B. Buy, Richard A. Causey, Timothy A. DeSpain, Andrew S. Fastow, Ben F. Glisan, Jr., David G. Gorte, Mark E. Koenig, and Jordan H. Mintz, and Ms. Rebecca C. Carter, all of the Company or affiliates thereof, and Mr. -Richard N. Foster, of McKinsey & Company, Inc., also attended the meeting. The Chairman, Mr. Winokur, presided at the meeting, and the Secretary, Ms. Carter, recorded the proceedings. Mr. Winokur called the meeting to order, noted that a draft of the minutes of the meeting of the Committee held on December 11, 2000 had been distributed to the Committee members, and called for any corrections or additions. There being none, upon motion duly made by Mr. Winokur, seconded by Mr. Meyer, and carried, the minutes of the meeting of the Committee held on December 11, 2000 were approved as distributed. E0004403745 N vt =XH006-01201 ============= Page 7 of 208 ============= ~ Mr. Winokur called upon Mr. Fastow to present the Chief Financial Officer's report, a copy of which is filed with the records of the meeting. Mr. Fastow discussed the Company's current and projected key financial lsi ratios, including coverage and leverage ratios, and stated that the ratios were based on the current plan. He noted that since the beginning of the year there had not been any purchases of the Company's stock for the trading portfolio but that during January the Company had purchased approximately one million shares now held in treasury. He presented a chart depicting the Company's interest rate exposure and noted the dollar amounts at fixed and at floating interest rates. He then reviewed the -; Company's cost of capital, utilizing the CAPM Black Scholes valuation 1.,ฃJ method, and discussed changes from the last report to the Committee. Mr. Winokur changed the agenda to discuss the Company's transactions with LJM later in the meeting and called upon Mr. Glisan for the Treasurer's report, a copy of which is filed with the records of the meeting. Mr. Glisan reviewed the liquidity report as of January 29, 2001 and noted that the Company's total liquidity was currently over $8.3 billion. He then reviewed the Company's outstanding letters of credit and discussed the changes since yearend. He presented the Company's guarantee portfolio as of yearend and noted that required guarantees continued to be higher than normal due to the significant increase in the volumes transacted by the Company. He then stated that there had not been any change in the Company's ratings by the rating agencies but noted that the Company was working on being upgraded to "positive outlook" by Standard & Poors. Mr. DeSpain joined him for a discussion of the zero coupon convertible debt security recently issued by the Company. Mr. Winokur called upon Mr. Buy to present the Chief Risk Officer's report, a copy of which is filed with the records of the meeting. Mr. Buy distributed a handout titled "Supplemental Schedules", -a copy of which is filed with the records of the meeting. He reviewed the Company's major relationship credit exposures and all of the Company's trade credit exposures that were in excess of $50 million. He then discussed the Company's internal rating of each company, the Company's total exposure, and any collateral held by the Company. He noted that only three of the major relationship credit exposures had a below investment grade rating. He then reviewed the cash and other collateral that the Company had received from or paid to its counterparties as of February 8, 2001. Mr. Skilling joined him for a lengthy discussion of the situation in the California energy markets and the efforts by the Company to mitigate its credit exposure. F 4 -iP Z E0004403746 =XH006-01202 ============= Page 8 of 208 ============= r Mr. Buy then began a discussion of the Company's merchant portfolio and noted that there had been a significant increase in the j Company's gross and net credit exposure since the end of the third quarter J 2000. He then moved to a discussion of the Risk Assessment and Control ("RAC") group's analysis of Enron Energy Services LLC ("EES"). He noted that EES had made significant progress in continuing to develop projects ~.j and obtaining customer approvals and that EES's project installation phase was now ahead of the plan. He stated that the RAC group had completed an energy asset management verification project to evaluate EES's actual performance relative to its initial engineering estimates. He stated that the total net present value of all projects was close to the original projected j value but the standard deviation was quite high. He noted that the RAC group had determined that the issues facing EES included a wide range of distribution of the energy efficiency of the outcomes and an increased need for a premeasurement process to validate actual energy savings on individual projects. He reviewed the additional steps that were being undertaken by the RAC group to complete the analysis of EES's business and commented on the impact of the California energy crisis on the -; business efforts. He updated the Committee on the efforts of the EES and RAC task force and Mr. Skilling joined him for a discussion of certain recent management changes at EES. Mr. Buy then began the market risk update by discussing the profit or loss that each commodity group had earned during 2000 compared to the average Value at Risk ("VAR") it had taken. He then presented the same information by business unit and specific commodity. He reviewed the VAR limit utilization by commodity for each quarter of 2000 and gave an overview of the VAR backtesting. He then presented four stress scenarios that had been analyzed by the RAC group and commented on the potential impact of each scenario on the Company's earnings. He noted that the potential impact of one of the scenarios had already been somewhat mitigated since the analysis was done. He then presented stress testing of the Company's exposure under "worst case" scenarios of 5% and 25% shifts in commodity prices. ฐ' Mr. Buy then discussed the Company's foreign exchange exposure by business unit and commented on the amounts that would be recorded in the Company's currency translation account and income statement. He reviewed a sensitivity analysis comparing the Company's foreign currency exposure in South America to that of all the other business units and { provided an update on the status of the RAC group's overall foreign exchange project. He then began a discussion of the proposed changes to the Enron Corp. Risk Management Policy ("Policy"). He noted that the first change was to increase the aggregate VAR limit by $25 million and Mr. E0004403747 (H006-01203 ============= Page 9 of 208 ============= r rrs E Skilling joined him for a discussion of the reason for the purposed increase. Mr. Buy then stated that the remaining changes to the Policy related to the following areas: 1) increases to the net open position limit, maturity /gap limit, and/or VAR for certain existing commodity groups, 2) establishing permanent net open position limits, maturity /gap limits, and/or VAR limits for certain commodities currently under the interim limit section of the L 1, Policy, 3) providing for notification of limit violations and loss notifications to the President and CEO ("CEO") at the discretion of the Chief Risk Officer ("CRO"), rather that the existing structured reporting, 4) delegation to the CRO the authority to allocate the discretionary VAR to facilitate a new market-driven allocation framework, rather than requiring both the CRO and the CEO to approve, 5) clarifying certain aspects related to the cross- commodity trading section of the Policy, and 6) specifying the operational t control requirement that all trades executed over the telephone must be recorded electronically. Following a lengthy discussion, upon motion duly made by Mr. Ferraz, seconded by Mr. Chan, and carried, all of the proposed changes to the Policy with the exception of items 3 and 4 above were approved for recommendation to the Board. Mr. Winokur then called upon Mr. Buy to discuss the proposed changes to the Transaction Approval Process ("TAP"). Mr. Buy stated that the proposed changes to the TAP were recommended to take into account certain reorganizations at the Company and to add capital expenditures to the risk adjusted capital definition to determine the aggregate exposure in transactions. Following a discussion, upon motion duly made by Mr. Ferraz, seconded by Mr. Urquhart, and carried, the proposed changes to the TAP as presented at the meeting, were approved for recommendation to the Board. Mr. Winokur then called upon Mr. Gorte to begin the Eli Lilly presentation. Mr. Gorte noted that the Board approved a transaction with Eli Lilly in December of 2000 and the Company was recommending j adjustments to the deal structure to: 1) decrease the approved energy asset project capital, 2) add LLC capital and mobilization costs, and 3) add a lease component to finance capital replacement expenditures. He €` reviewed each of the recommended adjustments and noted that it would `"' not cause a significant increase in the risks of the project. Following a discussion, upon motion duly made by Urquhart, seconded by Mr. Savage, w and carried, the proposed Eli- Lilly project presented at the meeting, was approved for recommendation to the Board. Mr. Winokur then called upon Mr. Glisan to begin the Project Crane presentation. Mr. Glisan stated that when the Board initially approved Project Crane the resolution did not provide the Company the flexibility to E0004403748 H006-01204 ============= Page 10 of 208 ============= close the transaction on balance sheet, therefore, management was recommending an additional resolution to provide this flexibility. Following ri a discussion, upon motion duly made by Mr. Meyer, seconded by Mr. Urquhart, and carried, the modification to Project Crane as presented at the meeting, was approved for recommendation to the Board. Messrs. Bradford, DeSpain, Glisan, Gorte, and Koenig and Directors Gramm and Skilling left meeting. Mr. Winokur called upon Messrs. Causey and Fastow to review the Company's procedures regarding transactions with LJM and the transactions completed in 2000. Mr. Fastow began with a discussion of the Company's utilization of the LJM vehicles. Mr. Causey reviewed each of LJM's investments with the Company that were made during 2000. He categorized the investments into four areas, balance sheet, hedges, income statement, and other, and presented a brief description of each transaction and the notional dollar amount. He then reviewed the Company's internal policies and procedures that were in place to monitor transactions between the Company and LJM, stated that the items had also been discussed with the Audit and Compliance Committee, and commented that the process was working effectively. He also noted that the Company had implemented supplemental efforts to complement the Board-established guidelines regarding transactions between the Company and LJM. There being no further business to come before the Committee, the meeting was adjourned at 5:45 p.m. C.S.T. Secretary APPROVED: Chairman E0004403749 -1006-01205 ============= Page 11 of 208 ============= Agenda Item 2 ============= Page 12 of 208 ============= Enron Corp. Financial Reports April 30, 2001 E0004403751 2-1 XH006-01207 ============= Page 13 of 208 ============= Agenda Item 2a m n 0 0 .A 0 w cn N EXH006-01208 ============= Page 14 of 208 ============= q E, Enron Corp. Chief Financial Officer Report April 30, 2001 E0004403753 (H006-01209 ============= Page 15 of 208 ============= Finance Issues/Exposures • Stock Activity • _Interest Rate Exposure • Refinancing Risk • Stock Price Risk in Financings • Finance Related Asset Sales • Funding Sources • Liquidity • Workouts E0004403754 2A-2 EXH006-01210 ============= Page 16 of 208 ============= C F, am L_-_73 EM Enron Stock Activity (000) except Share Price Stock Trading Activity MTM Description Shares (000) Avg Price Amount Opening Balance - - - Transactions - - - Ending Balance - $ - $ - EGF Equity Position Limits V@R Notional open Limit ($N M) $10.00 $300.00 Current position ($MM) $0.00 $0.00 Position limits exclude ENA position w hich is relflected in BVA equity book position report -Includes 60% of JEDI if an open position Stock Purchase Activity (Treasury) Description Shares (000) Avg Price Amount Opening Balance 577 $ - $ - Repurchases 4,199 $ 78.95 $ 331,520 Other Activity (851) Ending Balance 3,925 Authorization, Subject to Jim Derricks approval 20,000,000 Activity 4,199,000 2A - 3 ECO04403755 7, :XH006-01211 ============= Page 17 of 208 ============= 2A - 4 E0004403756 142,789 336,409 Bo l i Total 0 Floating - 16% ฎ Fixed - 84% J",~ EXH006-01212 ============= Page 18 of 208 ============= Refinancing Risk As of December 31, 2000 LTD Maturities 2,500,000 -- -- 8.00% ,, 7.50% 6 2,000,000 U) a w w 1,500,000 6.50% C c 6.00% c 1,000,000 5.50% 3 m 5.00% O 500,000 U 1 1 ~ -4.50% 0 1 El 1 {~, - ! I 4.00% N N 0 0 N N) N N N N O O O 0 O N N N N N N N 0 0 0 2 A _ 0 J O W O 0 N Ln 00 A Year -Average Life: 6.33 years Proforma 2001 LTD Maturities 2,500,000 7-,-" ~~ s a 8.00% 7.50% 2,000,000 00% 7 r ~/ - c ' Y S"ix` . ~ _ 6.50% eq 1,500,000 - e `ฐ ~ 6.00% o 1,000,000 ` 5.50% +~ 2 - 00% 5 500,000 i . U k $ 4.50% 0 Ill lei Ir a' .I oil 4.00% N N N N N N N O O O O N N N N N N N N W W _ O O O A J O W d) (O N (n 00 A Year -Average Life: 9.31 years -$1 billion tender and exchange will extend short term debt out five years -$1.25 billion Convert issued in January 2A _ 5 E0004403757 IX EXH006-01213 ============= Page 19 of 208 ============= LIU Stock Price Risk in Financings Potential Required Future Equity issuance (/s... r Equivalent Shares r s) ( 0C )o $40 $50 $60 $70 $80 Osprey 10,688 - - - - Raptor 1 11,683 7,149 2,666 1,197 95 Raptor 2 11,733 5,219 - - - Raptor 4 11,237 7,358 4,771 - - 45,341 19,726 7,437 1,197 95 i ~~ -Osprey matures in 2003 -Raptor vehicle share issuances are triggered by date -Osprey shares trigger in 2003 -Q101 Restructuring shares trigger in 2005 2A-6 E0004403758 EXH006-01214 ============= Page 20 of 208 ============= Finance Related Asset Sales ($MM) Sales of Financial Assets (125) Total Shortest Longest Enron Americas Enron Broadband Enron Europe Enron Energy Service Enron Global Finance Enron Net Works '( Crude Prepays Gas Prepays 225.2 Dec-01 Dec-13 150.6 Jun-02 Nov-02 347.2 Jan-02 Dec-32 197.4 Jun-02 Dec-13 517.0 May-02 200.0 Sep-01 1,637.4 Dec-01 Dec-32 Prepays Total Earliest Latest 2,116.2 Dec-01 Feb-07 1,822.4 Dec-01 Apr-11 3,938.6 Dec-01 Apr-11 2A _ 7 E0004403759 EXH006-01215 ============= Page 21 of 208 ============= Funding Sources 2000 1998 0CapMkt- oCapMkt- US on US ฎ Bank 1999 o Cap Mkt- Non US  Cap Mkt - US ฎ Bank Cap Mkt- Non US Cap Mkt- US Bank 1998 1999 2000 Funds Raised % of Total Funds Raised % of Total Funds Raised % of Total Bank 15,8,87 86% 12,400 68% 15,557 73% Cap Mkt - US 2,661 14% 4,855 26% 4,156 20% Cap Mkt - Non US - 0% 1,037 6% 1,569 7% Total $ 18,548 100% $ 18,292 100% $ 21,282 100% E0004403760 2A-8 EXH006-01216 ============= Page 22 of 208 ============= LIM Liquidity - Margin Activity Daily Net Margin Activity (000) March 2000 - March 2001 $800,000 $600,000 $400,000 $200,000 $0 ($200,000) ($400,000) ($600,000) o 0 L t4 Margin Activity Statistics ($000) Net Margin Activity for Maximum Minimum Month Daily Net Daily Net April-00 82,512 51,596 (30, 384) May-00 (659,172) 76,863 (137,606) June-00 4,227 165,527 (129, 599) July-00 129,450 119,191 (104,974) August-00 814,103 576,012 (96,635) September-00 (389,317) 77,234 (237,176) October-00 130,520 130,780 (225, 314) November-00 (10,487) 186,115 (138,954) December-00 855,778 431,775 (403,472) January-01 370,465 273,098 (274,559) February-01 (399,766) 218,525 (226,934) March-01 (453,293) 133,952 (364,801) 2A-9 E0004403761 =XH 006-01217 0 0 0 0 0 0 0 0 0 0 0 0 o 0 0 0 0 0 0 0 0 L Q N C 0) a) V 0 U C .Q (II Q -3i Q :3 (D U O Z 0 -, u ============= Page 23 of 208 ============= ). . . Workouts Dabhol Cuiaba Azurix Trakya Other E0004403762 2A - 10 .1 X, EXH006-01218 ============= Page 24 of 208 ============= Agenda Item 2b m n 0 0 -f~ 0 w v rn w EXH006-01219 ============= Page 25 of 208 ============= Enron Corp. Deputy Treasurer Nomination Discussion E0004403764 2B-1 EXH006-01220 ============= Page 26 of 208 ============= m 0 0 0 w rn cn ============= Page 27 of 208 ============= c . Enron Corp. Treasurer Report April 30, 2001 E0004403766 EXH006-01222 ============= Page 28 of 208 ============= LZi Enron Corp. Liquidity Report As of April 18, 2001 ($000) Overnight 2-30 Days 31-60 Days 61-90 Days 91+ Days Total Commercial Paper & Uncommitted Lines 2,754,000 2,754,000 Bank Facilities BHF 18,571 18,571 Accounts Recievable 250,000 250,000 Whitewing 164,000 164,000 Shelf Registration - Debt 1,000,000 1,000,000 Shelf Registration - Equity' 930,000 930,000 Merchant Portfolio Monetizations (as of:04/17/01) Public Equity 617,349 617,349 Debt Instruments 450,425 450,425 Private Equity 1,306,183 1,306,183 Total 2,772,571 2,961,349 450,425 - 1,306,183 7,490,528 1 Reflects 15mm shares at $62 per share. E0004403767 3-2 . f1J =XH006-01223 ============= Page 29 of 208 ============= Enron Corp. Active Letters of Credit by Category ($000) Bids Debt, EOTT Leases Other Other Third-Party Performance Trade ' Grand Total 04117101 12131100 12131199 $ 7,332 $ 6,321 $ 5,968 40,241 24,241 52,946 123,265 102,089 150,310 12,672 12,750 15,604 59,330 280,179 80,071 5,193 6,605 24,078 441,611 425,210 522,006 875,244 634,300 76,269 $ 1,564,888 $ 1,491,695 $ 927,252 E0004403768 3-3 r =XH006-01224 ============= Page 30 of 208 ============= Enron Corp. Guarantee Portfolio (ooo's) Trade (Payment & Performance) EOTT Trade Swap Agreements (Master & Individual) Projects (Non-Debt) Debt 03/30/01 $21,949,022 5449744 11,471,408 5,724,732 Consolidated Subsidiaries 3,001,223 Unconsolidated Subsidiaries 337,746 Grand Total $43,0283875 E0004403769 3-4 12131100 $21,197,904 544,744 10,878,431 4,632,739 3,084,698 337,746 12/31/99 $17,316,817 4405375 7,148,443 4,756,470 2,155, 303 337,746 $401676,262 $32,155,154 1) EXH006-01225 ============= Page 31 of 208 ============= IF M m ._tL^'~m 00 ~`e-'rte MEN, 5 4 3 2 1 55% 45%-- 35% 25% 15% 5% i,0 .0 .4 1996 1997 1998 1999 2000 2001P 1996 1997 1998 1999 2000 2001P ~• Total Obligations/Total Capital Funds Flow Interest'Coverage ~+- Debt/ B/S Capital "O" Interest Coverage ~* M1 FF0/Total Obligation Leverage V ~ c 3 i r C E0004403770 y '3-5 Targeted Key Financial Ratios Coverage EXH006-01226 ============= Page 32 of 208 ============= Rating Summary Commercial Rating Agency Long Term Paper Outlook Fitch IBCA BBB+ F-2 Stable Moody's Baal P2 Stable R and I(Japan) A- nla Stable Standard & Poors BBB+ A2 Stable E0004403771 3-6 0) EXH006-01227 ============= Page 33 of 208 ============= - - - '~J 35% 30% 25% 20% 15% 10% 5% Market Cost of After Tax Debt Equity Cost of Capital \~ Equity Analyst Forecasted Stock Prices 5 year annualized return T2 Month Firm Recommendation Target Price A.G. Edwards Hold 75 ENE Bear Steams Attractive 98 Bemstein Hold Bank of America Strong Buy 105 294% 8% CIBC Oppenheimer Buy 95 CSFB Strong Buy 110 Dain Rauscher Wessels Strong Buy 105 First Albany Strong Buy 100 Goldman Sachs Buy 110 Howard Weil Hold J.P. Morgan Buy 120 Lehman Bros. Strong Buy 100 Merrill Lynch Buy 99 Morgan Stanley Outperform 100 Prudential Strong Buy 89 Salomon Smith Bamey Buy 100 Simmons Buy 100 UBS Warburg Strong Buy 102 % of Capital Cost Structure 4.8% 29.8% WACC Enron Stock Price Date 12/29/2000 1/31/2001 2/28/2001 3/30/2001 Average 100.5 Closing Implied Price Equity Return 83.125 20.9% 80.000 25.6% 68.500 46.7% 58.100 73.0% % of Capital Cost of Capital Cost Structure N, After Tax Debt 4.8% 42% 2-0% 17.3% Equity 20.9% 58% 12.1% 19.3% WACC 7 14.1% s' E0004403772 EXH006-01228 0% Mar-98 Jun-98 SeP98 Dec-98 Mar-99 Jun99 SeP99 DecA9 Mer-00 J-00 Sep-00 Deco WACC using rolling 5 yr equity returns. ============= Page 34 of 208 ============= Market Structure Benchmark Yields Local Currency USD LIBOR 8.00 7.50 7.00 p 6.50 d 6.00 >- 5.50 5.00 4.50 'Ile all, 4.00 ep Cp tlp O O aD O O) D) O M M O O O O O O O O O Ol D) O) O O O W O) m O O O O O O O O a a 0 10 N- a M ~ e- M M N r ~ ~ M t0 n o~ ~ ~ M N t- M M -3Year , -5 Year 10 Year GBP LIBOR 6.75 T t?i~o "' .}., n x a 8.25 ". 775 7.25 kJ .!L .~ U h~ H~T Ia ~'~' 'WfahltL. ~ . fh 6 75 I . i A > , l! 6.25 ~ 1 5.75 5.25 4.75 (0 0) (0 (0 I- I- I-- 0) 0) 0) rn rn ao Co O rn 0) rn 0) 0) 0) rn rn m O C3 O o 0 0 0 N ) U) 0) U) 0) M 0) U) m -3 Year -5 Year 10 Year EUR LIBOR 6.50 ary r 6.00 550 ~ _ .00 5 MV -21641 75 -- - 4.00 3.50 -mss 3.00 r "~.. 2.50 O m O O d) m m O) '- M N t` op m O) O m a1 Q) O m W D) Q) m D) M O O ~ M I17 f~ O O O O O O O O O O O O O O O M ~!] (` Q) r" M - 3Year - 5 Year 10 Year Yen LIBOR 3.00 Wu w' v ~a 2.50 C s . 2.00- g w W I y 1.50 ;i I W 1.00 - _ 0.50 0.00 -- - , _' Oo 00 0) O) a M ~ M ao co 0 00 a) 0) 07 0,- a N- 0) In n m ~ 0) rn Co 0)a 0) 0) a r- M M to rn rn m 0) O1 Q) a a t` M o 0 O O a 0 o O o o 0 0 0 0 0 U) I- C a U) I- O) .- M -3 Year - 5 Year 10 Year E0004403773 3-8 EXH006-01229 ============= Page 35 of 208 ============= Market Health ---- --- Mutual Funds Flows 1 t_ ~,3 ~ Figure 1. investment Grade Corporate Debt Figure 2. Emerging Markets Debt (4-wk. avg., $ in millions, 111/97-317101) (4-wk. avg., $ in millions, 111197-317101) 750 120 600 90 450 60 300 iL j 30 150 0 k 0 I T (3a) j (150) (60) 1197 1 /38 V-99 1100 1101 1/37 1/98 1R39 1100 1101 Source: AMG Data Services Source: AMG Data Services Figure 3. All Equity Figure 4. International and Global Debt (4-wk. avg., $ in mil lions, ,111/97-317/01) (4-tiwk. avg., $ in millions, 111W-W101) 12.0 300 8.0 200 4.0 - J A 4 100 OD H - 0 (4.0) (100) (8.0) (200) (12.0) (300) 1/97 1198 1 / 9 1100 1101 1 /.37 1198 1199 1 MO 1101 Source: AMG Data Services Source: AMG Data Seniices 3-9 E0004403774 =XH006-01230 ============= Page 36 of 208 ============= Market Indicators YTD Max YTD Min YTD Change pr 4--A*r 78-Mar 3 yr Treasury 5.14% 4.28% 0`.66% 5.13% 4.47ฐl0 4.49% 4.2 - 5_y_r Treasuryy - 5.01% _~- _ _ -4.45% -0.27%-- ,----- _ 4.98% 4.711% 4.69% 4.50% 4.64%_ _ 10 Yr Treasury 5.31 ฐl0 4.76%a . 0.03% 5.11% 5.1.4% 5.12% 4:91 % 4:98% { Libor (3M) 6.40% 4.74% -1.57% 6.40% 4.83% 4.76% 4.81% 4.90% Dow Industrials 10,984 , - - 9,389 ~ _ (171) ~ 10,787 ~ 10,616 i0,0139,515 t~ 9,785 1 P Index 1,374 1,103 (82) _ 1,320 __ .____1,2-38-_ _ ,~ 36. 1,_103 1,153 _ NASDAQ 2,859 1,639 (391) , 2,471 2,079 1,899 1,639 - 1,854 Commn~ ltiae Natural Gas (Henry Hub) 10.50 4.92 (5.34) 10.50 5.16 5.46 5.21 ' 5.64 Crude (NYMEX) 32.19 25.59 1.15 26.80 27.95 28.18 27.12 26.31 3-10 E0004403775 =XH006-01231 ============= Page 37 of 208 ============= L -j ~ HISTORICAL 3-YEAR YIELD 3 -Treasuries Enron -Duke r -El Paso r -Dpnegy s -- ~ -W1lIams 4 •y Market Structure Sector Spreads HISTORICAL 5-YEAR YIELD t 1 r '- s 4 14,11, 1 'Al 4\1 0 -Treasuries Enron -Duke -El Paso -Dynegy -Wilams HISTORICAL 10-YEAR YIELD -Treasuries ~_ Enron u -Duke ' T -ElPaso >= Dynegy s - Wifiams Historical 3-Year Treasury Spread (bps ) 3/3012001 3/23/2001 3/2/2001 12/31/2000 Enron 139 141 140 138 (BBB+/Baal ) Duke Energy 144 144 117 118 (AA /Aa3) Dynergy (111nova) 152 174 173 154 (BBBIBaa3) El Paso (Coastal) 160 144 138 128 (BBBBaa2) Williams 160 154 143 122 BBB-Baa2 Historical 5-Year TreasurSpread b s 3130/2001 312312001 31212001 121 3112000 Enron 161 162 165 154 (BBB+/Baa1) Duke Capital 104 106 108 113 (AM) Dynergy 186 187 190 169 (BBB+/Baa2) El Paso (Coastal) 172 174 173 171 (BBB/Baa2) W illiams 176 177 178 176 BBB-lBaa2 3-11 Historical 10-Year Treasury Spread b s 313012001 3/23/2001 3/2/2001 1213112000 Enron 178 193 173 187 (BBB+/Baa1) Duke Energy 168 168 163 158 (A+/AI) Dynergy (IL Power) 193 193 193 186 (BBB+/Baal) El Paso (Coastal) 186 178 183 193 (BBB/Baa2) Williams 198 193 210 210 (BBB-/Baa2) E0004403776 EXH006-01232 ============= Page 38 of 208 ============= ,:.,.. Monthly change in Sector Spreads 40 30 20 10 0 U) Q -10 -20 -30 -40 -50 -60 w Energy as Pipelines N Oil/Gas  Telecom  Finance Dec-00 Jan-01 Feb-01 Mar-01 -5 -23 4 4 -5 -20 4 8 -8 -26 3 2 20 -56 30 2 -15 -29 -2 3 Implied Spread Moves for the Corporate Sector of the Salomon Smith Barney BIG Index E0004403777 3-12 EXH006-01233 Dec-00 Jan-01 Feb-01 Mar-01 ============= Page 39 of 208 ============= Estimated New Issue Cost Enron Estimated New Issue Cost 3y 5y 10y USD fixed 5.90% 6.51% 7.09% USD Equivalent libor Funding Spreads USD 0.85% 1.04% 1.08% Sterling 0.87% 1.04% 1.29% Euro 0.85% 0.96% 1.16% Yen 1.00% 1.25% 1.35% Enron Activity 2001 Completed Convertible Note, $1.25 billion face, Maturing 2/8/2021, Cost 2.125% TGS, $150 MM face, 5 year, libor + 298 Deal Pipeline Enron Credit Linked Note, $750-$1,000 MM face, Expected in 2Q Marlin, $800 MM face, Expected in 3Q Tender and Exchange, $750-1,000 face, Expected in 2Q 3-13 E0004403778 =XH006-01234 ============= Page 40 of 208 ============= E-1,01 CIZ" Other Notable Issuances Daimler Chrysler issued $3.5 billion • 3 currencies: USD, GBP, Euro • 2, 3, 5, 10, and 30 year tranches • Spreads ranging from 125 to 304 France Telecom issued approximately $16 billion • 3 currencies: USD, GBP, Euro • Maturities ranging from 2 to 30 years • Spreads ranging from 125 to 308 Williams Communications issued $1.4 billion Osprey like structure • Matures 2/15/04 • Paid 398 bps with a coupon of 8.25% Calpine issued $1.15 billion • Senior Notes • Maturity 2/15/11 • Paid 345 bps with a coupon of 8.50% 3-14 E0004403779 EXH006-01235 ============= Page 41 of 208 ============= ~; m_-= Funding Sources and Fees (MM) 2000 Top Five Fee Earners Funds Raised Fees Paid % of Total Fees CSFB/DLJ ,' 47.2 Bank 15,556.8 60.2 45% Chase 12.6 Cap Mkt 5,725.0 36.6 28% Citigroup 12.1 U Equity 504.0 33.1 25% CIBC 8.2 M&A - 2.6 2% West LB 6.9 Total $ 21, 785.8 $ 132.5 100% $ 87.0 1999 Fee Type Funds Raised Fees Paid % of Total Fees Merrill Lynch 26.8 Bank 12,400.0 105.5 40% CSFB 23.7 Cap Mkt 5,892.0 53.7 21% Citigroup 21.0 Equity 2,400.0 99.6 38% Chase 19.2 M&A - 3.3 1 % Bank of America 18.3 Total $ 20,692.0 $ 262.1 100% $ 109.0 1998 , Fee Type Funds Raised Fees Paid % of Total Fees DLJ 19.4 Bank 15,887.0 90.9 65% Bankers Trust 15.8 Cap Mkt 2,661.0 21.5 15% Citigroup 14.4 Equity 836.0 19.7 14% Chase 12.8 M&A - 7.6 6% CSFB 11.5 Total $ 19,384.0 $ 139.7 100% $ 73.9 E0004403780 3-15 EXH006-01236 ============= Page 42 of 208 ============= Agenda Item 4 m n 0 0 A 0 w w EXH006-01237 ============= Page 43 of 208 ============= 2LID L. Enron Corp. Chief Risk Officer Report April 30, 2001 E0004403782 4-1 EXH006-01238 ============= Page 44 of 208 ============= ~ E, LJ TOTAL BALANCE SHEET ASSETS $65.5 Bn 0 In T Wholes investmE America Industrip Works, E Global A EBS ve my Enron's Assets as of December 31, 2000 Part 1 • Trade Credit Update Trade Credit Part 2• Investment Portfolio 22.7 Bn price risk management assets,'-'., art 3• Enron Energy Services accounts receivable art 4. Market Risk Update 4-2 E0004403783 V EXH006-01239 ============= Page 45 of 208 ============= -a Trade Credit Update E0004403784 4-3 EXH006-01240 ============= Page 46 of 208 ============= _712 ~L~ Trade Credit Portfolio as of March 31, 2001 U Investment Grade In $Bn's 0 Non-Investment Grade i 96% 4% ($0.16) 82% - . Ann/ 7 Gross Exposure Cash Collateral* $19.93 ($3.90) $22.67 ($4.28) * Only includes collateral utilized. Numbers in italics represent comparable amounts at December 31, 2000. 4-4 Other Collateral* (including monetizations) ($1.79) ($1.30) E0004403785 Net Exposure $14.24 $17.09 v =XH006-01241 ============= Page 47 of 208 ============= Net Credit Exposure by E- Rating 0 0 4- L 0 0 0 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 12131100 $17.09 Bn 4-5 03131101 $14.24 Bn E0004403786 EXH006-01242 ============= Page 48 of 208 ============= 31 l Major Relationships as of March 31, 2001 Total Net Exposure $14.24 Bn c 1 \I z ~, r~ Gross Parent Exposure Collatera' \ E-Rating Relationship --------- ---- - --- In $MM's In $MM's 4 TXU Corp. 1,563 (99) 12 PG&E Corp. 964 (130) i 2 Bonneville Power Administration 769 - 5 Sithe/Independence Power Partners, L.P. 661 - 4 TransAlta Corporation 527 (5) 4 American Electric Power Company Inc. 291 - 3 Koch Petroleum Group, LP 268 - 3 Sempra Energy 309 (85) ~ Calpine Corporation 274 (75) 3 TransCanada Pipelines Ltd. 189 - 4 Petro-Canada 175 11 Edison International 173 - 4 El Paso Corporation 157 - 4 Reliant Energy Inc. 712 (588) 5 Avista Corporation 121 - 5 The Williams Companies, Inc. 791 (686) 4 The Southern Company Inc. 475 (379) 4 Nicor Inc. 76 - 5 Utilicorp United Inc. 71 (2) 3 Duke Energy Corporation 1,332 (1,297) Major Relationships Total 9,898 (3,346) Counterparties new to "Major Relationships" list Non-Investment Grade Credit Exposures 4-6 E0004403787 Net Exposure `, Jn $MM's 1,464 769 661 522 291 268 224 199 189 175 173 157 124 121 105 96 76 69 35 EXH006-01243 ============= Page 49 of 208 ============= Top 25 Net Credit Exposures for March 31, 2001 In $MM's k E-Rating Counterparty Name (Legal Entity) December 31, 2000 March 31, 2001 4 TXU Europe Energy Trading Ltd. 1,238 1,435 2 Bonneville Power Administration 606 769 5 Sithe/Independence Power Partners, L.P. 632 661 3 TransAlta Utilities Corporation 836 521 12 Pacific Gas & Electric Company 808 474 2 Koch Petroleum Group, L.P. N/A 255 O Calpine Energy Services, L.P. N/A 195 3 PG&E Gas Transmission, Northwest Corporation N/A 166 n 12 Southern California Edison Company 320 156 5 PG&E Energy Trading-Gas Corporation N/A 155 4 Petro-Canada Oil and Gas N/A 151 3 AEP Energy Services, Inc. 123 151 4 Canadian Natural Resources 160 132 4 American Electric Power Service Corporation 137 131 5 Avista Energy, Inc. 181 118 3 Axia Energy, LP N/A 107 2 Florida Power & Light Company 134 106 5 Williams Energy Marketing & Trading Company N/A 105 3 TransCanada Energy Ltd. N/A 103 1 Coral Energy Holing, L.P. N/A 96 4 Coastal States Trading Inc. N/A 96 2 Southern California Gas Company N/A 89 5 PPL Montana, LLC N/A 78 OSempra Energy Trading Corp. N/A 76 5 Marathon Ashland Petroleum, LLC N/A 73 Top 25 Total 6,399 Other Net Credit Exposures 7,843 Total Net Credit Exposure 14,242 Counterparties n .... _ ew to "Top 25" list O Non-investment Grade Credit Exposures 4-7 EOO04403788 EXH006-01244 ============= Page 50 of 208 ============= Collateral* as of March 31, 2001 In $MM's Counterparty Amount Counterparty Amount CASH POSITIONS INCOMING LETTERS OF CREDIT x;ฐ The Chase Manhattan Bank 1,234 Duke Energy Trading and Marketing, L.L.C. 577 Duke Energy Trading and Marketing, L.L.C. 731 Reliant Energy Services, Inc. 361 a Williams Energy Marketing & Trading Company 686 Mirant Americas Energy Marketing, L.P. 201 Reliant Energy Services, Inc. 201 Allegheny Energy Supply Company, LLC 184 Mirant Americas Energy Marketing, L.P. 178 Morgan Stanley Capital Group Inc. 144 J. Aron & Company 174 TXU Energy Trading Company 99 BP Amoco Corporation 131 Calpine Energy Services, L.P. 75 PG&E Energy Trading - Power, L.P. 130 Reliant Energy Services Canada Ltd. 62 Sempra Energy Trading Corp. 75 Mieco Inc. 28 Credit Suisse First Boston International 66 Woodward Marketing, L.L.C. 23 Kinder Morgan, Inc. 57 Other 299 Cargill, Incorporated 49 Total Incoming Letters of Credit 2,053 Bank of America, National Association 45 e Bankers Trust Company 31 CMS Marketing, Services and Trading Company 22 OUTGOING LETTERS OF CREDIT Powerex Corp. (200) Other Cash - Incoming 87 Duke Energy Marketing Limited Partnership (113) Other Cash - Outgoing (54) TransCanada Energy Financial Products Limited (109) California Power Exchange Corporation (107) Morgan Stanley Capital Group Inc. (21) Pacific Gas & Electric Company (100) Hess Energy Trading Company LLC (26) Southern California Edison Company (34) General Re Financial Products Corporation (26) Louis Dreyfus Corporation (26) Aquila Risk Management Corporation (48) Mittwell Energy Resources Pty., Ltd. (23) Citibank, N.A. (49) Other (28) Merrill Lynch Capital Services, Inc. (82) Total Outgoing Letters of Credit (740) Williams Energy Marketing & Trading Company (93) NYMEX (96) Mirant Americas Energy Marketing, L.P. (116) OUTGOING SURETY BONDS El Paso Merchant Energy, L.P. (169) Mahonia Ltd. (1,266) Duke Energy Trading and Marketing, L.L.C. (185) ISO New England Inc. (40) f Powerex Corp. (340) Total Outgoing Surety Bonds (1,306) E Mahonia Ltd (872) Net Incoming Cash 1,720 Total Incoming Cash 3,897 Total Outgoing Cash (2,177) ' Includes all collateral, including collateral not utilized. 4-8 E0004403789 EXH006-01245 ============= Page 51 of 208 ============= Top 5 Country Net Credit Exposures In $MM's % of % of E-Rating Country December 31, 2000 Total March 31, 2001 Total I United States 11,729 69% 9,977 70% 1 United Kingdom 2,246 13% 1,817 13% ' I Canada 2,254 13% 1,755 12% 1 Germany 115 1% 150 1% I Switzerland 100 50 Top 5 Total 16,444 13,749 Other Net Credit Exposures 644 493 Total Net Credit Exposure 17,088 14,242 Canada $1,755 $2,254 I United States $9,977 $11,729 United Kingdom $1,817 4 $2,2 * Calculated based on country of incorporation. Numbers in italics represent comparable amounts at December 31, 2000. 4-9 Germany $150 $115 EOO04403790 00 EXH006-01246 ============= Page 52 of 208 ============= Credit Reserve Historical Comparison In $MM's 420 400 380 360 340 320 300 280 260 240 220 200 180 160 140 120 100 C% 00 ~~ CP ~~ ~~ ~~ o~ o~ 00 00 00 00 0^ t' o~ a `o A o` e~ e`o ~t Jo O~ G~ e~ e~ Fe QQ ~~ P~ O pe Qe P~ ,~ P~ O O Q P Q. O p Q * Required Reserve: Amount of reserve required for existing portfolio after simulating defaults and assuming 50% recovery. 4-10 E0004403791 EXH006-01247 ============= Page 53 of 208 ============= E Investment Portfolio 4-11 E0004403792 EXH006-01248 ============= Page 54 of 208 ============= - 7 Investment Portfolio Summary In $MM's perty 3131/01 Net Portfolio Carry Value $8,622 Structured Equity Debt $47 $607 1% 7% Q1 2001` Activity $8,636 $610 ($466) ($10) ($148) $8,622 4-12 E0004403793 12/31/00 Net Portfolio Carry Value $8,636 Net Portfolio Carry Value 12/31100 Debt $598 7% Property city $219 2% ' Net Portfolio Net Net Change in Carry Value Additions Disposals Syndications Valuation 3/31101 EXH006-01249 ============= Page 55 of 208 ============= Summary of Investment Portfolio as of March 31, 2001 In $MM's Net Portfolio Carry Value $8,622 by Business Unit EB by Industry $78 1% j Regulated I . Utilities ~ $351 4% i nergy Services $244 3% Markets Global $92 Markets 1% $190 __. 2% 4-13 E0004403794 J EXH006-01250 ============= Page 56 of 208 ============= Portfolio Summary as of March 31, 2001 In $MM's Net Portfolio Carry Value $8,622 fWj El Paso (East Coast Power proceeds) ,z EcoElectrica, L.P. Equity Vengas by Performance Category .. HanoverCompressor Meets Expectations 261 203 172 138 k` Mariner 487 Below io p TGS - Transportadora De Gas Del Sur 429 ectat ns Ex r r $4,648 1 Gaspart 193 54ฐi : s KCS 171 ฐ Below Expectations aA Elektro 1,995 i :ceeds 10% N P1 -1 Dabhol Power Company 851 uctations -984 1 , Sarlux S.R.L. 350 SK-Enron 265 { Companhia Estaudal De Gas (CEG) 198 _ ,. ~ Promigas 155 c , COPEL 120 ฐ Bahia Las Minas 102 Troubled Cuiaba 432 Trakya 214 Transredes 138",,' 4-14 E0004403795 EXH006-01251 ============= Page 57 of 208 ============= _ ..~. -j =7772- C Z3 =1 RAC Portfolio Initiatives Expanded the Investment Portfolio to include April 2001 all former Enron International assets (these are now held for sale by Enron Global Assets) Major assets in the Investment Portfolio August 2001 (including Enron Global Assets) will be revalued quarterly to facilitate asset disposals Investment rates of return to be reported to the August 2001 Board quarterly RAC to monitor Off-Balance Sheet Vehicles August 2001 including syndications (Merlin, total return swaps/FAS 125) and accounting hedges (Raptor) 4-15 E0004403796 ~c~ XH006-01252 ============= Page 58 of 208 ============= Enron Energy Services E0004403797 4-16 EXH006-01253 ============= Page 59 of 208 ============= EES Reorganization • Wholesale and tariff positions as well as other risk management functions transferred to Enron Wholesale Services • Recent reorganization in EES has positioned the structuring and pricing organizations with more independence from origination • The EES Office of the Chairman is participating in the approval process to a larger extent to improve deal profitability and provide better coordination between origination and deal booking / implementation E0004403798 4-17 \A ~@6N EXH006-01254 ============= Page 60 of 208 ============= Major Challenges Responsible • Tariff Exposure Business Unit - Continued unfavorable changes of tariff components including transferred to generation charges and Competitive Transition Charges - Retail tariff risks are not currently characterized as a "Market Wholesale Position" subject to Enron Corp. Risk Management Policy Services • Credit Exposure - High working capital requirements due to contract structures - A disproportionate number of bankruptcies have occurred in EES' Wholesale portfolio; Enron Credit Policy not consistently adhered to Services / EES - Credit exposure is not fully aggregated and system deficiencies continue • Demand Side Management / Operations & Maintenance Exposure measuring actual project performance is lagging and no - Progress in , validation of the Demand Side Management business model EES assumptions exist - Demand Side Management risk premium is still being quantified and is not yet implemented in the portfolio valuation - Operations & Maintenance business infrastructure is grossly inadequate to determine deal-specific profitability • Operational Risk - Contractual deal terms and embedded options are not appropriately Wholesale captured and managed Services / EES 4-18 E0004403799 EXH006-01255 ============= Page 61 of 208 ============= EES / EWS/ RAC Task Force Status as of April 15, 2001 Qtr 3, 2000 Qtr 4, 2000 Qtr 1, 2001 Qtr 2, 2001 Qtr 3, 2001 Qtr 4, 2001 Qtr 1, 2002 ID Task Name Completed Task Jun Jul Au Se Oct Nov Dec Jan Feb Mar r Ma Jun Jul Au Se Oct Nov Dec Jan Feb 1 Tariff Exposure and Curve Management i 2 Models i 3 Review all tariff curves _ 1 J. Lewis 4 Review all valuation models to ensure logic/mechanics of pulling curves properly -( i J. Lewis 5 Institute scenarios/stress testing for all tariff risks (Le. CTC, fuel, ':. D. Black i 6 interest rates, dereg dates, rate increases) I I 7 Institute monthly reporting for credit exposures by utility i J. Lewis 8 Build the capability for monitoring regulatory switch options on all contracts - i D. Black 9 Establish V 6 R Models for tariff exposure 10 _ Development of model for interest rate S. Stoness ! l 11 - Development of model for fuel costs s. Stoness 12 Back Test to establish V C@ R limits for tariff exposure 13 back test V @ R model for interest rate ! , S. Stoness 14 - back test V @ R for fuel costs i i stoness is 15 i 16 [ ' 1 17 18 Credit Exposure Aggregate Credit Exposure I E r 19 Phase I ' I 20 Establish daily feeds for high priority A/R systems (gas, power, bundled) Complete P. Ho 21 22 23 24 25 Establish daily feeds for MTM positions - RPS (power) Establish daily feeds for MTM position - RGS (gas) Establish daily feeds for intramonth forward - power west desk Setup global counterparty ID's for customers (630) with Dec. MTM > $100,000 and AIR > $50,000 Complete Complete Complete Complete S. Yeargainj T. Donovan€ BM S. Yeargaln; E K. Williams I 26 Phase II 27 28 29 Establish daily feeds for other AIR systems (Clinton, Bentley, etc.) Establish daily feeds for A/P Setup and establish daily feeds for intramonth book - RPS - East Desk - -- ! P. Ho,B. Mahendra P. Ho,B. Mahendra S. Mills 30 Setup and establish daily feeds for intramonth book RGS; S. Mills 31 Set up and establish daily feeds for shipped not billed - Power S. Mills 32 Set up and establish daily feeds for shipped not billed Gas E0004403800 a ' s.Mills I 33 Improve system and business processes of RGS to allow validated data to i s. Mills,iBM 34 be transmitted daily by 5:00 a.m. 35 Consolidate benchmark & credit exposure to feed Risk TRAC (by 5:00am) s. Mills 36 Setup global counterparty ID's at average rate of 100 per week. ! l K. Williams i 37 38 Implement global analysis of EES Credit Reserve (after Phase II) Daily new deals report to assist in daily credit monitoring ^ ' M. Ruane 39 Harris' Gas Complete M. Hwang / M. Power j Complete N. Hong / M. Harris t 41 Review credit policy with Origination Complete Harris 42 Review Transaction Approval Process Complete M.Tribolet Arrows indicate status (incomplete items only): Red-as of 12100 BOD meeting; Blue -as of 2/01 BOD meeting; Green -as of 3101 Task Summary ^ Progress 4-19 EXH006-01256 ============= Page 62 of 208 ============= r" f EES / EWS/ RAC Task Force Status as of April 15, 2001 Qtr 3, 2000 Qtr 4, 2000 Qtr 1, 2001 Qtr 2, 2001 Qtr 3. 2001 Qtr 4, 2001 Qtr 1, 2002 ID Task Name Completed Task Jun Jul Au Se Oct Nov Dec Jan Feb Mar r May Jun Jul Au Se Oct Nov Dec Jan Feb 43 Review credit policy with Trading ! Complete Harris 44 Review EES Clients and Evaluate Portfolio Quality of Credit Exposure t 45 Compare EES booked credit reserves to Credit Department reserve calc Complete i E- Kingshitl 46 P P n 9 l - _ s. vasan a7 a lua t e ate portfolio quality alitY of credit ex Pos-un Review EES cp's, assign E ratings , P ev P I T. Selbel,D. Furey ae Review EFS c-p's, assign E ratings, evaluate portfolio quality of credit exp D. Furey,T. Seibet 49 Review Enron Direct cp's,assign E ratings, evaluate portfolio quality of credit a;! TBD so Review Clinton cp's, assign E ratings, evaluate portfolio quality of credit exp Complete T. Seibel ; 51 s2 Review EES Accounts Receivable Identify EES AR systems (listing) Complete - J. Fisher , 53 Establish consolidation timetable & establish plan J. Fisher , 54 Manual Preparation of AR aging with listing of obligors Complete J. Fisher ss Automated AR aging with listing of obligors 1 J. Fisher ss Define negative balance reporting criteria - ; M. Tribolet[ s 7 56 gin payment rate reporting Be Deal Capture Controls j J. Fisher , ; 59 60 Hire Deal Capture group lead Complete Establish centralized deal capture /confirm group (commodity deals) M. Eggleston ! 1 61 62 63 Redesign Credit Model to accommodate larger volume of deals Develop Credit Process for Mass Market, Mid Market. Fast Track Implement Credit Process for Mass Market, Mid Market, Fast Track E000440 M. O'Leary/Research-TBD M. Tribolet,M-Wilson ; 3801 ; M. Tribotet,M. Wilson 64 ss EAM/AOPS Exposure i ss 67 EAM Risk Book -Segregation of duties surrounding asset performance validation Complete ; I D. Roberts 68 69 - Engineering Audit Control function established - EAM Position Reporting (Time, Capital, Efficiency) Complete ' i D. Roberts j D. Draper I'D. Roberts 70 philosophy and methodology Complete - Delivery Performance Risk (DAPR) ! -- D. Roberts i 71 Site Level Actualization w/ Variance explanations ' TBD 72 -Dally Position Report includes EAM Options Complete € ! I ' 73 - Establish DASH EAM capital monitoring process Complete C. Morrow ; 74 Establish Approval Policy for Incremental Capital (DASH Addendum) Complete ! -- J. Hachen/C. Morrow' 75 LAMP roject valuation ; ; 7s Project valuation personnel in regions for consistency ; Complete D. Roberts r 77 Project valuation of projects in system (measure 20 projects per month) D. Roberts 78 - Initial RAC audits (intermediate control) 'Complete J. Hachen 79 EAM_Options volume 80 Establish options valuation & MTM Complete D. Draper ! i 81 Develop V Q R model ! - D. Roberts 82 Deal Pricing , l 83 - Develop EAM volatility model Complete M.?riboiet,J. Soo -- 84 RAC / EES agreement on handling implementation risk - pricing through MTM M. Tribolet,J. Wilitams,J. Hachen Arrows indicate status (incomplete items only): Red-as of 12/001301) meeting; Blue -as of 2/01 BOD meeting; Green -as of 3101 Task Summary _ Progress 4-20 EXH006-01257 ============= Page 63 of 208 ============= EES / EWS/ RAC Task Force Status as of April 15, 2001 Qtr 3, 2000 Qtr 4, 2000 Qtr 1, 2001 Qtr 2, 2001 Qtr 3, 2001 Qtr 4, 2001 Qtr 1, 2002 ID Task Name Completed Task Jun Jul Au Se Oct Nov Dec Jan Feb Mar r May Jun Jul Au Se Oct Nov Dec Jan Feb 85 } 86 Establish AOPs Risk Book 87 Establish Risk Analytics group for AOPS Complete C. Morrow f 88 - Inventory AOP's deals ] Complete C. Morrow I ; 89 -Develop financial models supporting deal risk exposure ; C. Morrow/D. Roberts so Review Accounting Process 1 I C. Morrow 91 E 92 93 Operational Risk ! 94 Bill Payment/Invoicing System Reconciliation to Commodity Books I 95 Establish plan for legacy deal reforecast ! s6 - Deep Dive process established/participation in ongoing deep dives v V I N. Hong 97 Reforecasting performed on legacy deals & ongoing process implemented { Complete 98 Cash Reconciliation of Liquidation 99 Establish plan ; Complete ML Ruffer 100 - Define data requirements; develop reconciliation process ML Ruffer 101 - Implement ongoing reconciliation, PPA process ML Ruffer 102 Capture Tariff Price From Utility Bills 103 Develop & implement tariff price update process € ML Ruffer 104 105 Address Working Capital Issue - Invoice and Payment System i ' i - Establish plan Complete E. Hughes 106 Risk Analytics t 107 Position Report i { { MOW 108 Intramonth reporting for Power West ; Complete N. Hong j 109 Create Intramonth reporting for Power East in excel Complete N. Hong j 110 Create East intramonth book in Access Database ! N. Hong I 111 Intramonth reporting for Gas ' Validate ALTRA positions /verify spot curves / IM Gas P&L Reporting Complete - N. Hong 113 - Develop & implement a plan for systems support from ALTRA To RGS , N. Hong 114 Canadian Risk Position Reporting ; ฐ 115 - Gas Positions captured in excel model revalued and reported monthly . Complete ~ ; { ! 116 - Conversion of Position from excel to RGS ! Complete N. Hong 117 __Power_ Canadian wholesale curve developed ._ 'Complete D. Benevides 118 - Power T&D curve development Complete s. Stoness ; 119 - Timely value / report of Power Canada Positions Complete 120 Stress testing procedures Complete ! I i 4 WNW ! ! 121 Ad Hoc stress testing procedures I Complete N. Hong 122 i 123 ! } ! i I 124 Ne 125 ...." Improve and streamline transaction valuation and market risk models E00 04403802 • • • ` M. Tribofet/c. Esteems 128 Enhance Risk TRAC to handle risk analytics of EES portfolio (V @ R analysis) P. Layton / v. Gorny Arrows indicate status (incomplete items only): Red-as of 12200 BOD meeting; Blue -as of 2/01 BOD meeting; Green -as of 3/01 Task Summary V MMMOV Progress 4-21 EXH006-01258 ============= Page 64 of 208 ============= CEO ED 160 140 120 5 _ 100 Z 80 0 R3 60 E 4I W 40 20 0 00 . r 0 or w .: MEN main .. a a. a ae - -- - -- - -- - - -- - - O O O O O O O O O O O O ^ ^ ^ N N N N N 10O ~O ~O X O ~O ~~O o0 O O ,O GO i O ~O O ~,O ~O JO ~O ~,O C. O O O ~C',~~~ ~`a Of ~t`a ~J ~` P~ 5p o~ mod,. O~G, • Progress slowed in January and February after strong performance in end of 2000: Clean-up of 2000 project work California volatility mitigation- ~ ~ 0~ Owens Corning delays t - Q.i > l • Project performance measurement process in place, but execution is lagging • NPV shown above is all estimated savings, no actual savings have been validated 4-22 E0004403803 Energy Asset Projects Net Present Value as of March _31, 2001.___, - ••••• Step I - Enron Approval Plan / Actual - ..... Step 2 - Customer Approval Plan / Actual . •.••• Step 3-Installed Plan /Actual - Step 4-ACTUAL SAVINGS VALIDATED - /' ' r r . .00 i EXH006-01259 ============= Page 65 of 208 ============= Market Risk Update I`xJ; 4-23 E0004403804 EXH006-01260 ============= Page 66 of 208 ============= Finance Committee Table of Contents • Risk Profile by Product • Risk Profile by Primary Commodity and Business Unit • Relative Risk Comparison • Backtesting of Enron Corp. Aggregate VaR • Utilization of VaR Limits • Potential Losses from Various Market Scenarios • Enron Foreign Exchange Update • Trading Limit Changes Policy Changes 4-24 E0004403805 EXH006-01261 ============= Page 67 of 208 ============= Risk Profile by Product Quarter Ended March 31, 2001 and 2000 541 Trading P&L 3 B Q1 2001 P&L = $1 ($MM) . 429 209 Q1 2000 P&L = $0.5 B 150 141 104 113 100 IN , .. I Ilk .; y fl 39 50 37 31 21 4 19 ` 41 17 17 15 4 11 (19) 9 6 3 (10) (34) 5 0 (50) NA NA UK Global Coal Financial European Pulp & Other(1) Weather Metals Bandwidth Nordic Gas Power Power Products Gas Paper Power ($MM) Average VaR Q1 2001 Avg VaR = $64 MM Q1 2000 Avg VaR = $28 MM (2) a - (4) i (s) (42) (13) (34) (19) (14) NA NA UK Global Coal Financial European Pulp & Other(1) Weather Metals Bandwidth Nordic Gas Power Power Products Gas Paper Power Enron Return on VaR 2001 163% 158% 185% 70% 104% 156% 35% 201% 45% 77% 10% nil nil 251% 2000 99% 76% 244% 71% 61% 148% 143% 74% nil 41% nil nil 395% 201% (1) includes commodities with 2001 prof!t/loss less than $7 MM 4-25 E0004403806 EXH006-01262 ============= Page 68 of 208 ============= Risk Profile by Primary Commodity and Business Unit Quarter Ended March 31, 2001 and 2000 Commodity Comparison Trading P&L Q1 2001 P&L = $1.3 B ($MM) 617 Q1 2000 P&L = $0.5 B 557 goo 460 300 -1237 Ll 20 160 - 57 35 19 39 15 14 not _9 0 Power Gas Products(1) Financial Other Business Unit Comparison Trading P&L r Q1 Trading P&L = $1.3 B ($MM) 950 971 700 460 209 200 77 18 (10) (60) Americas Europe Global Industrial EBS Markets Markets Average VaR Q1 2001 Avg VaR = $64 MM Average VaR Q1 Average VaR = $64 MM ($MM) - Q1 2000 Avg VaR = $28 MM ($MM) 0 0 (1) (0.2) (15) (7) (6) (1) (3) (4) (2) (20) (7) (13) 16) (30) (20) (40) (45) (37) (43) (60) (54) (60) Power Gas Products(1) Financial Other (60) Americas Europe Global Industrial EBS Markets Markets Return on Enron; i Return on VaR 209% 166% 101% 156% 44% I 251% J f VaR 226% 163% Enron 130% 218% nill 251% (1) Global Products and Coal 4-26 E0004403807 EXH006-01263 ============= Page 69 of 208 ============= Relative Risk Comparison Year Ended December 31, 2000 .24% Average Daily VaR as a Percentage of Market o 20% Capitalization  .08% .08 .06% .06% .06 .05% .05% .04% .04 .03% .03% .03 J U .01 % _ IL_ 0 Williams Mirant (1) Enron Dynegy Merrill _ Duke Goldman Dell Morgan JP Morgan Citigroup Lynch Energy Sachs Computer Stanley 9.0% Average Daily VaR as a Percentage of Net Income 5.3% 6.1% 5 4 3 2.2% 2 0.8% 0.9% 0.9% 1.0% 0.5% 0.5% 0 2% 1 . 0 Williams Mirant (1) Enron Dynegy Merrill Duke Goldman Dell Morgan JP Morgan Citigroup L nch Energy Sachs Computer Stanley Avg Daily VaR ($MM) 47 19 50 11 32 16 28 17 28 29 26 Market Cap at 12131100 ($Bn) 19 10 62 18 55 31 51 45 87 88 254 Net Income ($MM) 524 359 979 501 3,784 1,776 3,067 1,666 5,456 5,727 13,519 (1) 2000 spin-off of Southern Company's non-regulated business 4-27 EO004403808 EXH006-01264 ============= Page 70 of 208 ============= 77-1 7777- r 2- --D Backtesting of Enron Corp. Aggregate VaR 12 Months Ended March 31, 2001 ($MM) Curve Shift P/L - VaR ~~ VaR Limit 600 8/24/00 - $165 MM ~/ 12/4/00 - $485 MM 150 8/25100-$195M /M Loss Notifications >VaR Limit T.1 ($194) MM 8130 ($136) MM 1217 100 ($ 87) MM 911 ($630) MM 12/12 ($105) MM 11116 ($215) MM 12113 I I I I~ I. I n I 50 0 (50) (100) Conclusion: VaR Model is acceptable. (150) ( piec Test) Ku. _ 12112100-($551 MM) 8/30/00 - ($212 MM) (600) 12/13/00 - ($204 MM) O O O O 0 0 0 0 O O 0 0 0 0 0 O 0 0 0 0 0 O O O 0 O O O 0 0 0 0 0 0 O O O O 0 0 0 0 0 0 0 0 0 0 0 O O O 0 0 O O O 0 0 0 O O O O M M M M M M N N N N N_ N r O O O O O O 0) 0) 0) 0) 0) 0 W M n n ti 0 0) 0) d. N N N N N M N M r N M N N N N N N M N U) Uf) (0 cp N- r 00 W W 0) ) 0) O O O N N ~- N N M M 12 Month Corp. Limit Evolution: 2/7/00 6/1/00 10/7/00 - 12/6/00 12/7/00 - 12/27/00 12/28/00 - 2112/01 2113/01 - Present ($MM) 60 75 100 140 100 125 4-28 E0004403809 EXH006-01265 ============= Page 71 of 208 ============= Utilization of VaR Limits Quarterly Comparison ($MM) 120 100 80 60 40 20 Average VaR Limit Average VaR 4-29 E0004403810 EXH006-01266 Q2 Q3 Q4 Q11 Q2 Q3 Q4' Q1 Q2 Q3 Q4 Q11 Q2 Q3 Q4 (q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 21 2000 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 2001 NA Gas NA Power UK Power Products Financial TOTAL ENRON ============= Page 72 of 208 ============= Potential Losses from Various Market Scenarios as of March 31, 2001 What if... ($MM) (100) (200) (300) (400) (500) (600) (700) (800) • California regulates natural (750) gas prices • New York markets mirror recent California activity • California maintains bundled tariffs for 10' years; wholesale prices stabilize • UK power prices increase due to closing of nuclear power plants • European gas prices increase due  (60) to offshore problems at terminals • Continental power prices drop due (40) to wet weather • Copper and aluminum prices increase due to demand in China (30) (130) 4-30 (425) (70) (495) (230) (105) (60) (395) _ Gas - Retail Power Market Wholesale Power Market Metals E0004403811 EXH006-01267 ============= Page 73 of 208 ============= j -D LZ-D LID aj cm 800 700 600 Top Five Foreign Exchange Exposures Net Notional Position by Business Unit as of March 31, 2001 2,532 ($MM) Total $3,317 Exposure Impact  CTA Impact - $2,561 i  P&L Impact - $756 524 500 400 300 -I 200 100 0 ' ~~ - South America Asia India Canada Central America *Asia's P&L exposure represents payments received on sale of Hainan of $157MM, and SK-Enron exposure of $68MM 4-31 E0004403812 EXH006-01268 ============= Page 74 of 208 ============= Cumulative Translation Adjustment (CTA) Balances as of March 31, 2001 South America $MM 900 800 700 600 500 400 300 200 100 0 Dec-00 Mar-01 Total Devaluation of 99.3% to 2.1525 BRUUSD since purchase of CEG, CegRio and Gaspart in Jul-97 at 1.0803 BRL/USD Asia $MM 30 25 20 15 10 5 0 Dec-00 Mar-01 Total Devaluation of 13.8% to 1331 KRW/USD since purchase of SK-Enron in Jan-99 at 1170 KR W/USD 4-32 E0004403813 zl-~ EXH006-01269 ============= Page 75 of 208 ============= P&L Impact from Top Five Foreign Exchange Exposures Quarter Ended March 31, 2001 $MM 35 30 25 20 0 Loss on Canadian Translation loss Translation loss Quarterly FIX loss Fair Value of Net Income of Net Expenses on Top Five Investments Exposures 4-33 E0004403814 EXH006-01270 ============= Page 76 of 208 ============= 71 Summary of Trading Limit Changes Recommended Changes to Policy Limits: Note: Enron Corp. Aggregate VaR Limit --- NO CHANGE REQUESTED --- $125 MM Recommended Permanent Limit UK Electricity Net Open Position Limit Maturity / Gap Limit VaR Limit i Freight Markets Trading Net Open Position Limit Maturity / Gap Limit VaR Limit 60 Twh 15 Twh $ 30 MM 83,000 Full Truckload Units 103,750 Full Truckload Units $ 2 MM Global Risk Markets Trading Net Open Position Limit Maturity / Gap Limit VaR Limit Lifetime Capital at Risk (P95) Notional Maximum Loss (P95) 300,000 Mwh N/A $ 3 MM $ 30 MM $120 MM Existing Permanent Limit 35 Twh 15 Twh $10 MM Interim Limits Granted 41,500 Full Truckload Units 51,875 Full Truckload Units $ 1 MM 100,000 Mwh N/A $ 1 MM $ 10 MM $ 40 MM 4-34 E0004403815 EXH006-01271 ============= Page 77 of 208 ============= Summary of Trading Limit Changes Recommended Changes to Policy Limits (continued): Recommended Existing Permanent Limit Permanent Limit Advertising Net Open Position Limit 28,000 Cost Per Point * 54 Cost Per Point Maturity / Gap Limit 56,000 Cost Per Point * 108 Cost Per Point VaR Limit $ 2 MM $ 2 MM Position limit changes not substantive; due to benchmark measurement adjustment EES: VaR Limit Terminated ** $ 5 MM ** Termination of business unit sub-limit due to transfer of wholesale trading to Enron Americas DRAM Chips Net Open Position Limit Maturity / Gap Limit VaR Limit Interim Limit Extension for 6 additional months 2 MM Benchmark Equiv. Chips 1.5 MM Benchmark Equiv. Chips $1 MM 4-35 E0004403816 EXH006-01272 ============= Page 78 of 208 ============= Summary of Policy Changes We recommend BOD approval of the following amendments to the Risk Management Policy: • Modify the reporting requirements to the Enron Corp. Office of the Chairman as follows: - make the reporting requirements to the Chairman of the Board the same as those to the Chairman of the Finance Committee; (ie. limit daily reporting of individual commodity group violation/notifications to the Business Unit Office of the Chair and to the Enron Corp. President and CEO) - replace the current level of reporting to the Chairman of the Board with reporting to the Enron Corp. CEO (no immediate impact on reporting as the President is currently also the CEO) 4-36 E0004403817 EXH006-01273 ============= Page 79 of 208 ============= m 0 Agenda item 5 0 0 p 0 w 00 ============= Page 80 of 208 ============= Enron Corp. Projects and Amendments April 30, 2001 E0004403819 5-1 EXH006-01275 ============= Page 81 of 208 ============= m Agenda Item Sa 0 0 -P 0 W W N O i EXH006-01276 ============= Page 82 of 208 ============= To: The Finance Committee of the Board of Directors a From: Jeff Skilling and Rick Buy Recommended Changes to the Risk Management Policy Interoffice Memorandum Department: Risk Assessment and Control Date: April 30, 2001 I. We are recommending BOD approval of the following trading limits as amendments to the Risk Management Policy: Recommended Existing Permanent Limits Limits UK Electricity Net Open Position Limit 60 Twh 35 Twh Maturity / Gap Limit 15 Twh 15 Twh VaR Limit $ 30 MM $ 10 MM Interim Limits Granted Freight Markets Trading Net Open Position Limit 83,000 Full Truckload Units 41,500 Full Truckload Units Maturity / Gap Limit 103,750 Full Truckload Units 51,875 Full Truckload Units VaR Limit $ 2 MM $ 1 MM Global Risk Markets Trading Net Open Position Limit 300,000 Mwh 100,000 Mwh Maturity / Gap Limit N/A N/A VaR Limit $ 3 MM $ 1 MM Lifetime Capital at Risk (P95) $ 30 MM $ 10 MM Notional Maximum Loss (P95) $120 MM $ 40 MM Recommended Existing Permanent Limits Limits Advertising Net Open Position Limit 28,000 Cost Per Point * 54 Cost Per Point Maturity / Gap Limit 56,000 Cost Per Point' 108 Cost Per Point VaR Limit $ 2 MM $ 2 MM Position limit changes not substantive; du e to benchmark measurement adjustment EES VaR Limit Terminated `" $ 5 MM "' Termination of business unit sub-limit due to transfer of wholesale trading to Enron Americas Interim Limit Extension for 6 additional months DRAM Chips Net Open Position Limit 2 MM Benchmark Equivalent Chips Maturity / Gap Limit 1.5 MM Benchmark Equivalent Chips VaR Limit $ 1 MM II. We are recommending BOD approval of the following amendments to the Risk Management Policy: • Modify the reporting requirements to the Enron Corp. Office of the Chairman as follows: - make the reporting requirements to the Chairman of the Board the same as those to the Chairman of the Finance Committee; (ie. limit daily reporting of individual commodity group violation/notifications to the Business Unit Office of the Chair and to the Enron Corp. President and CEO) - replace the current level of reporting to the Chairman of the Board with reporting to the Enron Corp. CEO (no immediate impact on reporting as the President is currently also the CEO) E0004403821 aspect irm 000-469-1 (7/92) EXH006-01277 Integrity Communication Excellence r- to ============= Page 83 of 208 ============= ENRON CORP. Proprietary and Confidential RISK MANAGEMENT POLICY Approved by Enron Corp. Board of Directors Approved: October 1, 1996 Amended: December 8, 1998 Amended: May 3, 1999 Amended: August 10, 1999 Amended: October 20, 1999 Amended: December 14, 1999 Amended: February 7, 2000 Amended: May 2, 2000 Amended: August 8, 2000 Amended: October 7, 2000 Amended: December 12, 2000 Amended: February 13, 2001 Amended: May 1, 2001 I. General Authorization Enron Corp. is authorized to execute Transactions and manage these Transactions within certain authorized Portfolios in support of its businesses. All Transactions covered by this policy must be conducted in compliance with all Enron Corp. policies, as each may be amended, supplemented or restated from time to time (collectively the "Enron Corp. Policies"). II. Portfolios Designated Enron Business Units are authorized to enter into Transactions which create Positions for Enron Corp. and its affiliates, other Enron Business Units or their respective customers within the authorized Commodity Groups and limits, specified in the Appendices. These Positions are managed in the following Portfolios: A. Trading Portfolio - designed to capture and manage risks related to physical delivery of energy and other commodities, to provide related risk management services, to take advantage of market arbitrage opportunities and to manage positions within the approved limits. This portfolio includes commodity transactions, financial instruments and securities transactions. B. Merchant Portfolio - designed to capture and manage merchant investments in public and private companies, including the active management of embedded exposures and to provide greater liquidity for Enron's merchant investment activities, consistent with Enron Corp.'s core competencies within the approved limits. This portfolio includes equity, "equity-like," debt and "debt-like" investments in the public and private sector. C. Capital Portfolio - designed to accommodate positions and transactions in Enron's own stock or derivatives thereof which may occur from time to time in the execution of approved structural transactions (for example, stock buy-backs, hedging of stock option programs, etc.). III. Limit Structure Generally, Enron Business Units' business activities are subject to a combination of limits. These limits include, but are not limited to: Net Open Position, Maturity/Gap Risk, Potential Exposure (VaR), Regulated Exchange Limits, and Loss Notifications, as appropriate for the type of business activity under consideration. Limits will be applied at the Commodity Group and Portfolio level, as appropriate and monitored daily. Unless specifically allocated to a business unit for a basket of products, these limits are to be applied against Enron's consolidated position on an individual commodity group basis. E0004403822 Q =XH006-01278 ============= Page 84 of 208 ============= t ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential A. Net Open Position Limits. Enron Business Units' activities are subject to the Net Open Position limits at the Commodity Group level, as specified in the Appendices. For purposes of monitoring the Net Open Position Limits, all Positions within a Commodity Group shall be aggregated into a reference Benchmark Position assigned to each group. B. Maturity/Gap Risk Limits. Enron Business Units' activities are subject to the Maturity/Gap Risk limits at the Commodity Group level, as specified in the Appendices. For purposes of monitoring the Maturity/Gap Risk Limits, all Positions within a Commodity Group shall be aggregated into a reference Benchmark Position assigned to each group. C. Potential Exposure Limits. Enron Business Units' activities are subject to potential exposure analysis using stress-testing and scenario analysis, as directed by the Enron Corp. Chief Risk Officer, and limits based on Value-at-Risk (VaR), as specified in the Appendices, calculated daily or as appropriate to the business activity under consideration at the Portfolio level and at the Commodity Group level. l ~1 D. Regulated Exchange Limits. Enron Business Units may be subject to limits imposed by regulated exchanges on which they transact. Enron Business Units shall comply with any such limits imposed on them, as such limits may be modified from time to time. N E. Loss Notifications. Daily Losses and Cumulative 5-day Losses resulting from Enron Business Units' Q activities are subject to the reporting requirements specified in Section IV.C. "' All Enron Business Units are expected to formulate limits subordinate to limits specified in the Appendices, and such sub-limits should be monitored internally and act as triggers for reference to and action by senior Enron Business Unit management. IV. Limit Violation/Loss Notification Requirements Notwithstanding the other provisions of this Policy, any violation of limits must be reported to the Enron Corp. Chief Risk Officer. This limit violation report should be made to the Chief Risk Officer by the Enron Business unit prior to entering into a Transaction if there is a sufficient reason to believe that a limit violation will occur. Requirements for reporting limit violations and loss notifications, each accompanied by an explanation, as follows: A. Net Open Position Limits; Maturity/Gap Risk Limits. If the limit violation exceeds the applicable limit by greater than or equal to five percent (5%), the Enron Corp. Chief Risk Officer shall ensure the prompt communication of the occurrence to the Enron Business Unit Office of the Chairman and to the President of Enron Corp. If the limit violation exceeds the applicable limit by greater than or equal to ten percent (10%), the Enron Corp. Chief Risk Officer shall ensure the prompt communication of the occurrence to the Chief Executive Officer of Enron Corp. 1 B. Value-at-Risk Limits. If the VaR for any Commodity Group or Portfolio exceeds the applicable limit by greater than or equal to five percent (5%), the Enron Corp. Chief Risk Officer shall ensure the prompt communication of the occurrence to the Enron Business Unit Office of the Chairman and to the President of Enron Corp. If the VaR for any Commodity Group or Portfolio exceeds the applicable limit by greater E0004403823 :XH006-01279 ============= Page 85 of 208 ============= 71 i ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential B. Position Reporting. Designated Enron Business Units shall prepare, distribute and make available data constituting a daily report ("Daily Position Report") including Commodity Group Net Open Position, Maturity/Gap Position, profit or loss, potential exposure (VaR) and any other parameters as may be required by the President or the Chief Risk Officer of Enron Corp. The Daily Position Reports at the Commodity Group level will also report various limits compared to their respective actual amounts and will be signed off by the Commodity Group Manager of the position(s) and the head of the commercial support group responsible for their preparation, before any subsequent trading occurs. For purposes of limit monitoring and aggregation of Enron's consolidated trading results, Enron's consolidated Daily Position Report should include the Net Open Position, Maturity/Gap Position, profit or loss, and potential exposure (VaR) for approved Commodity Groups consolidated across the company without regard to which business unit undertook the trading activity. In those instances where limits are granted to a business unit for a basket of commodities, reporting for individual commodity risk books shall be maintained to facilitate aggregation of Enron's actual consolidated commodity specific exposure. Management reporting may separately provide business unit sub-limit monitoring and trading results aggregated according to management lines. The President of Enron Corp. and Enron Corp. Chief Risk Officer shall designate individuals who are authorized to approve the Daily Position Report on behalf of Enron Corp. After approval, a consolidated Daily Position Report shall be distributed to the Chairman, the President, the Chief Accounting Officer, the Chief Risk Officer of Enron Corp. and others as designated by the President or the Chief Risk Officer of Enron Corp. a C. Stress and Scenario Testing. On a monthly basis, or as markets dictate, designated Enron Business Q Units shall formulate and examine the effects of extreme changes in the market parameters relevant to "' exposures and positions. Results of these tests should be made available to the Enron Corp. Chief Risk Officer, or his designee(s). D. Valuation. On a monthly basis, or as markets dictate, designated Enron Business Units shall provide evidence of verification of all market parameters used in the calculation of risk metrics and profits and losses. This should be made available to the Enron Corp. Chief Risk Officer, or his designee(s). E. Transaction Approval and Execution. Only those employees designated by the Enron Corp. Chief Risk Officer or his designee(s) will be authorized to enter into Transactions on behalf of Enron. The Chief Risk Officer must also maintain a record of those employees responsible for the individual Commodity Groups (Commodity Group Manager) as specified in the Appendices. Individuals will be assigned as commodity leaders to manage Enron's aggregate position across the company as determined necessary by the Chief Risk Officer. All Transactions must be entered into in compliance with current policies of the Credit Group, Market Risk Management Group, and other relevant groups, as determined by the Enron Corp. Chief Risk Officer. All trades executed on the telephone must be executed on telephones that are recorded electronically. F. Brokerage Accounts. Designated Enron Business Units periodically open trading accounts with clearing brokers to facilitate the conduct of their business. All openings or revisions of trading accounts with a broker or brokers will be reviewed and approved by the Enron Corp. Chief Risk Officer or his designee(s). The Enron Corp. Chief Risk Officer or his designee(s) will also notify the brokers of the names of personnel authorized to trade futures, options or other contracts on regulated exchanges. Lill, E0004403824 EXH006-01280 ============= Page 86 of 208 ============= ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential VI. Policy Amendment Authority A. Portfolios, Commodity Groups and Positions. Subject to the authorization of the Board of Directors, the Enron Corp. Chairman, the President of Enron Corp. and the Enron Corp. Chief Risk Officer, additional Portfolios may be created and additional Commodity Groups may be added within existing Portfolios, and the related limits will be created or revised accordingly. The President of Enron Corp. and the Enron Corp. Chief Risk Officer can authorize additional Positions within the existing Commodity Groups, provided that such Positions can be aggregated within the limits of a currently authorized Commodity Group. B. Cross-Commodity Position Authorization. If in the ordinary course of its business an Enron Business Unit or trading desk incurs an exposure to an underlying commodity or financial instrument for which it does not have explicit authority to carry, this exposure should be hedged internally with the appropriate Enron desk(s), with appropriate notification to the Chief Risk Officer or his designee(s). Hedge positions should be in instruments that have an observable correlation with the underlying exposure, and should be rebalanced regularly to substantially neutralize the underlying exposure. ,.. Upon notification to the Chief Risk Officer or his designee(s), the Enron Business Unit Office of the Chairman who has authority for that commodity group may authorize a specific trader in a different commodity group to take speculative positions with other Enron trading desks in commodities and/or ,. financial instruments other than those which that trader has explicit authority to trade (i.e. the Business Unit Office of the Chairman for North American Natural Gas may authorize a trader in the Coal group to trade gas with the North American Natural Gas desk). For limit monitoring purposes, these cross- Q commodity positions shall be captured by individual commodity to facilitate aggregation and reporting of "' Enron's consolidated exposure by commodity in the Daily Position Report (Coal desk's gas position will be aggregated with the North American Natural Gas commodity group.). C. Position Measurement Parameters. Any changes to parameters used in the aggregation and measurement of Positions must be approved by the Enron Corp. Chief Risk Officer or his designee(s). This includes, but is not limited to, the Benchmark Positions, VaR parameters, Maturity/Gap Risk periods, conversion ratios, volatility factors and correlation factors. Any substantive change as determined by the Chief Risk Officer will be communicated to Enron's Board at the next regularly scheduled Board of Directors' meeting. D. Interim Policy for New Commodity Groups. The President of Enron Corp. and the Chief Risk Officer of Enron Corp. may approve positions in new Commodity Group(s) prior to approval in the next meeting of the Enron Corp. Board of Directors, subject to the following criteria: (i) maximum VaR of $1 million, along with corresponding position limits, and (ii) maximum initial term of six (6) months, subject to one extension for an additional term prior to review by the Board of Directors for permanent limits. These interim limits adjust the limit violation and loss notification requirements at the commodity group level until the granted limits expire, but they do not change the Aggregate VaR Limit. Interim limits shall be reported to the Enron Corp. Board of Directors at each regularly scheduled Board of Directors' meeting. E. Discretionary VaR. The President of Enron Corp. and Chief Risk Officer of Enron Corp. may allocate "Discretionary VaR" to the existing Commodity Groups listed in Appendix I, along with the 011 corresponding adjustments to Net Open Position limits and Maturity/Gap Position limits, under the following guidelines: (i) allocation is limited to 100% of the existing commodity group VaR limit in E0004403825 EXH006-01281 ============= Page 87 of 208 ============= ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential Appendix I, (ii) VaR allocation and corresponding adjustments to position limits adjust the limit violation and loss notification requirements at the commodity group level, (iii) nominal allocations of Discretionary VaR may exceed the amount listed in Appendix I due to portfolio diversification effect, as determined by the Chief Risk Officer or his designee(s),and (iv) term of allocation is determined by the Enron Corp. President and Chief Risk Officer. Discretionary VaR allocations are to be reported to the Enron Corp. Board of Directors at each regularly scheduled Board of Directors' meeting. F. Temporary Limits. The Board of Directors of Enron Corp. may from time to time approve temporary limits to encompass certain specific approved positions. These temporary limits adjust the limit violation and loss notification requirements at the commodity group level until the granted limits expire, but they do not change the Aggregate VaR Limit unless the Aggregate VaR Limit is specifically adjusted. G. Limit Changes and Other Policy Amendments. Any modification of limits or other amendments, supplements or updates to this Policy, unless otherwise covered by this Section VI, must be either approved by (i) the Enron Corp. Board of Directors, or (ii) the Enron Corp. President and Chief Risk Officer and ratified by the Enron Corp. Board of Directors at the next regularly scheduled Board of Directors' meeting. VII. Miscellaneous Employee Trading. No employee of any Enron Business Unit may engage in the trading of any Position for the benefit of any party other than an Enron Business Unit (whether for their own account or for the account of any third party) where such Position relates to (i) any financial instrument, security, financial asset or liability which falls within such employee's responsibility at an Enron Business Unit, or (ii) any other commodity not covered by (i) included in any Commodity Group. Employee Review of Policies. As determined by the Chief Risk Officer or his designee(s), an employee of any Enron Business Unit participating in any activity or transaction within the coverage of this Policy shall sign on an annual basis or upon any material revision to this Policy, a statement approved by the Enron Corp. Chief Risk Officer that such employee (i) has read this Policy, (ii) understands this Policy, and (iii) has complied and will comply with this Policy. Compliance with Policy. All Business Units and their employees should comply with this Policy. Dispensation for non-compliance should be sought from the President of Enron Corp., the Enron Corp. a ' Chief Risk Officer or their designee(s). Willful or deliberate non-compliance or falsification of risk metrics or profits and losses referred to by this Policy will be regarded as gross misconduct. Supersedes Prior Policies. This Policy supersedes and replaces all previous Policies of Enron Corp. approved by the Enron Corp. Board of Directors concerning risk management or trading. This Risk Management Policy was approved by the Enron Corp. Board of Directors on October 1, 1996, and as permitted hereunder it has been amended as of the date reflected on the first page hereof VIII. Definitions "Aggregate VaR Limit" shall mean the total Enron Trading Portfolio VaR Limit as specified in Appendix I. Discretionary VaR allocation, and approval of Temporary VaR limits and Interim VaR limits do not E0004403826 EXH006-01282 ============= Page 88 of 208 ============= ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential than or equal to ten percent (10%), the Enron Corp. Chief Risk Officer shall ensure the prompt communication of the occurrence to the Chief Executive Officer of Enron Corp. If the Aggregate VaR Limit is exceeded, the Enron Corp. Chief Risk Officer shall ensure the prompt communication of the occurrence to the President of Enron Corp.. If the Aggregate VaR Limit is exceeded by greater than or equal to ten percent (10%), the Enron Corp. Chief Risk Officer shall ensure the prompt communication of the occurrence to the Chief Executive Officer of Enron Corp.. If the Aggregate VaR Limit is exceeded by greater than or equal to fifteen percent (15%), the Enron Corp. Chief Risk Officer shall ensure the prompt communication of the occurrence to Chairman of the Board and to the Chairman of the Finance Committee of Enron Corp. C. Loss Notifications. The Enron Corp. Chief Risk Officer shall ensure the prompt communication to the Enron Business Unit Office of the Chairman, the President of Enron Corp., or the Chief Executive Officer of Enron Corp., if a Daily Loss in any Commodity Group or Portfolio is equal to or in excess of 100%, 125%, or 150% of the corresponding VaR limit, respectively. The Enron Corp. Chief Risk Officer shall ensure the prompt communication to the President of Enron Corp., the Chief Executive Officer of Enron Corp., or the Chairman of the Board or the Chairman of the Finance Committee of Enron Corp., if the aggregate Daily Loss is equal to or in excess of 50%, 75%, or 100% of the Aggregate VaR Limit, respectively. The Enron Corp. Chief Risk Officer shall ensure the prompt communication to the Enron Business Unit Office of the Chairman, the President of Enron Corp., or the Chief Executive Officer of Enron Corp. if a Cumulative 5-day Loss in any Commodity Group or Portfolio is equal to or in excess of 125%, 150%, or 175% of the corresponding VaR Limit, respectively. The Enron Corp. Chief Risk Officer shall ensure the prompt communication to the President of Enron Corp. or the Chief Executive Officer of Enron Corp., if the aggregate Cumulative 5-day Loss is equal to or in excess of 75% or 100% of the corresponding VaR limit, respectively. D. Reporting to the President of Enron Corp., and to the Chairman, Audit and Finance Committees of the Board of Directors. Aggregate loss notifications and limit violations shall be communicated to the President of Enron Corp., the Chief Executive Officer of Enron Corp., the Chairman of the Board, and the Chairman of the Finance Committee of the Board of Directors of Enron Corp. by the Chief Risk Officer of Enron Corp., as specified in Section IV. of this policy, and as otherwise determined by the Chief Risk Officer. Aggregate loss notifications and a summary of limit violations, along with an analysis of Enron's market risks will be reported to the Audit Committee of the Board of Directors by the Chief Risk Officer of Enron Corp. at all regularly scheduled Audit Committee meetings. V. Operations and Controls A. Segregation of Duties. Enron Business Units shall keep segregated individuals entering into Transactions each of the following activities: Transactions; preparation, reporting of Positions and models, periodic validation and/or financial settlement statements. 3 issuance and verification of Enron Corp. Commodity Group information; review of the of prices from independent market sources; of Transactions; reconciliation of accounts; from the business groups or recording and aggregation of or third-party documentation; reasonableness of prices and monitoring of limits; physical and preparation of financial EOO04403827 M Q EXH006-01283 ============= Page 89 of 208 ============= ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential change the Aggregate VaR Limit unless the Aggregate VaR Limit is specifically adjusted by action of the Board of Directors. "Benchmark Position" shall mean the Position within a Commodity Group into which all other Positions within the same Commodity Group can be converted using price volatility and correlation based conversion factors. Such conversion factors shall be established and authorized by the Enron Corp. Chief Risk Officer. "Commodity Group" shall mean a collection of Positions having sufficient relationship and correlation (as approved by the Enron Corp. President and Enron Corp. Chief Risk Officer) that allow for aggregation into a Benchmark Position. "Cross-Commodity Position" shall mean a Position within a certain Commodity Group that is not explicitly authorized as part of that Commodity Group. (i.e. Coal trading desk might hold a North American Natural Gas position as a hedge, or as a speculative position). The suitability and approval of Cross-Commodity Positions shall be reviewed and approved by the Business Unit Office of the Chairman of the Commodity Group specifically authorized to hold those Positions. Aggregation of risk components and profit or loss for all commodity groups will be reported on a consolidated basis in the Enron Daily Position Report. "Cumulative 5-day Loss" shall mean a sum of daily profit and loss for the last consecutive five business days, either for any Commodity Group or for an aggregate loss in value of the trading portfolio. Upon occurrence of a Cumulative 5-day Loss limit notification or a Daily Loss limit notification reported in accordance with Section IV.C. of this policy, the Cumulative 5-day Loss calculation is reset. Daily profit and loss will be calculated using the mark-to-market method on a net present value basis, exclusive of non-trading type of originations and exclusive of prudence. Q "Daily Loss" shall mean the loss in value of any Commodity Group or a loss in value of the trading "' portfolio in aggregate on a daily basis. The Daily Loss will be calculated using the mark-to-market method on a net present value basis, exclusive of non-trading type of originations and exclusive of prudence. "Daily Position Report" shall mean a hard or soft copy report including, but not limited to the following, for each major commodity and price curve traded: Commodity Group Net Open Position, Maturity/Gap Position, profit or loss, potential exposure (VaR), and for all positions regardless of financial accounting treatment: 1. The amounts by which the mark-to-market value of the portfolio can change for small (or unit) ~-. changes in all "market parameters", as a term structure (i.e. by time "bucket") and on a net aggregate y basis. 2. For portfolios with option or non-linear risks, the concentration of sensitivities (delta, gamma, vega) according to expiry date and strike price ("strike concentration"). 3. The VaR for the portfolios, according to Enron's approved methodology. The Daily Position Report shall also report the aggregated risk components (positions, VaR, and profit or loss) for approved Commodity Groups on a consolidated basis, without regard to which Enron Business Unit transacted, as discussed in Section VI.B. of this policy. cs~ E0004403828 EXH006-01284 ============= Page 90 of 208 ============= ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential "Discretionary VaR" shall mean the VaR capital specified in Appendix I approved by the Enron Board of Directors that may be periodically allocated by the Enron Corp. President and Enron Corp. Chief Risk Officer to permanent Commodity Groups listed in Appendix I as provided in Section VI. E. of this policy. "Enron Business Unit(s)" shall mean Enron Corp. and any entity controlled, directly or indirectly, by Enron Corp., (including internal groups created for the purposes of trading, or aligned according to the commodities set out in the Appendices), or any entity directly or indirectly under common control of Enron Corp. For this purpose, the criteria for establishing "control" of any entity include but are not limited to, ownership of more than fifty percent (50%) of the voting power of such entity. "Market Parameters" shall mean market spot and forward prices/curves, market spot and forward volatility, correlation (where appropriate), market interest rates, spot foreign exchange rates (where appropriate). "Maturity/Gap Risk" shall mean the risks related to non-parallel changes of forward prices or interest rates. For purposes of this Policy, the Maturity/Gap Risk related to commodity Positions with forward prices shall be measured using a rolling total of the net open position per period, which may be modified based on the market structure of the underlying Position and pending authorization of the Chief Risk Officer of Enron Corp. "Net Open Position" shall mean the aggregate of the open Positions in a Commodity Group on a Benchmark Position equivalent basis. `' "Position" shall mean, collectively, the risk components (including, but not limited to, price risk, basis "` risk, index risk, credit risk and liquidity risk) of all products (commodities, financial instruments, securities, equities, financial assets or liabilities) which have been authorized for trading in the Enron Corp. Risk Management Policy, any of the Enron Corp. Policies or approved for trading through any amendments to this Policy. Q "Transactions" shall mean, collectively, forwards, futures, swaps, options, or any combination of these instruments and any other derivative or cash market instruments creating a Position. "Value-at-Risk" (VaR) shall mean the Potential Exposure related to a Commodity Group or Position representing the potential change in value resulting from changes including: market prices, interest rates, currency rates, counterparty credit condition, liquidity, funding and settlement risk, among others. VaR shall be calculated using the Enron Corp. adopted VaR methodology at the 95% confidence interval using a 1-day time horizon. Any recalibration or modification of the VaR methodology or parameters that take into account observed or anticipated changes in market factors or developments in VaR technologies must be approved by the Enron Corp. Chief Risk Officer or his designee(s). 4 E0004403829 EXH006-01285 ============= Page 91 of 208 ============= ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential APPENDIX I Permanent Trading Limits (page 1 of 2): Commodity Group Benchmark Position Net Open Position Limit - Maturity/ Gap Risk Limit VaR Limit TRADING PORTFOLIO $125 MM Discretionary VaR $ 25 MM North American Electricity North American Electricity Equivalents 90 Twh 25 Twh (Rolling 12-Month) $ 54 MM North American Natural Gas NYMEX Henry Hub Equivalents 500 Bcf 200 Bcf (Rolling 3-Month) $ 61 MM Southern Cone Natural Gas Southern Cone Natural Gas Equivalents 35 Bcf 20 Bcf (Rolling 12-Month) $ 2 MM Southern Cone Electricity Southern Cone Electricity Equivalents 3.5 Twh 3.5 Twh (Rolling 12-Month) $ 5 MM Metals & Minerals LME Copper Futures Equivalents Metric Tonnes (MT) 375,000 MT 600,000 MT (Rolling 12-Month) $ 8 MM European Natural Gas UK Northern Balancing Point Gas Equivalents 200 Bcf 90 Bcf (Rolling 12-Month) $ 10 MM UK Electricity UK Electricity Equivalents 60 Twh 15 Twh (Rolling 12-Month) $ 30 MM Continental Electricity Continental Electricity Equivalents 20 Twh 20 Twh (Rolling 12-Month) $ 4 MM Nordic Electricity Nordic Electricity Equivalents 20 Twh 20 Twh (Rolling 12-Month) $ 5 MM Australian Electricity Australian Electricity Equivalents 3 Twh 6 Twh (Rolling 12-Month) $ 3 MM Japanese Electricity Japanese Electricity Equivalents 4 Twh 4 Twh (Rolling 12-Month) $ 4 MM Credit Trading Market Value in USD $750,000 $50,000 / by total, / b individual N/A $ 5 MM Global Products NYMEX WTI Equivalents 18 (EOL Crude MM Bbl - 2 Mil Bbl) 19 Mil Bbl (Rolling 12-Month) (EOL Crude - 3 Mil Bbl) $ 15 MM EOL Crude - $ 3 MM LNG LNG Equivalents 9 Bcf 12 Bcf (Rolling 12-Month) $ 5 MM Weather Derivatives EOL Equivalent Contracts 40,000 EOL Contracts N/A $ 4.5 MM Coal . U.S. Eastern Coal Equivalents Metric Tonnes (MT) 30 MM MT 30 MM MT (Rolling 12-Month) $ 7 Vessel Tradin MM g - $ 2 MM Freight Markets Trading Full Truckload (FTL) Equivalent Units 83,000 FTL Units 105,000 FTL Units (Rolling 12-Month) $ 2 MM Emissions S02 Credits 1,000,000 Credits 1,000,000 Credits (Rolling 12-Month) $ 3 MM Global Risk Markets Trading (1) North American Electricity Equivalents 300,000 Mwh N/A $ 3 MM (1) (1) Lifetime Capital at Risk (P95) Limit $ 30 MM Notional Maximum Loss (P95) Limit $120 MM E0004403830 5A-9 EXH006-01286 ============= Page 92 of 208 ============= t~ j 7 o r ] (. ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential APPENDIX I Permanent Trading Limits (page 2 of 2): Commodity Group Benchmark Position " Net Open Position Limit Maturity / Gap Risk Limit VaR Limit Financial Instruments $ 5 MM Interest Rate USD Notional Equivalent @ AA Libor $250,000 / by N/A - Foreign Currency USD Spot Rate Notional Equivalents $150 MM N/A - Equity Trading Market Value in USD $200 MM N/A $ 10 MM Convertible Arbitrage Market Value in USD $150 MM N/A $ 2 MM Meats Trading Futures Contract Equivalents 750 Contracts N/A $ 0.5 MM Grain Trading Futures Contract Equivalents 750 Contracts N/A $ 0.5 MM Soft Commodities Futures Contract Equivalents 4,000 Contracts N/A $ 2 MM Pulp & Paper Pulpex NBSK (Pulp) Futures Equivalents Metric Tonnes (MT) 0.5 MM MT 500,000 MT (Rolling 12-Month) $ 5 MM Lumber Board Feet (BF) 44 MM BF 44 MM BF $ 0.5 MM Steel Hot Rolled Coil Steel Equivalents Metric Tonnes (MT) 1.5 MM MT 2.5 MM MT $ 5 MM Broadband N/A N/A N/A $ 2 MM Advertising Swaps New York Al 849 PR Cost Per Point (CPP) 28,000 Cost Per Point 56,000 Cost Per Point $ 2 MM MERCHANT PORTFOLIO Market Value in USD N/A N/A N/A CAPITAL PORTFOLIO $ 10: MM Enron Companies Market Value in USD $300 MM N/A - Other S&P Equivalents $200 MM N/A - E0004403831 5A-10 (H006-01287 ============= Page 93 of 208 ============= GEE UZ L-3 ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential APPENDIX II INTERIM POLICY TRADING LIMITS: Commodity Group " ` Benehii ark Position _ Net Open Position L-iniit' Maturity /,Gap Risk Limit VAR Limit Expiration Limit DRAM Chips 128M SDRAM PC 100 Equiv. Chips 2 MM Benchmark Equiv. Chips 1.5 MM Benchmark Equiv. Chips $1 MM 11/15/01 DISCRETIONARY POLICY TRADING LIMITS: Discretionary VaR is allocated among Commodity Groups frequently in accordance with the Policy and limits in Appendix I. E0004403832 5A-11 -XH006-01288 ============= Page 94 of 208 ============= Approved: Amended: ..':r Amended: Amended: Amended: Amended: ENRON CORP. Proprietary and Confidential RISK MANAGEMENT POLICY Approved by Enron Corp. Board of Directors October 1, 1996 December 8, 1998 May 3, 1999 August 10, 1999 October 20, 1999 December 14, 1999 Amended: February 7, 2000 Amended: May 2, 2000 Amended: August 8, 2000 Amended: October 7, 2000 Amended: December 12, 2000 Amended: February 13, 2001 Amended: May 1.2001 I. General Authorization Enron Corp. is authorized to execute Transactions and manage these Transactions within certain authorized Portfolios in support of its businesses. All Transactions covered by this policy must be conducted in compliance with all Enron Corp. policies, as each may be amended, supplemented or restated from time to time (collectively the "Enron Corp. Policies"). II. Portfolios Designated Enron Business Units are authorized to enter into Transactions which create Positions for Enron Corp. and its affiliates, other Enron Business Units or their respective customers within the authorized Commodity Groups and limits, specified in the Appendices. These Positions are managed in the following Portfolios: A. Trading Portfolio - designed to capture and manage risks related to physical delivery of energy and other commodities, to provide related risk management services, to take advantage of market arbitrage opportunities and to manage positions within the approved limits. This portfolio includes commodity transactions, financial instruments and securities transactions. B. Merchant Portfolio - designed to capture and manage merchant investments in public and private companies, including the active management of embedded exposures and to provide greater liquidity for Enron's merchant investment activities, consistent with Enron Corp.'s core competencies within the approved limits. This portfolio includes equity, "equity-like," debt and "debt-like" investments in the public and private sector. ~.'s C. Capital Portfolio - designed to accommodate positions and transactions in Enron's own stock or derivatives thereof which may occur from time to time in the execution of approved structural transactions (for example, stock buy-backs, hedging of stock option programs, etc.). III. Limit Structure `: Generally, Enron Business Units' business activities are subject to a combination of limits. These limits include, but are not limited to: Net Open Position, Maturity/Gap Risk, Potential Exposure (VaR), Regulated Exchange Limits, and Loss Notifications, as appropriate for the type of business activity under consideration. Limits will be applied at the Commodity Group and Portfolio level, as appropriate and monitored daily. Unless specifically allocated to a business unit for a basket of products, these limits are to be applied against Enron's t, ;2 t consolidated position on an individual commodity group basis. E0004403833 N EXH006-01289 ============= Page 95 of 208 ============= `_ ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential A. Net Open Position Limits. Enron Business Units' activities are subject to the Net Open Position limits at the Commodity Group level, as specified in the Appendices. For purposes of monitoring the Net Open Position Limits, all Positions within a Commodity Group shall be aggregated into a reference Benchmark Position assigned to each group. B. Maturity/Gap Risk Limits. Enron Business Units' activities are subject to the Maturity/Gap Risk limits at the Commodity Group level, as specified in the Appendices. For purposes of monitoring the Maturity/Gap Risk Limits, all Positions within a Commodity Group shall be aggregated into a reference Benchmark Position assigned to each group. C. Potential Exposure Limits. Enron Business Units' activities are subject to potential exposure analysis using stress-testing and scenario analysis, as directed by the Enron Corp. Chief Risk Officer, and limits based on Value-at-Risk (VaR), as specified in the Appendices, calculated daily or as appropriate to the business activity under consideration at the Portfolio level and at the Commodity Group level. D. Regulated Exchange Limits. Enron Business Units may be subject to limits imposed by regulated exchanges on which they transact. Enron Business Units shall comply with any such limits imposed on them, as such limits may be modified from time to time. M E. Loss Notifications. Daily Losses and Cumulative 5-day Losses resulting from Enron Business Units' Q activities are subject to the reporting requirements specified in Section IV. C. '~ All Enron Business Units are expected to formulate limits subordinate to limits specified in the Appendices, and such sub-limits should be monitored internally and act as triggers for reference to and action by senior Enron Business Unit management. IV. Limit Violation/Loss Notification Requirements Notwithstanding the other provisions of this Policy, any violation of limits must be reported to the Enron Corp. Chief Risk Officer. This limit violation report should be made to the Chief Risk Officer by the Enron Business unit prior to entering into a Transaction if there is a sufficient reason to believe that a limit violation will occur. Requirements for reporting limit violations and loss notifications, each accompanied by an explanation, as follows: A. Net Open Position Limits; Maturity/Gap Risk Limits. If the limit violation exceeds the applicable limit by greater than or equal to five percent (5%), the Enron Corp. Chief Risk Officer shall ensure the prompt communication of the occurrence to the Enron Business Unit Office of the Chairman and to the President of Enron Corp. If the limit violation exceeds the applicable limit by greater than or equal to ten percent (10%), the Enron Corp. Chief Risk Officer shall ensure the prompt communication of the occurrence to the Chairman Executive Officer of Enron Corp. 11 B. Value-at-Risk Limits. If the VaR for any Commodity Group or Portfolio exceeds the applicable limit by greater than or equal to five percent (5%), the Enron Corp. Chief Risk Officer shall ensure the prompt communication of the occurrence to the Enron Business Unit Office of the Chairman and to the President of Enron Corp. If the VaR for any Commodity Group or Portfolio exceeds the applicable limit by greater U E0004403834 =XH006-01290 ============= Page 96 of 208 ============= ` ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential than or equal to ten percent (10%), the Enron Corp. Chief Risk Officer shall ensure the prompt communication of the occurrence to the Chair Chief Executive Officer of Enron Corp. If the Aggregate VaR Limit is exceeded, the Enron Corp. Chief Risk Officer shall ensure the prompt communication of the occurrence to the President of Enron Corp.. If the Aggregate VaR Limit is exceeded by greater than or equal to ten percent (10%), the Enron Corp. Chief Risk Officer shall ensure the prompt communication of the occurrence to the QiaiRffan-Chief Executive Officer of Enron Corp.. If the Aggregate VaR Limit is exceeded by greater than or equal to fifteen percent (15%), the Enron Corp. Chief Risk Officer shall ensure the prompt communication of the occurrence to Chairman of the Board and to the Chairman of the Finance Committee of Enron Corp. C. Loss Notifications. The Enron Corp. Chief Risk Officer shall ensure the prompt communication to the Enron Business Unit Office of the Chairman, the President of Enron Corp., or theme hief Executive Officer of Enron Corp., if a Daily Loss in any Commodity Group or Portfolio is equal to or in excess of 100%, 125%, or 150% of the corresponding VaR limit, respectively. The Enron Corp. Chief Risk Officer shall ensure the prompt communication to the President of Enron Corp., the Chairman Chief Executive Officer of Enron Corp., or the Chairman of the Board or the Chairman of the Finance Committee of Enron Corp., if the aggregate Daily Loss is equal to or in excess of 50%, 75%, or 100% of the Aggregate VaR Limit, respectively. The Enron Corp. Chief Risk Officer shall ensure the prompt communication to the Enron Business Unit Office of the Chairman, the President of Enron Corp., or the Q~-Chief Executive Officer of Enron `; Corp. if a Cumulative 5-day Loss in any Commodity Group or Portfolio is equal to or in excess of 125%, 150%, or 175% of the corresponding VaR Limit, respectively. The Enron Corp. Chief Risk Officer shall ensure the prompt communication to the President of Enron Corp. or the C haiFakanChief Executive Officer of Enron Corp., if the aggregate Cumulative 5-day Loss is equal to or in excess of 75% or 100% of the corresponding VaR limit, respectively. D. Reporting to the President of Enron Corp., and to the Chairman, Audit and Finance Committees of the Board of Directors. Aggregate loss notifications and limit violations shall be communicated to the President of Enron Corp., the Chief Executive Officer of Enron Corp., the Chairman of Enfen -Corps the Board, and the Chairman of the Finance Committee of the Board of Directors of Enron Corp. by the Chief Risk Officer of Enron Corp., as specified in Section IV. of this policy, and as otherwise determined by the Chief Risk Officer. Aggregate loss notifications and a summary of limit violations, along with an analysis of Enron's market risks will be reported to the Audit Committee of the Board of Directors by the Chief Risk Officer of Enron Corp. at all regularly scheduled Audit Committee meetings. V. Operations and Controls A. Segregation of Duties. Enron Business Units shall keep segregated from the business groups or individuals entering into Transactions each of the following activities: recording and aggregation of Transactions; preparation, issuance and verification of Enron Corp. or third-party documentation; reporting of Positions and Commodity Group information; review of the reasonableness of prices and models, periodic validation of prices from independent market sources; monitoring of limits; physical and/or financial settlement of Transactions; reconciliation of accounts; and preparation of financial statements. I XH006-01291 E0004403835 ============= Page 97 of 208 ============= ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential B. Position Reporting. Designated Enron Business Units shall prepare, distribute and make available data constituting a daily report ("Daily Position Report") including Commodity Group Net Open Position, Maturity/Gap Position, profit or loss, potential exposure (VaR) and any other parameters as may be required by the President or the Chief Risk Officer of Enron Corp. The Daily Position Reports at the Commodity Group level will also report various limits compared to their respective actual amounts and will be signed off by the Commodity Group Manager of the position(s) and the head of the commercial support group responsible for their preparation, before any subsequent trading occurs. For purposes of limit 'monitoring and aggregation of Enron's consolidated trading results, Enron's consolidated Daily Position Report should include the Net Open Position, Maturity/Gap Position, profit or loss, and potential exposure (VaR) for approved Commodity Groups consolidated across the company without regard to which business unit undertook the trading activity. In those instances where limits are granted to a business unit for a basket of commodities, reporting for individual commodity risk books shall be maintained to facilitate aggregation of Enron's actual consolidated commodity specific exposure. Management reporting may separately provide business unit sub-limit monitoring and trading results aggregated according to management lines. The President of Enron Corp. and Enron Corp. Chief Risk Officer shall designate individuals who are authorized to approve the Daily Position Report on behalf of Enron Corp. After approval, a consolidated Daily Position Report shall be distributed to the Chairman, the President, the Chief Accounting Officer, the Chief Risk Officer of Enron Corp. and others as designated by the President or the Chief Risk Officer of Enron Corp. uo C. Stress and Scenario Testing. On a monthly basis, or as markets dictate, designated Enron Business `~ Units shall fonnulate and examine the effects of extreme changes in the market parameters relevant to 10, exposures and positions. Results of these tests should be made available to the Enron Corp. Chief Risk Officer, or his designee(s). D. Valuation. On a monthly basis, or as markets dictate, designated Enron Business Units shall provide evidence of verification of all market parameters used in the calculation of risk metrics and profits and losses. This should be made available to the Enron Corp. Chief Risk Officer, or his designee(s). E. Transaction Approval and Execution. Only those employees designated by the Enron Corp. Chief Risk Officer or his designee(s) will be authorized to enter into Transactions on behalf of Enron. The Chief Risk Officer must also maintain a record of those employees responsible for the individual Commodity Groups (Commodity Group Manager) as specified in the Appendices. Individuals will be assigned as commodity leaders to manage Enron's aggregate position across the company as determined necessary by the Chief Risk Officer. All Transactions must be entered into in compliance with current policies of the Credit Group, Market Risk Management Group, and other relevant groups, as determined by the Enron Corp. Chief Risk Officer. All trades executed on the telephone must be executed on telephones that are recorded electronically. F. Brokerage Accounts. Designated Enron Business Units periodically open trading accounts with clearing brokers to facilitate the conduct of their business. All openings or revisions of trading accounts with a broker or brokers will be reviewed and approved by the Enron Corp. Chief Risk Officer or his designee(s). The Enron Corp. Chief Risk Officer or his designee(s) will also notify the brokers of the names of personnel authorized to trade futures, options or other contracts on regulated exchanges. n EOO04403836 :XH006-01292 ============= Page 98 of 208 ============= ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential VI. Policy Amendment Authority A. Portfolios, Commodity Groups and Positions. Subject to the authorization of the Board of Directors, the Enron Corp. Chairman, the President of Enron Corp. and the Enron Corp. Chief Risk Officer, additional Portfolios may be created and additional Commodity Groups may be added within existing Portfolios, and the related limits will be created or revised accordingly. The President of Enron Corp. and the Enron Corp. Chief Risk Officer can authorize additional Positions within the existing Commodity Groups, provided that such Positions can be aggregated within the limits of a currently authorized Commodity Group. B. Cross-Commodity Position Authorization. If in the ordinary course of its business an Enron Business Unit or trading desk incurs an exposure to an underlying commodity or financial instrument for which it does not have explicit authority to carry, this exposure should be hedged internally with the appropriate Enron desk(s), with appropriate notification to the Chief Risk Officer or his designee(s). Hedge positions should be in instruments that have an observable correlation with the underlying exposure, and should be rebalanced regularly to substantially neutralize the underlying exposure. Upon notification to the Chief Risk Officer or his designee(s), the Enron Business Unit Office of the Chairman who has authority for that commodity group may authorize a specific trader in a different commodity group to take speculative positions with other Enron trading desks in commodities and/or financial instruments other than those which that trader has explicit authority to trade (i.e. the Business Unit Office of the Chairman for North American Natural Gas may authorize a trader in the Coal group to m trade gas with the North American Natural Gas desk). For limit monitoring purposes, these cross- Q commodity positions shall be captured by individual commodity to facilitate aggregation and reporting of Enron's consolidated exposure by commodity in the Daily Position Report (Coal desk's gas position will be aggregated with the North American Natural Gas commodity group.). C. Position Measurement Parameters. Any changes to parameters used in the aggregation and measurement of Positions must be approved by the Enron Corp. Chief Risk Officer or his designee(s). This includes, but is not limited to, the Benchmark Positions, VaR parameters, Maturity/Gap Risk periods, conversion ratios, volatility factors and correlation factors. Any substantive change as determined by the Chief Risk Officer will be communicated to Enron's Board at the next regularly scheduled Board of Directors' meeting. D. Interim Policy for New Commodity Groups. The President of Enron Corp. and the Chief Risk Officer of Enron Corp. may approve positions in new Commodity Group(s) prior to approval in the next meeting of the Enron Corp. Board of Directors, subject to the following criteria: (i) maximum VaR of $1 million, along with corresponding position limits, and (ii) maximum initial term of six (6) months, subject to one extension for an additional term prior to review by the Board of Directors for permanent limits. These interim limits adjust the limit violation and loss notification requirements at the commodity group level until the granted limits expire, but they do not change the Aggregate VaR Limit. Interim limits shall be reported to the Enron Corp. Board of Directors at each regularly scheduled Board of Directors' meeting. x E. Discretionary VaR. The President of Enron Corp. and Chief Risk Officer of Enron Corp. may allocate "Discretionary VaR" to the existing Commodity Groups listed in Appendix I, along with the corresponding adjustments to Net Open Position limits and Maturity/Gap Position limits, under the following guidelines: (i) allocation is limited to 100% of the existing commodity group VaR limit in E0004403837 EXH006-01293 ============= Page 99 of 208 ============= ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential Appendix I, (ii) VaR allocation and corresponding adjustments to position limits adjust the limit violation and loss notification requirements at the commodity group level, (iii) nominal allocations of Discretionary VaR may exceed the amount listed in Appendix I due to portfolio diversification effect, as determined by the Chief Risk Officer or his designee(s),and (iv) term of allocation is determined by the Enron Corp. President and Chief Risk Officer. Discretionary VaR allocations are to be reported to the Enron Corp. Board of Directors at each regularly scheduled Board of Directors' meeting. ti E0004403838 EXH006-01294 ============= Page 100 of 208 ============= ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential F. Temporary Limits. The Board of Directors of Enron Corp. may from time to time approve temporary limits to encompass certain specific approved positions. These-temporary limits adjust the limit violation and loss notification requirements at the commodity group level until the granted limits expire, but they do not change the Aggregate VaR Limit unless the Aggregate VaR Limit is specifically adjusted. G. Limit Changes and Othee supplements or updates to approved by (i) the Enron Officer and ratified by the Directors' meeting. VII. Miscellaneous Policy Amendments. Any modification of limits or other amendments, this Policy, unless otherwise covered by this Section VI, must be either :orp. Board of Directors, or (ii) the Enron Corp. President and Chief Risk Enron Corp. Board of Directors at the next regularly scheduled Board of Employee Trading. No employee of any Enron Business Unit may engage in the trading of any Position for the benefit of any party other than an Enron Business Unit (whether for their own account or for the account of any third party) where such Position relates to (i) any financial instrument, security, financial asset or liability which falls within such employee's responsibility at an Enron Business Unit, or (ii) any other commodity not covered by (i) included in any Commodity Group. Employee Review of Policies. As determined by the Chief Risk Officer or his designee(s), an employee of any Enron Business Unit participating in any activity or transaction within the coverage of this Policy shall sign on an annual basis or upon any material revision to this Policy, a statement approved by the LO Enron Corp. Chief Risk Officer that such employee (i) has read this Policy, (ii) understands this Policy, and (iii) has complied and will comply with this Policy. Compliance with Policy. All Business Units and their employees should comply with this Policy. Dispensation for non-compliance should be sought from the President of Enron Corp., the Enron Corp. Chief Risk Officer or their designee(s). Willful or deliberate non-compliance or falsification of risk metrics or profits and losses referred to by this Policy will be regarded as gross misconduct. Supersedes Prior Policies. This Policy supersedes and replaces all previous Policies of Enron Corp. approved by the Enron Corp. Board of Directors concerning risk management or trading. This Risk Management Policy was approved by the Enron Corp. Board of Directors on October 1, 1996, and as permitted hereunder it has been amended as of the date reflected on the first page hereof. VIII. Definitions 1 "Aggregate VaR Limit" shall mean the total Enron Trading Portfolio VaR Limit as specified in Appendix I. Discretionary VaR allocation, and approval of Temporary VaR limits and Interim VaR limits do not change the Aggregate VaR Limit unless the Aggregate VaR Limit is specifically adjusted by action of the Board of Directors. "Benchmark Position" shall mean the Position within a Commodity Group into which all other Positions within the same Commodity Group can be converted using price volatility and correlation based conversion factors. Such conversion factors shall be established and authorized by the Enron Corp. Chief Risk Officer. E0004403839 EXH006-01295 ============= Page 101 of 208 ============= ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential ! 971, ^i "Commodity Group" shall mean a collection of Positions having sufficient relationship and correlation (as approved by the Enron Corp. President and Enron Corp. Chief Risk Officer) that allow for aggregation into a Benchmark Position. "Cross-Commodity Position" shall mean a Position within a certain Commodity Group that is not explicitly authorized as part of that Commodity Group. (i.e. Coal trading desk might hold a North American Natural Gas position as a hedge, or as a speculative position). The suitability and approval of Cross-Commodity Positions shall be reviewed and approved by the Business Unit Office of the Chairman of the Commodity Group specifically authorized to hold those Positions. Aggregation of risk components and profit or loss for all commodity groups will be reported on a consolidated basis in the Enron Daily Position Report. "Cumulative 5-day Loss" shall mean a sum of daily profit and loss for the last consecutive five business days, either for any Commodity Group or for an aggregate loss in value of the trading portfolio. Upon occurrence of a Cumulative 5-day Loss limit notification or a Daily Loss limit notification reported in accordance with Section IV.C. of this policy, the Cumulative 5-day Loss calculation is reset. Daily profit and loss will be calculated using the mark-to-market method on a net present value basis, exclusive of non-trading type of originations and exclusive of prudence. :`Daily Loss" shall mean the loss in value of any Commodity Group or a loss in value of the trading " portfolio in aggregate on a daily basis. The Daily Loss will be calculated using the mark-to-market method on a net present value basis, exclusive of non-trading type of originations and exclusive of l prudence. "Daily Position Report" shall mean a hard or soft copy report including, but not limited to the following, for each major commodity and price curve traded: Commodity Group Net Open Position, Maturity/Gap Position, profit or loss, potential exposure (VaR), and for all positions regardless of financial accounting treatment: The amounts by which the mark-to-market value of the portfolio can change for small (or unit) changes in all "market parameters", as a term structure (i.e. by time "bucket") and on a net aggregate basis. For portfolios with option or non-linear risks, the concentration of sensitivities (delta, gamma, vega) according to expiry date and strike price ("strike concentration"). The VaR for the portfolios, according to Enron's approved methodology. The Daily Position Report shall also report the aggregated risk components (positions, VaR, and profit or loss) for approved Commodity Groups on a consolidated basis, without regard to which Enron Business Unit transacted, as discussed in Section VI.B. of this policy. "Discretionary VaR" shall mean the VaR capital specified in Appendix I approved by the Enron Board of Directors that may be periodically allocated by the Enron Corp. President and Enron Corp. Chief Risk Officer to permanent Commodity Groups listed in Appendix I as provided in Section VI. E. of this policy. "Enron Business Unit(s)" shall mean Enron Corp. and any entity controlled, directly or indirectly, by Enron Corp., (including internal groups created for the purposes of trading, or aligned according to the commodities set out in the Appendices), or any entity directly or indirectly under common control of Enron Corp. For this purpose, the criteria for establishing "control" of any entity include but are not limited to, ownership of more than fifty percent (50%) of the voting power of such entity. E0004403840 EXH006-01296 ============= Page 102 of 208 ============= ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential "Market Parameters" shall mean market spot and forward prices/curves, market spot and forward volatility, correlation (where appropriate), market interest rates, spot foreign exchange rates (where appropriate). "Maturity/Gap Risk" shall mean the risks related to non-parallel changes of forward prices or interest rates. For purposes of this Policy, the Maturity/Gap Risk related to commodity Positions with forward prices shall be measured using a rolling total of the net open position per period, which may be modified based on the market structure of the underlying Position and pending authorization of the Chief Risk Officer of Enron Corp. "Net Open Position" shall mean the aggregate of the open Positions in a Commodity Group on a Benchmark Position equivalent basis. "Position" shall mean, collectively, the risk components (including, but not limited to, price risk, basis risk, index risk, credit risk and liquidity risk) of all products (commodities, financial instruments, securities, equities, financial assets or liabilities) which have been authorized for trading in the Enron Corp. Risk Management Policy, any of the Enron Corp. Policies or approved for trading through any amendments to this Policy. "Transactions" shall mean, collectively, forwards, futures, swaps, options, or any combination of these instruments and any other derivative or cash market instruments creating a Position. 0 "Value-at-Risk" (VaR) shall mean the Potential Exposure related to a Commodity Group or Position representing the potential change in value resulting from changes including: market prices, interest rates, currency rates, counterparty credit condition, liquidity, funding and settlement risk, among others. VaR shall be calculated using the Enron Corp. adopted VaR methodology at the 95% confidence interval using a 1-day time horizon. Any recalibration or modification of the VaR methodology or parameters that take into account observed or anticipated changes in market factors or developments in VaR technologies must be approved by the Enron Corp. Chief Risk Officer or his designee(s). L E0004403841 =XH006-01297 ============= Page 103 of 208 ============= ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential APPENDIX I Permanent Trading Limits (page 1 of 2): Commodity Group Benchmark Position Net Open Position Limit Maturity / Gap Risk Limit VaR Limit TRADING PORTFOLIO $125 MM Discretionary VaR $25 MM North American Electricity North American Electricity Equivalents 90 Twh 25 Twh (Rolling 12-Month) $54 MM North American Natural Gas NYMEX Henry Hub Equivalents 500 Bcf 200 Bcf (Rolling 3-Month) $61 MM Southern Cone Natural Gas Southern Cone Natural Gas Equivalents 35 Bcf 20 Bcf (Rolling 12-Month) $2 MM Southern Cone Electricity Southern Cone Electricity Equivalents 3.5 Twh 3.5 Twh (Rolling 12-Month) $5 MM Metals & Minerals LME Copper Futures Equivalents. Metric Tonnes (MT) 375,000 MT 600,000 MT (Rolling 12-Month) $8 MM European Natural Gas UK Northern Balancing Point Gas Equivalents 200 Bcf 90 Bcf (Rolling 12-Month) $10_MM UK Electricity (4) UK Electricity Equivalents X60 Twh (-1-) 15 Twh (Rolling 12-Month) $1-O-30 MM (-I-) Continental Electricity Continental Electricity Equivalents 20 Twh 20 Twh (Rolling 12-Month) $4 MM Nordic Electricity Nordic Electricity Equivalents 20 Twh 20 Twh (Rolling 12-Month) $5 MM Australian Electricity Australian Electricity Equivalents 3 Twh 6 Twh (Rolling 12-Month) $3 MM Japanese Electricity Japanese Electricity Equivalents 4 Twh 4 Twh (Rolling 12-Month) $4 MM Credit Trading Market Value in USD $750,00018-/-bp total, $50,000 DVO-1--/-b individual N/A $5 MM Global Products NYMEX WTI Equivalents 18M44-MM Bbl (EOL Crude - 2 Mil Bbl) 19 Mil Bbl (Rolling 12-Month) (EOL Crude - 3 Mil Bbl) $15 MM (EOL Crude - $3 MM) LNG LNG Equivalents 9 Bcf 12 Bcf (Rolling 12-Month) $5 MM Weather Derivatives EOL Equivalent Contracts 40,000 EOL equiv-C_eontracts N/A $4.5 MM Coal & Freigh U.S. Eastern Coal Equivalents Metric Tonnes (MT) 30 MM MT 30 MM MT (Rolling 12-Month) $7 MM (Freight-Vessel Trading- $2 MM) uivalent Units Full Truckload (FTL) E 000 FTL Units 83 105,000 FTL Units (Rolling 12-Month) 2 MM Freight t Markets Trading q , Emissions S02 Credits 1,000,000 Credits 1,000,000 Credits (Rolling 12-Month) $3 MM Global Risk Markets Trading (1) North American Electricity Equivalents 300.0 00 Mwh N/A 3 MM I (1) See Temporary Limits- Appendix (I) Lifetime Capital at Risk (P95) Limit $ 30 MM E0004403842 Notional Maximum Loss (P95) Limit $120 MM 5A-21 EXH006-01298 ============= Page 104 of 208 ============= ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential APPENDIX I Permanent Trading Limits (page 2 of 2): Commodity Group Benchmark Position Net Open Position Limit Maturity / Gap Risk Limit VaR Limit Financial Instruments $5 MM Interest Rate USD Notional Equivalent @ AA Libor $250,000 / by N/A - Foreign Current USD Spot Rate Notional Equivalents $150 MM N/A - Equity Trading Market Value in USD $200 MM N/A $10 MM Convertible Arbitrage Market Value in USD $150 MM N/A $2 MM Meats Trading Futures Contract Equivalents 750 Contracts N/A $0.5 MM Grain Trading Futures Contract Equivalents 750 Contracts N/A $0.5 MM Soft Commodities Futures Contract Equivalents 4,000 Contracts N/A $2 MM Pulp & Paper Pulpex NBSK (Pulp) Futures Equiv ?tents MetdTanneLrMl. -500j00)-0,5-MM MT 500,000 MT (Rolling 12-Month) $5 MM Lumber Board Feet (BF) 44 MM BF 44 MM BF $dt5.1YIl\g5003000 Steel Hot Rolled Coil Steel Equivalents Metric Tonnes (MT) 1.5 MM MT 2.5 MM MT $5 MM Broadband N/A N/A N/A $2 MM Advertising Swaps New York A1849 PR Cost Per Point (CPP) 2~0-0-254-Cost Per Point 56 0O.0_4- & Cost Per Point $2 MM (-Nor-th-A-merienn-igleetr-leity and (sub-limit) MERCHANT PORTFOLIO Market Value in USD N/A N/A N/A CAPITAL PORTFOLIO $ 10 MM Enron Companies Market Value in USD $300 MM N/A - Other S&P Equivalents $200 MM N/A - E0004403843 5A-22 EXH006-01299 ============= Page 105 of 208 ============= ENRON CORP. RISK MANAGEMENT POLICY Proprietary and Confidential APPENDIX II INTERIM POLICY TRADING LIMITS: Commodity Croup Benehmar~C Position; lef Open ~aงihon Limit Mature / Gap_ rsic Limit VaR I niit Fxpiiraizori . 'uii , DRAM Chips 128M SDRAM PC100 Equiv. Chips 2 MM Benchmark Equiv. Chips 1.5 MM Benchmark Equiv. Chips $1 MM X11/15/01 DISCRETIONARY POLICY TRADING LIMITS: Discretionary VaR is allocated among Commodity Groups frequently in accordance with the Policy and limits in Appendix I. E0004403844 5A-23 EXH006-01300 ============= Page 106 of 208 ============= Agenda Item 5b EXH006-01301 ============= Page 107 of 208 ============= 77 Transaction Approval Process E0004403846 5B- 1 EXH006-01302 ============= Page 108 of 208 ============= Summary of Significant Changes • In an effort to reduce Board approval of revisions to the Transaction Approval Process due solely to personnel or organizational changes, a modification to grant approval authority to holders of certain executive positions is recommended. The Chief Risk Officer will maintain an incumbency certificate with the holders of such executive positions. • Added approval authority for certain business unit Chief Operating Officers • All remaining changes are non-substantive, but provide further clarification to the Transaction Approval Process. E0004403847 5B-2 EXH006-01303 ============= Page 109 of 208 ============= w,_7 Transaction Approval Process REVISED 511/01 Request For: RISK ADJUSTED CAPITAL or PREPAID OR EMBEDDED DEBT FINANCING (5) or DIVESTITURE (>$2,500,000) (1) TRANSACTION size $MM (4) Approving Unit ASSESSMENT < 5 BUSINESS GROUP CONTROL AHEAD • Transaction CONFORMING < 20 (2) WHOLESALE OOC Review and %" < 75 t21 ENE-OOC Valuation • Credit and 75+ ENE-BOD Market Risk ~. Assessment • Pricing • RAC RECOMMEND- ATION < 25 (2) ENE-OOC NON T transaction a. roru 1 CONFORMING 25+(3) ENE-BOD ongoing portfolio review and revaluation ?; (1) Except NON-CONFORMING transactions and venture capital transactions not authorized by the Company's charter, for both of which the limit is $500,000. (2) Deal Approval Sheets approved by the WHOLESALE OOC and ENE-OOC will be distributed to the ENE-BOD (Finance Committee) after approval. (3) Transactions deemed NON-CONFORMING only due to RAC RECOMMENDATION being "Returns Below Capital Price" will NOT require ENE-BOD approval if < $75MM. (4) Merchant asset DIVESTITURES exceeding $500MM and strategic asset DIVESTITURES exceeding $200MM require ENE-BOD approval. (5) Transactions meeting certain criteria may be approved under the E-DASH process of the Transaction Approval Process, see page 5B-5. DEFINED TERMS IN ITALICS 5B-3 E0004403848 EXH006-01304 ============= Page 110 of 208 ============= Approval Process for Originated Contractual Transactions I Commodity VaR Position Risk ORIGINATED :i TRANSACTION <5 Non-standard Capital $ documentation Expenditure RISK RAC TRANSACTION (if any) ADJUSTED s APPROVAL . OR CAPITAL PROCESS Reserve `. Deal results in 4 ~4 Credit Risk violation of existing limits a ~! PV8 Savings " ~ Guarantee 71 (or equivalent) E0004403849 5B-4 EXH006-01305 ============= Page 111 of 208 ============= E-DASH Process "' PREPAID OR EMBEDDED DEBT FINANCING <= $5MM <= $10MM <= $15MM <= $20MM <= $25MM ! >$25MM i j AAA-/Aaa3 i <= 7 years <= 7 years <= 5 years <= 5 years <= 5 years AA-/Aa3 <= 6 years <= 5 years <= 4 years <= 3 years A-/A3 <= 5 years <= 3 years <= 2 years I BBB+/Baal <= 4 years <= 2 years BBB/Baa2 <= 3 years I BBB-/Baa3 <= 1 year BB-/Ba3 <= 6 months B+/B1 or lower or unrated <= 3 months REVISED 5/1101 I TRANSACTION '' APPROVAL PROCESS Example Transactions Include: • Prepays • Tilted swaps or other transactions where debt financing of a counterparty is embedded in a trading I risk management transaction MApproval to be documented in an Expedited DASH ("E-DASH") and approved by EGF, RAC, and BUSINESS GROUP HEADS only. (2) In the case of split-rated entities, the lowest applicable rating level shall apply (e.g., an A+/A2 counterparty is classified as A-/A3 or higher and a BBB-/Ba2 counterparty is classified as BB/Ba2 or higher) 5B-5 E0004403850 EXH006-01306 ============= Page 112 of 208 ============= Approval Authority REVISED 511/01 CONFORMING NON-CONFORMING LIMIT LIMIT /ENE-BOD 75+ 25+ Enron Corp. Board of Directors (Executive Committee between Board Meetings) ENE-OOC < 75 < 25 Enron Corp. Office of the Chairman WHOLESALE < 20 N/A Chairman & CEO OOC President & COO BUSINESS, < 5 N/A Enron Americas President & CEO GROUP COO HEADS ................................................................................................................ Enron Europe ............................................................................................................... President & CEO (WHOLESALE) ........................................... . COO ............................................................................. Enron Global Markets President & CEO ........................................................................................................................... COO ............................................................................................................... Enron Industrial Markets President & CEO ....................................................................... COO ............................................................................................................... Enron Global Assets President & CEO COO BUSINESS < 5 N/A Enron Energy Services Chairman & CEO GROUP ..................................................................................................................................... COO .............................................................................................................. HEADS Enron Broadband Services CEO (OTHER) President & COO . Enron Global Finance CFO Enron Transportation & Services ........... . ........ . ....... . ....... . ... . . . ................. . . . . . . Chairman & CEO . . . . .......... . . . . . . . . . . . . . . . . . . " . . . . . . ............. . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... . .... . ... Enron Xcelerator Chaiman & CEO r _ The ENE-OOC has authority to suspend or revoke approval privileges. 5B-6 E0004403851 EXH006-01307 ============= Page 113 of 208 ============= Incumbency Certificate REVISED 511101 CONFORMING NON-CONFORMING LIMIT LIMIT I ENE-BOD 75+ 25+ Enron Corp. Board of Directors (Executive Committee between Board Meetings) ENE-OOC < 75 < 25 Ken Lay, Jeff Skilling - Enron Corp. Office of the Chairman WHOLESALE < 20 NIA Mark Frevert, Chairman & CEO OOC Greg Whalley, President & COO BUSINESS < 5 NIA Enron Americas John Lavorato, President & CEO GROUP .. . .. . . . .. ... Louise Kitchen, COO ........... . . . . . . ............ . . . . . . . . ................. . . . . . . . . . . . . . . . . .. . . . . . . . . .. . . . .. . . ........ - ... .............. . .. ................ HEADS ....... . .. . ................ . . . . . . . .. . . . . . . . . . . . . . . . . .. . . ........ .. . ............ . .. Enron Europe . . . . . ... . . . . . John Sherriff, President & CEO (WHOLESALE) ................................................................................................. Michael Brown, COO ..................................................................................................................................................... Enron Global Markets Mike McConnell, President & CEO Jeff Shankman, COO .......... . ..................... . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . .. . . .. . . . .......... Enron Industrial Markets . . . . . .. . . . . . . ............................. . . . . . . . . . . . . . . . . . . . . . . .......... - .......................... -11 .. ................... . ............ . .......... Jeff McMahon, President & CEO ........... ...................... ._._........... ............ ......._Ray...Bowen,..COO............................................... ................... Enron Global Assets Rebecca McDonald, President & CEO Jim Hughes, COO BUSINESS < 5 N/A _ Enron Energy Services Dave Delainey, Chairman & CEO GROUP .............................. . . . . . . . . . .. . .. . .. .. . . . . . .. . . . .......... . .............. . . . . . . . . ....................... . .... Janet Dietrich, COO . . . . . .. . . . .. . . . . .. . . . ........... - .................. . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................ . . . . . . . . . . . . . . . . . ................ HEADS Enron Broadband Services Ken Rice, CEO (OTHER) Kevin Hannon, President & COO .............................................---....-- ..................................------............- Enron Global Finance ....................................... ...... .........Andy..Fastow,...CFO.................. ............................................ Enron Transportation & Services . .... ..... Stan Horton, Chairman & CEO . ...... .. .. . .... . . .... .................................................................... ............... ............. ...... Enron Xcelerator ....... .. .... ......... .... ....... .. ... ..... . ... Lou Pai Chairman & CEO The Chief Risk Officer maintains incumbency certificate with approval authority. 5B-7 E0004403852 =XH006-01308 ============= Page 114 of 208 ============= Definitions REVISED 5/1/01 CONFORMING • Routine, non-budgeted and within the general business lines of Enron • Made in an industry where Enron has established expertise • Made in a country where Enron has established a local presence and is currently conducting business • RAC will determine if CONFORMING DIVESTITURES Disposal of assets (including securities) NON-CONFORMING Outside the general business lines of Enron or in an industry where Enron has little or no expertise • Made in a country where Enron has no local expertise or where the overall exposure to the country is excessive • Made to an entity or within an industry that would result in excessive exposure to that entity or industry • Deemed NON-CONFORMING if the Deal Approval Sheet indicates RAC RECOMMENDATION of "Returns Below Capital Price" or "Do Not Proceed" _ - • RAC will determine if NON-CONFORMING PREPAID OR • Maximum exposure.to Enron or any affiliate as a result of a prepaid physical or derivative trading / risk EMBEDDED management transaction, a tilted swap or other transaction where debt financing of a counterparty is DEBT FINANCING ' embedded in a trading / risk management transaction RAC Risk Assessment and Control group at Enron • Chief Risk Officer, responsible for RAC activities RAC RAC's overall recommendation on a TRANSACTION, summarized in one of the following: RECOMMEND- ATION - Proceed with Transaction - Returns Below Capital Price - Do Not Proceed 5B-8 E0004403853 EXH006-01309 ============= Page 115 of 208 ============= _' LA Definitions REVISED 511101 • The aggregation of exposure in a transaction that results from: RISK ADJUSTED - Capital Expenditure CAPITAL * cash outflow or commitment to make a cash outflow (examples include any form of debt or equity financing and prepaid physical or derivative trading I risk management transactions) * providing, directly or indirectly, a guarantee of obligations of unaffiliated third parties or of NON- CONFORMING obligations the maximum exposure to Enron or any affiliates as a result of a tilted swap or other transaction where debt financing of a counterparty is embedded in a trading I risk management transaction * a commodity or financial position that results in an exposure outside of Board approved limits - Commodity positions Credit - Guaranties Such exposure translated to an equivalent amount of capital • RAC will determine the components and total amount of RISK ADJUSTED CAPITAL TRANSACTION € RISK ADJUSTED CAPITAL / DIVESTITURE / PREPAID OR EMBEDDED DEBT FINANCING Exposure reflected net to Enron, including funding vehicle exposure 5B-9 EOO04403854 EXH006-01310 ============= Page 116 of 208 ============= 9 Ti Agenda Item 5(b) TRANSACTION APPROVAL PROCESS (Suggested Form of Resolutions) WHEREAS, the Board of Directors of the Company approved resolutions on October 12, 1998 adopting the Enron Corp. Transaction Approval Process (the "Transaction Approval Process") which provides for (i) a process for review and approval of Capital Expenditures (as defined in the revised policy attached to these minutes) and (ii) a process for prior transactions involving Capital Expenditures to be reviewed for performance and results; and WHEREAS, the Board of Directors of the Company approved amendments to the Transaction Approval Process at meetings held on February 8, 1999, August 10, 1999, February 7t and 8th, 2000, May 2, 2000, October 7, 2000, December 12, 2000 and February 13, 2001; and WHEREAS, it would be in the best interest of the Company to further amend the Transaction Approval Process in order to: (1) better account for and reflect changes in approval authority with respect to Business Group Heads and changes in the organizational structure of Enron Corp.; and (2) make such amendments necessary to further clarify the Transaction Approval Process; =i NOW THEREFORE BE IT RESOLVED, that the Company revise the o Transaction Approval Process to that attached to these minutes and as set forth in m these resolutions; ~' RESOLVED FURTHER, that the revised Transaction Approval Process is adopted and approved, that a copy of the revised policy be attached to the minutes as Exhibit A, and that the persons, officers and Approving Units identified therein shall perform the responsibilities as specified; for the purposes of this policy a certification by the President and Chief Executive Officer, the Chief Risk Officer (or his or her designee), the Chief Financial Officer, the Treasurer, any Managing Director or any Vice President to the effect that this policy has been complied with in connection with any transaction involving Capital Expenditures shall be conclusive evidence of compliance and may be relied upon by all persons interested in or participating in such transaction, including (without limitation) the officers signing transactional documents on behalf of the Company and attorneys issuing legal opinions with respect to the transaction; RESOLVED FURTHER, that the revised Transaction Approval Process shall not apply to the approval process for guarantees except as to those guaranteeing the obligations of unaffiliated third parties. The approval process for all other guarantees shall continue as described in the Company's existing "Policy for Approval of Guarantees, Letters of Credit, Letters of Indemnity, and Other Support Arrangements , and shall be reviewed by the Finance Group and the Risk Assessment and Control Group; E0004403855 EXH006-01311 ============= Page 117 of 208 ============= j S EXH006-01312 RESOLVED FURTHER, that the Chairman of the Board , the President and Chief Executive Officer, the Chief Risk Officer, the Chief Financial Officer, the Treasurer, any Managing Director, any Vice President of the Company or any other person authorized by the Board to act on behalf of the Company be, and each of them hereby is, authorized and empowered to negotiate, enter into, execute, and deliver on behalf of the Company any agreements and documentation in connection with any transaction involving Capital Expenditures which has been approved in accordance with the revised Transaction Approval Process and as the officers executing such agreements shall approve, such approval to be conclusively evidenced by such execution; and RESOLVED FURTHER, that all actions heretofore taken by the Chairman of the Board, the President and Chief Executive Officer, the Vice Chairman, the Chief Risk Officer, the Chief Financial Officer, the Treasurer, any Managing Director or any Vice President, in the name and on behalf of the Company, related to or in connection with transactions of the type contemplated by the new review process attached to these minutes but which originated prior to these resolutions, including, without limitation, the execution and delivery of any instruments or other documents as any such officer shall have deemed necessary, proper, or advisable, are hereby adopted, ratified, confirmed, and approved in all respects. ฐQ LO E0004403856 ============= Page 118 of 208 ============= m 0 Agenda Item 5c 0 w 0 cn v ============= Page 119 of 208 ============= AGENDA ITEM 5(c) (SUGGESTED FORM OF RESOLUTIONS) RESOLVED, that in connection with the business of the Company and the formation, capitalization, and business of Enron Finance Partners, LLC, a Delaware limited liability company ("EFP") and a minority interest financing vehicle, the Company be, and hereby is, authorized to cause the creation of a new series of preferred stock of the Company (the "Preferred Stock") in an aggregate authorized amount of $1 billion and in accordance with the terms set forth on Exhibit A hereto and such other terms as any Authorized Officer (as hereafter defined) of the Company shall approve; RESOLVED FURTHER, that the Statement of Resolutions Establishing a Series of Preferred Stock of the Company, in the form of Exhibit B hereto ("Statement of Resolutions"), be, and it hereby is, authorized and approved, and any Authorized Officer (as hereafter defined) of the Company is hereby authorized, empowered, and directed to cause the Statement of Resolutions to be filed with the State '. of Oregon, setting forth the rights and preferences of the Preferred Stock; RESOLVED FURTHER, that in consideration of and against payment to the Company of the "Issue Price" as referenced on Exhibit A hereto in the form of cash, promissory notes, and/or other securities of the Company, the Company issue and sell to Enron Asset Holdings, LLC, a Delaware limited liability company ("EAH") and an indirect subsidiary of EFP, the number of shares of the Preferred Stock consistent with the terms set forth on Exhibit A and Exhibit B hereto; and the proper officers of the Company be, and each of them hereby is, authorized, empowered, and directed to issue in the name of EAH, and in accordance with the terms set forth on Exhibit A and Exhibit B hereto, one or more certificates representing such stock, and to deliver such certificate or certificates to EAH upon delivery to the Company of the consideration for which such stock is to be issued; and that such shares, when so issued and delivered, shall be fully paid and nonassessable shares; n E0004403858 EXH006-01314 ============= Page 120 of 208 ============= N: 3 RESOLVED FURTHER, that the Preferred Stock be represented by certificates in the form of a certificate approved by the Board of Directors of the Company and hereafter attached to these resolutions; x [RESOLVED FURTHER, that shares of common stock, without par value per share, of the Company P, ("Common Stock") are hereby appropriated, reserved, and irrevocably set aside for the purpose of enabling the holders of the Preferred Stock to convert same in accordance with the terms and provisions of the Company's Articles of l Incorporation and the Statement of Resolutions, and upon conversion and delivery of the appropriate instrument to the Company in the form for conversion, the Company shall forthwith cause to be issued and delivered shares of Common Stock in conversion of same, and such shares when issued and delivered shall be fully paid and non-assessable shares;] [For the convertibility feature; To confirm we have the capacity in Enron's current authorized common stock and want to reserve shares for this purpose.] RESOLVED FURTHER, that the formation and N capitalization of a new minority interest financing vehicle ("Financing Vehicle") by the Company and one or more controlled affiliates of the Company (to be identified by any Authorized Officer (as hereafter defined) of the Company), be, and hereby is, authorized, approved, ratified, and confirmed; RESOLVED FURTHER, that in connection with the formation and capitalization of the Financing Vehicle, the Company be, and hereby is, authorized to cause the formation and capitalization of two direct or indirect subsidiaries of the Financing Vehicle, and such formation and capitalization be, and hereby is, authorized, approved, ratified, and confirmed; RESOLVED FURTHER, that in addition to an initial $1,000 cash capital contribution by the Company to Financing Vehicle in consideration of its admission as a member of Financing Vehicle, which is hereby authorized, approved, ratified, and confirmed, the Company be, and it hereby is, authorized to cause a further capital contribution to Financing Vehicle by executing an Option Agreement ("Option Agreement"), between the Company and Financing Vehicle, E0004403859 EXH006-01315 ============= Page 121 of 208 ============= granting Financing Vehicle an exclusive and irrevocable option through May 31, 2011 to purchase all issued and outstanding shares of common stock, $3.75 par value per share (the "Shares"), of Portland General Electric Company, an Oregon corporation ("PGE") and an affiliate of the Company, the exercise of which is conditioned upon (i) termination of that certain Stock Purchase Agreement, dated November 5, 1999, between the Company and Sierra Pacific Resources, a Nevada corporation, providing for the sale of common stock of PGE, and (ii) the receipt or satisfaction of any and all governmental and regulatory approvals (or waiting periods) required for the exercise of the option and the transfer or assignment of the Shares, as the case may be; and the execution, delivery, and performance of such Option Agreement and contribution be, and hereby are, authorized, approved, ratified, and confirmed; RESOLVED FURTHER, that in connection with the execution and delivery of the Option Agreement, Financing Vehicle will assume approximately $1.9 billion of debt of the Company (the "Enron Debt Obligations"), which debt will be assumed pursuant to an assumption agreement (the "' "Assumption Agreement") between the Company and Financing Vehicle, and such assumption by Financing Vehicle of the Enron Debt Obligations and the execution and delivery of the Assumption Agreement be, and hereby are, authorized, approved, ratified, and confirmed; RESOLVED FURTHER, that upon assumption of the Enron Debt Obligations by Financing Vehicle, . a subsidiary of Financing Vehicle will assume the Enron Debt Obligations pursuant to a supplemental assumption agreement (the "Supplemental Assumption Agreement"), and such assumption by such Financing Vehicle subsidiary and the execution and delivery of the Supplemental Assumption Agreement be, and hereby are, authorized, approved, ratified, and confirmed; RESOLVED FURTHER, that as a result of the Assumption Agreement and the Supplemental Assumption Agreement, the Company and the Financing Vehicle subsidiary will not be released from the Enron Debt E0004403860 EXH006-01316 ============= Page 122 of 208 ============= Obligations, but Financing Vehicle will be released from the 117 Enron Debt Obligations; RESOLVED FURTHER, that in order to provide financing and liquidity for the Company and its businesses, the Company is hereby authorized, in its own capacity and in its capacity as any direct or indirect managing or other member of Financing Vehicle, to arrange, participate in, and consummate a financing for Financing Vehicle with up to $500 million in proceeds from one or more third parties and, in connection therewith, to: (a) cause Financing Vehicle to loan funds to one or more third parties or to the Company or to affiliates of the Company, or receive as a loan, contribution, or investment funds by one or more third parties, the Company, or affiliates of the Company, in connection with the business of Financing Vehicle and the Company; (b) seek the participation or investment by any `~ affiliated or unaffiliated investors, and cause the issuance and/or sale of equity or debt securities or membership interests in Financing Vehicle in such amounts and at such times as determined by the Company, which issuances may be to an affiliate of the Company or to an investor or investor group not affiliated with the Company; (c) engage any financial, legal, or other advisors to implement financings, loans, and issuances of equity or debt securities or membership interests for Financing Vehicle, the Company, or their respective affiliates; and (d) form and capitalize all entities necessary or appropriate to effectuate the foregoing transactions; E0004403861 EXH006-01317 ============= Page 123 of 208 ============= RESOLVED FURTHER, that the Company hereby authorizes the implementation of all actions necessary or appropriate to accomplish the purposes of the foregoing without limitation, (i) the creation of including resolutions , , entities (including, but not limited to, corporate entities, limited liability companies, branches, and/or partnerships under the laws of the United States, the states thereof, and foreign jurisdictions), (ii) the issuance of or purchase of shares or :.1 other interests by the Company, EFP, EAH, Financing Vehicle, and their respective subsidiaries and affiliates, (iii) contributions of capital to EFP, EAH, Financing Vehicle, and to subsidiaries and affiliates of EFP, EAH, Financing Vehicle, and the Company, (iv) transfers by the Company, EFP, EAH, Financing Vehicle, or their respective subsidiaries or affiliates of receivables or other assets (including, without limitation, third party, Company, EFP, EAH, Financing Vehicle, '' or their respective subsidiaries' or affiliates' notes or other financial obligations), (v) making guarantees and indemnifications by the Company, EFP, EAH, Financing Vehicle, or their respective subsidiaries or affiliates, (vi) borrowing or providing lending by the Company, EFP, y EAH, Financing Vehicle, or their respective subsidiaries or affiliates, (vii) acquisitions of securities of the Company, EFP, EAH, Financing Vehicle, or their respective subsidiaries or affiliates, and (viii) the sale of securities by the Company, EFP, EAH, Financing Vehicle, or their respective subsidiaries or affiliates to third parties, all of the foregoing subject to the applicable charter and governing documents of the Company, EFP, EAH, Financing Vehicle, and their respective subsidiaries and affiliates, and the execution and delivery of contractual agreements as deemed necessary or appropriate and approved and executed by any Authorized Officer (as hereafter defined) or representative of the Company, EFP, EAH, or Financing Vehicle acting on the advice of counsel, which is hereby authorized and which shall be conclusively evidenced by their signatures on documents intended to be final documents; RESOLVED FURTHER, that a Committee of the Board of Directors consisting of Kenneth Lay and Jeffrey Skilling (with Kenneth Lay to serve as chairman) be, and hereby is, constituted under Section 3, Article IV of the Company's Bylaws with full power and authority on behalf of the Board E0004403862 EXH006-01318 ============= Page 124 of 208 ============= 10~11 (except as otherwise contemplated by Section 6, Article IV of the Company's Bylaws) to: (a) settle and approve the terms and authorize execution on behalf of the Company of such additional documents relating to the transactions undertaken or proposed to be undertaken by the foregoing resolutions as may be required or necessary in order to enable the Company and its affiliates to fulfill their respective obligations in connection with the foregoing resolutions; (b) pay or authorize the payment of all fees, expenses, or charges incurred by or on behalf of the Company or its affiliates in connection with the transactions contemplated by the foregoing resolutions, including (but without limitation) the fees and expenses of the Company's and its affiliates' financial, legal, and professional advisers; and U (c) take any and all such further action as they LO shall deem necessary or, desirable in connection with the transactions contemplated by the foregoing resolutions; RESOLVED FURTHER, that the Chairman of the . Board, any Vice Chairman of the Board, the President or any Vice President (including any Executive Vice President, Senior Vice President, or Vice President), the Treasurer or any Deputy Treasurer, and the Secretary or any Assistant Secretary of the Company (each an "Authorized Officer") and its counsel be, and each hereby is, authorized, empowered, and directed (and any one of them acting alone) to take any and all such further action, to amend, execute, and deliver all ' .~ such further instruments and documents, for and in the name and on behalf of the Company, EFP, EAH, Financing Vehicle, and/or their respective affiliates, under their respective corporate seals or otherwise, and to pay all such expenses as in their discretion appear to be necessary or desirable to carry E0004403863 EXH006-01319 ============= Page 125 of 208 ============= into effect the purposes and intentions of this and each of the foregoing resolutions; and RESOLVED FURTHER, that all actions heretofore taken by any officer or representative of the Company related to or in connection with the transactions contemplated by these resolutions be, and hereby are, adopted, ratified, confirmed, and approved in all respects. ci N ci ci LJ E0004403864 =XH006-01320 ============= Page 126 of 208 ============= n AGENDA ITEM 5 (c) (SUGGESTED FORM OF RESOLUTIONS) WHEREAS, in connection with the formation, capitalization, and financing of Enron Finance Partners, LLC, a Delaware limited liability company ("EFP") and an affiliate of the Company, and the consummation of certain transactions in connection therewith previously approved by the Board of Directors at a meeting held on August 7-8, 2000, the Company has executed and delivered a Demand Promissory Note, dated LL' as of November 21, 2000, in the original principal amount of $125 Million Dollars, with a maturity date of November 21, 2010, and bearing an interest rate of eight percent per annum ("Promissory Note"), made payable to Enron Capital Investments Corp., a Delaware Corp. ("ECIC") and an affiliate of the Company, as a contribution to the capital of ECIC; WHEREAS, upon receipt of the Promissory Note, ECIC contributed the Promissory Note to EFP as a capital contribution by ECIC; WHEREAS, in connection with the formation, capitalization, and financing of EFP, and the consummation of `~ certain transactions in connection therewith previously approved by the Board of Directors at a meeting held on August 7-8, 2000, the Company has contributed $20 Million cash to Enron Finance Management, LLC, a Delaware limited liability company ("EFM") whose sole member is the Company; WHEREAS, upon receipt of such contribution, EFM further contributed the $20 Million cash to Enron Asset Holdings, LLC, a Delaware limited liability company ("EAH") and an affiliate of the Company, as a capital contribution; WHEREAS, upon receipt of such contribution, EAH loaned the $20 Million to the Company; WHEREAS, in connection with the approval of the contribution by the Company to EFP of 11,500,000 shares of common stock (the "EOG Stock") of EOG Resources, Inc. ("EOG") previously approved by the Board of Directors at a meeting held on August 7-8, 2000, the Company entered into t;E E0004403865 =XH006-01321 ============= Page 127 of 208 ============= that certain Consent Agreement, dated as of November 28, 2000 ("Consent Agreement"), among the Company, EOG, EFP, Enron Intermediate Holdings, LLC, a Delaware limited liability company ("EIH"), EAH, and Aeneas L.L.C., a Delaware limited liability company ("Aeneas"), providing for: (i) the consent by EOG of the transfers of the EOG Stock from the Company to EFP, from EFP to EIH, from EIH to EAH, and from EAH to Aeneas; (ii) the commitment of the Company, during the period from the date thereof through the maturity date of Enron's 7% Exchangeable Notes, at any meeting of EOG stockholders with respect to which Enron, EFP, EIH, EAH or Aeneas owns any, =~ EOG Stock entitled to vote, to attend and vote (or cause to be voted) all of such EOG Stock in the manner, if any, recommended by the board of directors of EOG; (iii) the obligation of the Company to indemnify EOG and its subsidiaries from and against any taxes imposed on EOG or EOG International with respect to the share exchange consummated in August 1999 to the extent resulting from the } transfers of the EOG Stock pursuant to the transactions consented to by EOG in the Consent Agreement; (iv) the agreement by the Company that EOG shall not be liable for and shall not be obligated to indemnify the Company from any taxes if EOG shall prove by clear and convincing evidence that any of the transactions consented to by EOG in the Consent Agreement that were or are effected by Enron were a contributing cause of the failure to maintain continuity of interest within the meaning of Treas. Reg. ง1.355-2(c); (v) the forgiveness by the Company of certain indebtedness owing from EOG and/or its affiliates to the Company for telecommunication services, treasury services and banking services provided by the Company and its affiliates pursuant to a services agreement in an aggregate of approximately $1,000,000; and (vi) the obligation of the Company to reimburse EOG for all reasonable out-of-pocket legal expenses incurred by EOG with Wachtell, Lipton, Rosen & Katz, special ~~ counsel to EOG, and Steptoe & Johnson LLP, special tax counsel to EOG, in connection with the negotiation and execution of the Consent Agreement; WHEREAS, Joint Energy Development Investments II Limited Partnership, a Delaware limited partnership ("JEDI II"), owned, among other investments, a Class B Membership Interest in East Coast Power L.L.C., a Delaware limited liability company ("ECP LLC"); E0004403866 =XH006-01322 ============= Page 128 of 208 ============= f WHEREAS, Enron Capital Management III Limited Partnership, a Delaware limited partnership ("ECM III"), is a limited partner in JEDI II; WHEREAS, ECT Merchant Investments Corp. ("ECT Merchant") and Enron Capital North America Corp. ("Enron Capital"), each Delaware corporations and wholly-owned affiliates of the Company, are limited partners in ECM III; WHEREAS, under the Amended and Restated Partnership Agreement of ECM III, dated as of December 4, 2000, the rights and obligations of the ECM III limited partners are, in part, defined by reference to the underlying investments of JEDI II; WHEREAS, ECT Merchant contributed to Boreas Holdings Corp., a Delaware corporation ("Boreas") and wholly- owned affiliate of the Company, the portion of ECT Merchant's limited partnership interest in ECM III that relates to JEDI II's Class B Membership Interest in ECP LLC or any interest in ECP LLC received in exchange therefor (the "ECT Merchant Asset"), in exchange for shares of common stock, $0.01 par value per share, of Boreas ("Common Stock"), pursuant to a Contribution Agreement among ECT Merchant, Enron Capital and Boreas (the "Boreas Contribution Agreement"); WHEREAS, Enron Capital contributed to Boreas the portion of Enron Capital's limited partnership interest in ECM III that relates to JEDI [I's investment in ECP LLC and in East Coast Power Holding Company L.L.C., a Delaware limited liability company, other than the ECT Merchant Asset (such interest being the "Enron Capital Asset," and the ECT Merchant Asset and the Enron Capital Asset are sometimes collectively referred to as the "ECM Interests"), in exchange for shares of Common Stock, pursuant to the Boreas Contribution Agreement; ` L WHEREAS, it was and is the intention of the affected parties that the contributions of the ECT Merchant Asset and the Enron Capital Asset to Boreas, and the issuances of shares of Common Stock of Boreas to ECT Merchant and to Enron F? Capital, be consummated pursuant to Section 351 of the Internal Revenue Code of 1986, as amended (the "Code"); E0004403867 :XH006-01323 ============= Page 129 of 208 ============= 7., WHEREAS, following consummation of the foregoing transactions, Boreas transferred and contributed to EFP, as an initial capital contribution, the ECM Interests in exchange for a Class B Membership Interest in EFP and the admission of Boreas to EFP as a Class B Member (the "EFP Contribution"), pursuant to a Contribution Agreement among Boreas, EFP, EIH, and EAH (the "EFP Contribution Agreement"); WHEREAS, pursuant to the EFP Contribution Agreement, Boreas was admitted to EFP as a Class B Member -'d and holds a Class B Membership Interest in EFP, all pursuant to a First Amendment to Third Amended and Restated Limited Liability Company Agreement of EFP (the "First Amendment"); WHEREAS, pursuant to the EFP Contribution Agreement, EFM and the other members of EFP (including the Company) entered into the First Amendment, reflecting the capital contribution by Boreas to EFP; WHEREAS, following the EFP Contribution, EFP further contributed the ECM Interests to EIH, as a capital contribution (the "EIH Contribution"), pursuant to the EFP Contribution Agreement; to WHEREAS, following the EIH Contribution, EIH further contributed the ECM Interests to EAH, as a capital contribution (the "EAH Contribution"), pursuant to the EFP Contribution Agreement; WHEREAS, pursuant to the EFP Contribution Agreement, EFM and EIH entered into a First Amendment to Second Amended and Restated Limited Liability Company Agreement of EAH, reflecting the additional capital contribution by EIH to EAH; WHEREAS, in connection with the EFP Contribution, the EIH Contribution and the EAH Contribution, Enron North America Corp., a Delaware corporation ("ENAC") and an affiliate of the Company, assumed in the aggregate $93,634,266.60 of debt of the Company under that certain indenture dated as of November 1, 1985, between the Company (formerly InterNorth, Inc.) and Harris Trust and Savings Bank, as Trustee (whose successor in interest is The E0004403868 =XH006-01324 ============= Page 130 of 208 ============= irk Bank of New York ), as supplemented and amended to date (the "Debt Obligations"), which debt was assumed pursuant to two Assumption Agreements (the "ENAC Assumption Agreements"); WHEREAS, upon assumption of the Debt Obligations by ENAC, ECT Merchant further assumed $936,342.67 of such Debt Obligations pursuant to a Supplemental Assumption Agreement (the "ECT Merchant First Supplemental Assumption Agreement"); WHEREAS, upon assumption of the Debt Obligations by ENAC, Enron Capital further assumed $92,697,923.93 of such Debt Obligations pursuant to a Supplemental Assumption Agreement (the "Enron Capital First Supplemental Assumption Agreement"); WHEREAS, upon assumption of the Debt Obligations by ECT Merchant and Enron Capital, Boreas further assumed the Debt Obligations evidenced by the ECT Merchant First Supplemental Assumption Agreement and the Enron Capital First Supplemental Assumption Agreement pursuant to two Supplemental Assumption Agreements (the "Second Supplemental Assumption Agreements"); WHEREAS, upon assumption of the Debt Obligations by Boreas pursuant to the Second Supplemental Assumption Agreements, EFP further assumed such Debt Obligations pursuant to two Supplemental Assumption Agreements (the "Third Supplemental Assumption Agreements"); WHEREAS, upon assumption of the Debt Obligations by ฐ` EFP pursuant to the Third Supplemental Assumption Agreements, EIH further assumed such Debt Obligations pursuant to two Supplemental Assumption Agreements (the "Fourth Supplemental Assumption Agreements"); and WHEREAS, as a result of the ENAC Assumption Agreements, the ECT Merchant First Supplemental Assumption ~~ Agreement, the Enron Capital First Supplemental Assumption Agreement, the Second Supplemental Assumption Agreements, the Third Supplemental Assumption Agreements, and the Fourth Supplemental Assumption Agreements, EFP was w released from the Debt Obligations, but the Company, Boreas, E0004403869 =XH006-01325 ============= Page 131 of 208 ============= ECT Merchant, Enron Capital and Boreas were not released from the Debt Obligations; WHEREAS, in connection with the third party financing of EFP in the amount of $500 million and the syndication thereof, the Company and the other members of EFP entered into a Second Amendment to Third Amended and Restated Limited Liability Company Agreement of Enron Finance Partners, LLC ("Second Amendment") providing that no Class B Membership Interest (including those held by the Company and its subsidiaries) may be transferred to a person other than to the Company or an affiliate of the Company without the consent of a majority of the interests held by the Class C Member (an affiliate of Chase Bank of Texas); NOW, THEREFORE, IT IS RESOLVED, that the 0 execution and delivery by the Company of the Promissory Note be, and hereby is, authorized, approved, ratified and confirmed; RESOLVED FURTHER, that the contribution by ECIC of the Promissory Note to EFP as a capital contribution by ECIC be, and hereby is, authorized, approved, ratified and confirmed, and the Company hereby recognizes EFP as the holder of the Promissory Note; RESOLVED FURTHER, that the contribution by the Company to EFM of $20 Million cash as a capital contribution be, and hereby is, authorized, approved, ratified and confirmed; `''' RESOLVED FURTHER, that the Directors hereby authorize, approve, ratify and confirm the execution, delivery and performance by the Company of the terms and conditions of the Consent Agreement; RESOLVED FURTHER, that the Directors hereby authorize, approve, ratify and confirm the assumption by ENAC of the Debt Obligations pursuant to the ENAC Assumption Agreements and the -execution, delivery and performance by the Company of the terms and conditions of the ENAC Assumption Agreements; RESOLVED FURTHER, that the Directors hereby authorize, approve, ratify and confirm the execution, delivery and performance by the Company of the ECT Merchant First E0004403870 =XH006-01326 ============= Page 132 of 208 ============= r Supplemental Assumption Agreement and the Enron Capital First Supplemental Assumption Agreement; RESOLVED FURTHER, that the Directors hereby authorize, approve, ratify and confirm the execution, delivery and performance by the Company of the First Amendment and the Second Amendment; RESOLVED FURTHER, that the Chairman of the Board, any Vice Chairman of the Board, the President or any Vice President (including any Executive Vice President, Senior Vice President, or Vice President), the Treasurer or any Deputy Treasurer of the Company and its counsel be, and each hereby is, authorized, empowered, and directed (and any one of them acting alone) to take any and all such further action, to amend, execute, and deliver all such further instruments and documents, for and in the name and on behalf of the Company and/or EFP, under their respective corporate seals or otherwise, and to pay all such expenses as in their discretion appear to be necessary or desirable to carry into effect the purposes and intentions of this and each of the foregoing resolutions; RESOLVED FURTHER, that all actions heretofore taken by any officer or representative of the Company related to or in connection with the transactions contemplated by these resolutions be, and hereby are, adopted, ratified, confirmed, and approved in all respects; and RESOLVED FURTHER, that the proper officers of the Company and its counsel be, and each of them hereby is, authorized, empowered, and directed (any one of them acting alone) to take any and all such further action, to amend, execute, and deliver all such further instruments and documents, for and in the name and on behalf of the Company, under its corporate seal or otherwise, and to pay all such expenses as in their discretion appear to be necessary, proper, or advisable to carry into effect the purposes and intentions of this and each of the foregoing resolutions. E00044403871 EXH006-01327 ============= Page 133 of 208 ============= I 04/25/01 Personal & Confidential EXHIBIT A NEW SERIES OF ENRON CORP. PREFERRED STOCK Summary of Rights and Preferences Issuer: Enron Corp. Holder: Enron Asset Holdings, LLC Securities: Cumulative Junior Preferred Stock, Series A (the "New Preferred Stock") Amount: US$1 billion aggregate principal amount Issue Price: $50 million per share Maturity: 20 years from the date of issuance Liquidation Preference: $50 million per share; Ranks junior to any existing series of the Issuer's preferred stock outstanding as to dividends and distributions on liquidation. Dividend Rate: Cumulative dividends at the rate of 5% per annum, payable quarterly in arrears, will accrue on each share of the New Preferred Stock from the date of original issue. Dividends will be paid to the holders either in cash or in additional shares of the New Preferred Stock at the option of the Issuer, with the valuation of any dividend shares based on the Issue Price. The Issuer shall not have the right to elect to make in-kind dividends with respect to more than 12 quarterly dividend payments without the affirmative vote of the holders of at least two-thirds of the outstanding New Preferred Stock, voting as a class. Payment of cash dividends on the New Preferred Stock may be subject to certain restricted payment provisions under the Issuer's loan agreements. Sinking Fund: None Optional Redemption: No Mandatory Redemption: The Issuer shall redeem all shares of the New Preferred Stock which remain outstanding on the date which is 20 years following the date of issuance, at a redemption price equal to $50 million per share, plus an amount equal to the dividends accrued and unpaid to the redemption date. Page 1 of 2 E0004403872 ;HO06-01328 ============= Page 134 of 208 ============= Liquidation Rights: In the event of a voluntary or involuntary liquidation, dissolution or winding-up of the Issuer, holders of the New Preferred Stock II will be entitled to receive $50 million per share, plus accrued and unpaid dividends to the date of payment, before any distribution or payment may be made to holders of any junior preferred stock or common stock of the Issuer. A consolidation, merger or reorganization of the Issuer with any other corporation or corporations, or a sale or transfer of all or substantially all of the assets of the Issuer, or any purchase or redemption by the Issuer of any of its outstanding shares, shall not be regarded as a liquidation, dissolution or winding-up of the affairs of the Issuer. Subsequent Series of Preferred Stock: No subsequent series of preferred stock may rank senior to the New Preferred Stock, except as permitted below with the approval of the holders. Voting Rights: So long as the New Preferred Stock is outstanding, the Issuer will not, without the affirmative vote of the holders of at least two- thirds of the outstanding New Preferred Stock, voting as a class, (a) change by amendment to the Issuer's Articles of Incorporation, by merger or otherwise, the terms and provisions of the New Preferred Stock so as to affect adversely the rights and preferences of the holders thereof or (b) authorize the issuance of capital stock ranking senior to the New Preferred Stock. Otherwise, holders of New Preferred Stock will not be entitled to vote unless otherwise required by law. Exchange: Conversion Rights: Transfer Restrictions: Publicly Registered: Preemptive Rights. Registration Rights. Tag-Along Rights: Issuer Board Approval: Public Disclosure pref stock issue\ps-terms-v3.doc None None None No None None None Yes; May 1, 2001 Enron Corp. Board Meeting Yes; Oregon charter filings and SEC filings Page 2 of 2 H006-01329 E0004403873 ============= Page 135 of 208 ============= EXHIBIT B STATEMENT OF RESOLUTIONS ESTABLISHING A SERIES OF PREFERRED STOCK OF ENRON CORP. CUMULATIVE JUNIOR PREFERRED STOCK, SERIES A Pursuant to Oregon Revised Statutes Section 60.134 and Article IV of the Articles of Incorporation, as amended, of Enron Corp. (the "Corporation"), the Board of Directors of the Corporation has duly adopted the following resolutions on May 1,.2001, establishing a series of Preferred Stock of the Corporation: RESOLVED, that there is hereby established a series of Preferred Stock of the Corporation designated the Cumulative Junior Preferred Stock, Series A (herein referred to as the "Cumulative Junior Preferred Stock"). The designation and number of shares of such series and the powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations and restrictions thereof (in addition to those set forth in the Articles of Incorporation, as amended, that may be applicable to such series) are as follows: A. Definitions. Capitalized terms used but not defined herein shall have the meaning ascribed thereto in the Corporation's Articles of Incorporation, as amended. In addition, the following terms shall have the following meanings when used herein: (1) The term "accrued dividends" for a share shall mean an amount computed at the quarterly dividend rate on such share from the date on which dividends on such share become cumulative to and including the date to which such dividends are to be accrued, less the aggregate amount of all dividends theretofore paid thereon. (2) The term "Business Day" shall mean any day of the year except Saturday or Sunday that is a day on which banks are not required or authorized by law to close in New York City, New York, Houston, Texas, or Wilmington, Delaware. (3) The term "junior stock" shall mean (and references to shares ranking "junior to" the Cumulative Junior Preferred Stock shall refer to), with respect to paragraph C, the Common Stock of the Corporation and any other class or series of stock of the Corporation not entitled to receive any dividends unless all dividends required to have been paid or declared and set apart for payment on the Cumulative Junior Preferred Stock shall have been so paid or declared and, with respect to paragraph D, any class or series of stock of the Corporation not entitled to receive any assets upon the liquidation, dissolution or winding up of the affairs of the Corporation until the Cumulative Junior Preferred Stock shall have received the entire amount to which such stock is entitled upon liquidation, dissolution or winding up. E0004403874 =XH006-01330 ============= Page 136 of 208 ============= (4) The term "parity stock" shall mean (and references to shares ranking "on a parity with" the Cumulative Junior Preferred Stock shall refer to), with respect to paragraph C, any class or series of stock of the Corporation entitled to receive payment of dividends on a parity with the Cumulative Junior Preferred Stock and, with respect to paragraph D, any class or series of stock of the Corporation entitled to receive assets upon the liquidation, dissolution or winding up of the affairs of the Corporation on a parity with the Cumulative Junior Preferred Stock. (5) The term "senior stock" shall mean (and references to shares ranking "senior to" or "prior to" the Cumulative Junior Preferred Stock shall refer to), with respect to paragraph C, any class or series of stock of the Corporation ranking senior to the Cumulative Junior Preferred Stock in respect of the right to receive dividends and, with respect to paragraph D, any class or series of stock of the Corporation ranking senior to the Cumulative Junior Preferred Stock with respect to the right to receive assets upon the liquidation, dissolution or winding up of the affairs of the Corporation. All classes or series of stock of the Corporation other than junior stock or parity stock shall be senior stock with respect to the Cumulative Junior Preferred Stock, except to the extent expressly provided otherwise in the Corporation's Articles of Incorporation, as amended, including any Statement of Resolutions Establishing a Series of Preferred Stock filed by the Corporation prior to the filing date hereof. The Corporation's (i) 9.142% Perpetual Second Preferred Stock, (ii) Cumulative Second Preferred Convertible Stock, (iii) Mandatorily Convertible Single Reset Preferred Stock, Series A, (iv) Mandatorily Convertible Single Reset Preferred Stock, Series B, (v) Mandatorily Convertible Junior Preferred Stock, Series B and (vi) Series A Junior Voting Convertible Preferred Stock shall be senior stock with respect to the Cumulative Junior Preferred Stock. B. Designation. The distinctive designation of the series shall be the "Cumulative Junior Preferred Stock, Series A." The number of shares that shall constitute such series shall be twenty (20) shares plus up to the number of shares necessary to fulfill the Corporation's obligations pursuant to paragraph C in the event the Corporation elects to pay dividends in the form of Cumulative Junior Preferred Stock, but in no event more than the number of authorized but unissued shares of Preferred Stock. C. Dividends. (1) The holders of Cumulative Junior Preferred Stock, in preference to the rights of holders of any junior stock but subject to the rights of any senior stock, shall be entitled to receive, as and when declared by the Board of Directors out of any funds legally available therefor dividends at an annual rate equal to $2,500,000 per share (as adjusted for any stock dividends, recombinations or splits with respect to such shares after the filing date hereof), payable quarterly on the first days of January, April, July and October, respectively, in each year, with respect to the quarterly period ending on the day preceding each such respective payment date. Such dividends shall be cumulative E0004403875 2 EXH006-01331 ============= Page 137 of 208 ============= from and shall accrue on each share of Cumulative Junior Preferred Stock beginning on the date on which such share is issued by the Corporation (the "Original Issuance Date"). All dividends paid pursuant to this paragraph C(1) shall be paid in cash or, at the option of the Corporation, in share(s) of the Corporation's Cumulative Junior Preferred Stock (an "In-Kind Dividend"). In the event the Corporation elects to pay an In-Kind Dividend pursuant to'` this paragraph C(l ), the Corporation shall be authorized to issue, at its discretion, fractional shares of Cumulative Junior Preferred Stock or scrip representing fractional shares of Cumulative Junior Preferred Stock. Any fractional shares or scrip representing fractional shares shall be issued based upon a value per share of Cumulative Junior Preferred Stock of $50,000,000. Notwithstanding the foregoing, the consent of the holders of at least two-thirds of the outstanding Cumulative Junior Preferred Stock, voting as a class, given in person or by proxy, either in writing without a meeting (if permitted by law) or by vote at any meeting called for the purpose, shall be necessary for the Corporation to have the right to elect to make In-Kind Dividends with respect to more than twelve quarterly dividend payments. (2) No dividend shall be paid upon, or declared or set apart for, any share of Cumulative Junior Preferred Stock or shares ranking on parity with Cumulative Junior Preferred Stock for any dividend period unless at the same time a like proportionate dividend for the same dividend period, ratable in proportion to the respective annual dividend rates fixed therefor, shall be paid upon, or declared and set apart for, all shares of Cumulative Junior Preferred Stock and any Preferred Stock ranking on parity with the Cumulative Junior Preferred Stock that are entitled to such dividends. (3) As long as shares of Cumulative Junior Preferred Stock remain outstanding, in no event at any time shall any dividend, whether in cash or property, be paid or declared, nor shall any distribution be made, on any junior stock, nor shall any shares of any junior stock be purchased, redeemed or otherwise acquired for value by the Corporation, nor shall the Corporation permit any shares of any junior stock to be purchased, redeemed or otherwise acquired by any subsidiary of the Corporation, unless full cumulative dividends on the Cumulative Junior Preferred Stock scheduled to be paid at or prior to such time pursuant to paragraph C(l) have been declared and paid. The foregoing provisions of this subparagraph (3) shall not, however, apply to (i) a dividend payable solely in any junior stock, (ii) the acquisition of shares of any junior stock in exchange for, or through application of the proceeds of the sale of, shares of any other junior stock, (iii) the acquisition of shares of any junior stock pursuant to contractual obligations binding against the Corporation or any of its subsidiaries that were entered into at a time when such acquisitions of shares could be made pursuant to this subparagraph (3) or (iv) the dividend, distribution or issuance of Rights. "Rights" means rights or warrants distributed by the Corporation under a shareholder rights plan or agreement to all holders of Common Stock entitling the holders thereof to subscribe for or purchase shares of the Corporation's capital 3 E0004403876 =XH006-01332 ============= Page 138 of 208 ============= stock (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events: (a) are deemed to be transferred with such shares of Common Stock, (b) are not exercisable, and (c) are also issued in respect of future issuances of Common Stock. D. Liquidation Preference. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, then, before any distribution or payments shall be made to the holders of any junior stock, but subject to the rights of any senior stock or parity stock, the holders of the Cumulative Junior Preferred Stock shall be entitled to be paid in full in cash the amount of $50,000,000 per share (as adjusted for any stock dividends, combinations or splits with respect to such shares after the filing date hereof), together with accrued dividends to the date of such distribution or payment, whether or not earned or declared. If such payment shall have been made in full to the holders of the Cumulative Junior Preferred Stock and all preferential payments or distributions to be made with respect to senior stock and parity stock have been made in full, the remaining assets and funds of the Corporation shall be distributed among the holders of the junior stock, according to their respective rights and preferences and in each case according to their respective shares. If, upon any liquidation, dissolution or winding up of the affairs of the Corporation, the amounts so payable are not paid in full to the holders of all shares of the Cumulative Junior Preferred Stock and parity stock, the holders of the Cumulative Junior Preferred Stock, together with holders of parity stock, shall share ratably in any distribution of assets in proportion to the full amounts to which they would otherwise be respectively entitled. Neither the consolidation, merger or reorganization of the Corporation, the sale, lease or conveyance of all or a part of its assets, nor the purchase or redemption of any of its outstanding shares, shall be deemed a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of the foregoing provisions of this paragraph D. E. Redemption. (1) To the extent it may lawfully do so and subject to the rights of holders of any senior stock, on the twentieth anniversary of the Original Issuance Date (or, in the event it may not lawfully do so, the first day following the twentieth anniversary of the Original Issuance Date upon which it may lawfully do so), the Corporation shall redeem all of the Cumulative Junior Preferred Stock at the redemption price of $50,000,000 per share, together with accrued dividends to the date of distribution or payment, whether or not earned or declared. (2) Notice of the redemption of Cumulative Junior Preferred Stock shall be mailed or personally delivered, addressed to the holders of record of the shares of outstanding Cumulative Junior Preferred Stock at their respective 4 EOO04403877 EXH006-01333 ============= Page 139 of 208 ============= addresses as they shall appear on the stock books of the Corporation (but no failure to mail or otherwise deliver such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption). (3) If, on or before the redemption date specified in the notice, the redemption price, together with accrued dividends to the date fixed for redemption, whether or not earned or declared, shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares so called for redemption, so as to be and continue to be available therefor, then, from and after the date of redemption so designated, notwithstanding that any certificate for shares of Cumulative Junior Preferred Stock so called for redemption shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding, the dividends thereon shall cease to accumulate, and all rights with respect to the shares of Cumulative Junior Preferred Stock so called for redemption shall forthwith on the redemption date cease and terminate, except only the right of the holders thereof to receive the redemption price of the shares so redeemed, including accrued dividends to the redemption date, but without interest. (4) The Corporation may also, at any time prior to the redemption date, deposit in trust, for the account of the holders of the Cumulative Junior Preferred Stock to be redeemed, with a bank or trust company in good standing, organized under the laws of the United States of America, designated in the notice of redemption, the redemption price, together with accrued dividends to the date fixed for redemption, whether or not earned or declared, and, unless the notice of redemption herein provided for has previously been duly mailed or personally delivered, deliver irrevocable written instructions directing such bank or trust company, on behalf and at the expense of the Corporation, to cause notice of redemption specifying the date of redemption to be duly mailed or personally delivered as herein provided promptly upon receipt of such irrevocable instructions. Upon such deposit in trust, after due mailing or personally delivering the notice of redemption or accompanied by irrevocable instructions as provided above, notwithstanding that any certificate for shares of Cumulative Junior Preferred Stock so called for redemption shall not have been surrendered for cancellation, all shares of Cumulative Junior Preferred Stock with respect to which the deposit shall have been made shall no longer be deemed to be outstanding, and all rights with respect to such shares of Cumulative Junior Preferred Stock shall forthwith cease and terminate except only the right of the holders thereof to receive from such bank or trust company, at any time after the time of the deposit, the redemption price, including accrued dividends to the redemption date, whether or not earned or declared, but without interest, of the shares so to be redeemed. (5) Any moneys deposited by the Corporation pursuant to this paragraph E which shall not be required for the redemption shall be repaid to the Corporation forthwith. Any other moneys deposited by the Corporation pursuant 5 E0004403878 EXH006-01334 ============= Page 140 of 208 ============= e to this paragraph E and unclaimed at the end of six years from the date fixed for redemption shall be repaid to the Corporation upon its request expressed in a resolution of its Board of Directors, after which repayment the holders of the shares so called for redemption shall look only to the Corporation for the payment thereof. F. Voting Rights. The holders of Cumulative Junior Preferred Stock shall have no right to vote except as otherwise specifically provided herein, in the Articles of Incorporation, as amended, of the Corporation, or as required by statute. (1) So long as any shares of Cumulative Junior Preferred Stock are outstanding, in addition to any other vote or consent of shareholders required in the Articles of Incorporation or by law, the consent of the holders of at least two-thirds of the outstanding Cumulative Junior Preferred Stock, voting as a class, given in person or by proxy, either in writing without a meeting (if permitted by law) or by vote at any meeting called for the purpose, shall be necessary for effecting or validating: (a) any amendment, alteration or repeal of any of the provisions of the Articles of Incorporation of the Corporation, whether by merger or otherwise, which affects adversely the voting powers, rights or preferences of the holders of the Cumulative Junior Preferred Stock; or (b) the authorization, creation or issuance of, or the increase in the authorized amount of, any stock of any class or series, or any security convertible into stock of any class or series, ranking senior to the Cumulative Junior Preferred Stock with respect to the right to receive dividends or the right to receive any assets of the Corporation in the event of the liquidation, dissolution or winding up of the Corporation. (2) Holders of Cumulative Junior Preferred Stock shall not be entitled to receive notice of any meeting of shareholders at which they are not entitled to vote or consent. G. Other Rights. Shares of Cumulative Junior Preferred Stock shall not have any relative, participating, optional or other special rights or powers other than as set forth herein or in the Articles of Incorporation, as amended. Austin 194940.5 E0004403879 6 EXH006-01335 ============= Page 141 of 208 ============= rn 0 Agenda Item 5d 0 0 -A. 0 w w w 0 ============= Page 142 of 208 ============= Presentation to the Enron Corp. Finance Committee Las Vegas Cogeneration, L.L.C. 222MW Power Plant Expansion April 30, 2001 5D-1 E0004403881 Confidential & Proprietary EXH006-01337 ============= Page 143 of 208 ============= Las Vegas Cogeneration Overview Existing Power Plant • Las Vegas Cogeneration (LVCI) is located in North Las Vegas in rapid-growth load center that is short energy • LVC 1 began commercial operation in May 1994 as a qualifying facility (QF) • 45 MW of on-peak capacity and energy provided to Nevada Power Company under a PPA through May 2024 • ENA acquired LVCI in August 1999 • Funded by non-recourse project debt ($54.9MM) and Enron/JEDI equity ($24MM). • ENA repowered LVCI in December 1999, reducing heat rate and increasing capacity to 51MW • Excess energy is available for merchant sales Proposed Expansion • Continued strong industry demand for merchant generation projects in Western Region • Proposal - LVCII: • 222MW gas-fired generating facility • Two, two-on-one combined cycle units • 4 LM6000's from Enron's existing turbine portfolio • LVCII is adjacent to LVCI using similar technology • 15 year, fixed price tolling agreement with Allegheny Energy Supply (rated BBB+) • ENA intends to finalize development, commence construction and divest prior to commercial operations. 5D-2 E0004403882 EXH006-01338 ============= Page 144 of 208 ============= Development Status and Sources & Uses Completed: • Site: Industrial zoning approved • Air: Permits issued • Water/Wastewater: Permits issued/authority granted • Engineering, procurement and construction contract executed with Modern Continental with fixed-price, date certain completion guaranteed by A-rated bonding and insurance • Firm Power Transmission arranged to liquid delivery point Remaining: • Electrical Interconnect at Nevada Power's 138kv substation • Gas Interconnect - Southwest Gas to design, build & operate lateral from the Kern River Pipeline to LVCII • Water/Wastewater Definitive Agreement • Notice to Proceed with Construction • Commercial Operations expected September, 2002 Transaction Sources and Uses (in MM) Sources JEDIII $ 99.55 ENA 99.55 TOTAL: $199.10* Uses Existing Turbines $ 62.0 Construction Costs $107.5 Interest Costs $ 19.4 Contingency 10.2 TOTAL: $199.1 * Excludes $0.6 MM Letter of Credit temporarily required for interconnect agreement 5D-3 E0004403883 EXH006-01339 ============= Page 145 of 208 ============= Strategy • Finalize development, commence construction and then divest prior to commercial operations. • The expansion project, combined with the existing QF asset, will be attractive to numerous generation companies: • Proven reliable technology • 100% controlling interest • Location in fast-growing load pocket in short region 15 year fixed-price tolling agreement • Pro-Forma economics are superior to those of Fountain Valley Power, which was recently sold to Black Hills Energy Capital. • Equity IRR 18.9% - 21.6% • Expressions of interest from Black Hills, Northland Power, Delta Power, Energy Investors Fund, Calpine. Expected gain on sale in 2001: $25MM - $30MM 5D-4 E0004403884 EXH006-01340 ============= Page 146 of 208 ============= Recommendation Approve $199.1 MM to finance construction of Las Vegas Cogeneration expansion (LVCII) subject to completion of the following: • Execution of definitive tolling agreement with Allegheny Energy Supply • Receipt of Electrical Transmission Agreement Confirmation • Execution of Southwest Gas Interconnection Agreement • Execution of Water/Wastewater Agreement • Execution of Nevada Power Interconnection Agreement 5D-5 E0004403885 EXH006-01341 ============= Page 147 of 208 ============= 11~~11'.,. ENRON RISK ASSESSMENT AND CONTROL DEAL APPROVAL SHEET Deal Type: SUBSEQUENT INVESTMENT ri DEAL NAME: Priscilla Counterparty: Southwest Power LLC Business Unit: Enron Americas Business Unit Originator: Jake Thomas Industry Category: Wholesale Energy - Non-Regulated Power Public/Private: Private Merchant/Strategic: Merchant Conforming/Nonconforming: Conforming RAC Recommendation: Proceed with Transaction APPROVAL AMOUNT REQUESTED ($MMs) New Capital Investment Capital Equipment from E-Next Generation Security L/C for Electrical Interconnection Date DASH Completed: April 19, 2001 RAC Underwriter: Chip Schneider RAC Analyst: Felipe Ibarra Transaction Type: Equity - Private Capital Funding Source: JEDI II/On Balance Sheet Country: United States Expected Closing Date: May 1, 2001 Expected Funding Date: May 1, 2001 Board Approval: Pending $137.1 $62.0 $0.6 (Unfunded commitment) TOTAL $ 199.7 EXPOSURE SUMMARY ($MMs) This Transaction (1) $194.9 Existing Exposure (DASH dated 06/15/00) 4.8 TOTAL $199.7 Note (1): Includes $14.6 million of interest during construction (IDC) and interest on development loan of $4.8 million. At 80% leverage the c9 expected equity contribution is approximately $39.8 million. D DEAL DESCRIPTION ENA requests the approval to invest $199.1 million for construction of Southwest Power's expansion to be called Las Vegas Cogeneration II, LLC (LVC 11). The project will be located adjacent to the site of Southwest Power's existing 51 MW plant ("LVC I") in North Las Vegas, Nevada. LVC II is a 222 MW gas-fired CCGT comprised of four 3 LM6000s and two steam turbines, yielding a projected heat rate of 7,800 Btu/kWh. Enron will own 50% of LVC II and JEDI II will own the remaining 50%, giving Enron an effective 75% equity interest. Initial funding for the development was provided through a $4.8 million bridge loan facility from ENA to LVC II through April 30, 2001. Southwest Power (SWP) is developing LVC II with the assistance of ENA through the existing Corporate Services Agreement. The EPC contractor will be Modern Continental under a fixed-price turnkey contract. Total construction and development costs (before IDC and financing fees) are estimated at $181.4 million ($817/kW), while current projection estimates total project cost, including the cost of project financing, is $199.1 million ($897/kW). After project financing, the remaining equity investment for each Enron and JEDI II is expected to be approximately $20 million. The financing plan includes a bridge loan from ENA to LVC II starting on May 1, 2001, with project financing takeout by September 30, 2001. LVC 11 will have the option to either extend the current Preliminary Notice-to-Proceed or give Modern Continental Full Notice-to-Proceed on May 1, 2001. Estimated funding for the period May 1, 2001, to September 30, 2001 (expected funding-date for the project financing) is $30 million. The four LM6000 PC turbines and two 138 kV transformers required for the expansion will be procured from E-Next Generation. Prior to Notice-to-Proceed under the EPC Contract, Southwest Power will enter into a 15-year tolling agreement with Allegheny Energy Supply Company ("Allegheny") for the full output of the plant. Further details of this agreement are presented in Appendix I. tJ E0004403886 EXH006-01342 ============= Page 148 of 208 ============= RAC Deal Approval Sheet TRANSACTION SOURCES AND USES OF FUNDS Sources Jedi II $99.5 ENA $99.5 Total $199.1 RETURN SUMMARY (Unlevered) PV @ Cumulative Return Components: Capital Price IRR Cash Outflows (166,263) N/A Cost of Delays in COD (2,547) N/A Intermed. Cash Flows 167,934 10.94% Terminal Value 9,178 11.89% a Total Project NPV 7,761 11.89% EPC Owners' Cost Contingency Other Costs Deal Name: Priscilla Uses $154.3 $8.9 $10.2 $25.7 $199.1 Capital Price Components Risk free rate (%): 5.12% Equity Premium (%): 3.37% Credit Premium (%): 0.00% Country Premium (%): 0.00% Transaction-Specific (%): 2.51% RAC CAPITAL PRICE: 11.00% E-Rating: N/A Relative upside ratio N/A The return summary represents an unlevered case and ownership/operation through the 15-year Tolling Agreement. A probabilistic analysis was also performed for a levered case. Assumptions and results for the levered case are detailed below: Case 70% Debt Case 80% Debt Case Tenor 14 years 14 years Coupon LIBOR + Applicable Margin below LIBOR + Applicable Margin below Average Life 8.14 years 8.14 years Debt-to-Capitalization 70% 80% Coverage 1.40x min; 1.79x av 1.31x min; 1.57x av Equity IRR 18.9% 21.6% ADDlicable Margin Spread (years 1-3) 2002 1.375% Spread (years 4-6) 2006 1.625% Spread (years 7-9) 2009 1.875% Spread (years 10-13) 2012 2.250% Spread (year 14) 2016 2.500% CASH FLOW SUMMARY IRR Distribution t20"/ฐ Expected 10.0% 8.0% 6. M. 4.0% P5 95 2Mo 0.0'/0 eฐ o a eฐ e e eฐ ;` eฐ o N •• O t` W v1 O10 1 N O O Q h D Oo P O N O b h a\ E0004403887 Cash FlowSummary $400,000 $300,000 ~ ~ $200,000 .~ Terminal Value 1 $100,000 W •„J Ongoing $(100,000)" D Fees II $(200,000) ฎ Outflows I I 5(300,000) ~-Cumulative P95 j Cumulative P 5 Years Expected cumulative cash (lows TRANSACTION UPSIDES/OPTIONALITY Potential upside in the Tolling Agreement includes a revenue provision under which the capacity payments are adjusted for actual output and heat rate. Enron Americas Technical Services believes that LVC II can improve upon Page 2 r. O EXH006-01343 ============= Page 149 of 208 ============= 'J RAC Deal Approval Sheet Deal Name: Priscilla the baseline design heat rate and output capacity stipulated in the tolling agreement of 7,800 Btu/kWh (HHV) and 222 MW, respectively. The baselines for the toll are the GE guaranteed output and heat rate. Additionally, the Variable O&M offered rate ($3.71/MWh) includes a 5% contingency so it is possible that a small margin could be earned on variable costs when dispatching. RISK MATRIX RISK DESCRIPTION MITIGATION/COMMENTS Construction Risk Modern Continental, the EPC Contractor, is bonded for the full amount of its $154 million turnkey EPC Contract by United States Fidelity and Guaranty Co ("US Fidelity") and Lumbermen's Mutual Casualty Company ("Lumbermen's"). Each of these entities is responsible for half of the total bond. Both have strong credit ratings--US Fidelity is rated AA and Al for financial strength by S&P and Moody's, respectively. Lumbermen's is rated A and A2 by S&P and Moody's, respectively. Project construction costs could be higher than currently forecasted; however, the degree of variability and potential for unforeseen costs are low at this point given the known cost of major equipment, interconnections and wastewater facilities. In addition, the pro forma includes maximum costs on these items and an additional $10.1 million contingency. The tolling agreement incorporates damages for which LVC II could be liable. These include $40,000 per day, liquidated damages for delay in start-up capped at 75 days. The potential liquidated damages are mitigated by damages that would be due to LVC II by Modern Continental under the terms of the EPC contract. The EPC delay liquidated damages begin at $5,000 per day and ramp-up, over 30 days, to $40,000 per day. There is a potential $775,000 cash outflow in the first 75 days of a delay in COD due to this mis- match in liquidated damage payments. Key to Modern Continental's execution and avoidance of LDs will be its ability to hire and maintain appropriate levels of skilled labor in a tight power plant construction market, to timely complete this project. After 75 days, it is expected that the project will be obligated to pass-on to Allegheny only the LDs received from the EPC Contractor. The project incurs a monthly opportunity cost of $2.7 million in capacity payments in the event of a COD delay as the Tolling Agreement does not extend beyond its stated termination due to such delay. To the extent any delay in COD is not caused by the EPC contractor (e.g. delay in gas line/interconnection or electrical interconnection facilities) the project will be responsible for liquidated damages under the Tolling Agreement for up to 75 days. It is expected that after 75 days, the project will be relieved of its LD obligations related to non-EPC delays. Environmental / Permitting Risk Development is nearly complete. Status of critical path items is outlined in A endix III. Operating / Fuel Risk The tolling agreement incorporates an annual test protocol for the steady state heat rate and capacity of the plant. It is possible that tolling revenue could vary. The tolling agreement includes as its base case both the GE guaranteed heat rate and capacity. Deviations from the design heat rate and design output will be accounted for via adjustments to the capacity payment. Failure to achieve design heat rate or design capacity shall not be an event of default under agreement--adjustment to the capacity payment is the sole remedy. PUC Approval is required for gas interconnection agreement. EXH006-01344 E0004403888 Page 3 O ============= Page 150 of 208 ============= RAC Deal Approval Sheet Deal Name: Priscilla Credit / Market Risk Allegheny is rated BBB+ and Baal by S&P and Moody's, respectively. The Interconnection Agreement will allow transmission to Mead. Additionally, from Mead, output can be wheeled to SP-15 in California and Palo Verde. Although deregulation has improved the market potential for power produced by LVC II, implementation of legislation in Nevada is not expected for at least two years. Equity Syndication Risk Factors that make the expansion project attractive to an equity investor are its stable cash flow from the tolling agreement, strategic location in the West near California and flexible combined-cycle design. KEY SUCCESS FACTORS NA Poor Excellent Core Business X Strategic Fit X Upside Potential X Management X Risk Mitigation X EXIT STRATEGY ~' ENA intends to finalize development of this asset, commence construction and divest it prior to the expected commercial operation date (COD). West Origination's estimated value of the Project, upon COD, is presented in Appendix II under various levered discount rate scenarios. For reference, ENA estimates that the discount rate applied to Fountain Valley Power's levered equity cash flows by Black Hills was in the range of 16-18% for terminal values of $350/kW to $500/kW. Given the longer term of LVC ll's Tolling Agreement (15 years versus 11 years), LVC II's combined-cycle design and, thus, lower heat rate, it is expected that LVC II will sell at the lower end of 7j these discount rates. As shown in Appendix III, the deal team estimates a pre-tax gain of between $13.5 million ` -•J and $24.5 million. OTHER RAC COMMENTS Tolling Agreement with Allegheny can be viewed as sale of a covered physical spread option with the premium paid in level installments over a 15-year period. Primary risk is timely construction and start-up of facility by Modern Continental, a lesser-known EPC Contractor in the power industry. Allegheny Energy Supply Company has a stand-alone rating of BBB+/Baal that is not supported by a guaranty of its parent Allegheny Energy, Inc. PUC approval is required for the gas interconnection agreement with Southwest Gas (See Appendix III). Gas transmission capacity will be assigned to Allegheny The draft tolling agreement is not clear on LDs, default or termination beyond the first 75 days of delay in COD. ~., This will be reviewed prior to final approval and execution. This approval provides that up to $2 million of the $194.9 be expended before all conditions precedent below are met. CONDITIONS PRECEDENT Approval of the investment beyond an incremental $2 million in development costs is subject to: • Execution of definitive Tolling Agreement with Allegheny Energy Supply Company Execution of Southwest Gas Interconnection Agreement Execution of Water/Wastewater Agreement Execution of Nevada Power Interconnection Agreement • RAC and Legal review of all Agreements U • RAC technical review with Americas Technical Services E0004403889 Page 4 =XH006-01345 rn O ============= Page 151 of 208 ============= RAC Deal Approval Sheet Deal Name: Priscilla _ESTONES Execution of Water/Wastewater Agreement 04/24/01 Execution of Gas Interconnection Agreement with Southwest Gas 04/27/01 Execution of Interconnection Agreement with Nevada Power 04/27/01 Execution Tolling Agreement 04/27/01 Execution of ENA / JEDI II Bridge Loan 04/27/01 Enron BoD Finance Committee Approval 04/30/01 Notice-to-Proceed under EPC Contract 05/01/01 Building Permit 06/01/01 PUC Approval for Gas Transmission 08/30/01 Funding of Project Financing 09/30/01 Sale of Asset 09/30/01 Mechanical Completion 08/01/02 Commercial Operation 09/01/02 0 O to E0004403890 Page 5 ============= Page 152 of 208 ============= APR-19-2001 10:40 RAC Deal Approval Sheet ENRON NORTH AMERICA PDX APPROVALS Name West Origination Jake Thomas Regional Management Christopher Calger Technical Services Brian Redmond JEDI II Shirley Hudler Americas Accounting Wes Colwell/Cris Sherman Americas Legal JQ,~ark Haedicke Americas Management John Lavorato/Louise Kitchen EWS Management Mark Frevert RAC Management Rick Buy/Dave Gorte Enron Global Finance Andy Fastow/Ben Glisan ENE Management Jeff Skilling 503 464 3740 P.02i02 Deal Name: Priscilla Si ure Date ;~ N Iq of ~y rilT-mil t,S 6 D E0004403891 Page 5 TOTAL . .02 ============= Page 153 of 208 ============= APR-19-2001 10:40 ENRON NORTH AMERICA FDX RAC Deal Approval Sheet 503 464 3740 P.02/02 Deal Name: Priscilla rI : ; APPROVALS Name ~ ~ West Origination Jake Thomas Regional Management Christopher Cal er Technical Services Brian Redmond IA-J_ JEDI II Shirley Hudler t=om Americas Accounting Wes Colwell/Cris Sherman Americas Legal ~,QiMark Haedicke J ~' Americas Management John Lavorato/Louise Kitchen EWS Management Mark Frevert RAC Management Rick Buy/Dave Gorte Enron Global Finance Andy Fastow/Ben Glisan ENE Management Jeff Skilling U EO004403892 Page 5 EXH006-01348 Sin ure Date Iq 0 v TOT;:',L P.02 N ============= Page 154 of 208 ============= APR-19-2001 10:40 LNKUN NUR i H H` LK 1 C.H t-'uX RAC Deal Approval Sheet APPROVALS Name ,j West Origination Jake Thomas ;; Regional Management Christopher Calger L; Technical Services Brian Redmond JEDI II Shirley Hudler i l ll/C i Sh W C Americas Account ng r erman es we o s Q,-Mark Haedicke Americas Legal 5' J Americas Management John Lavorato/Louise Kitchen EW S Management Mark Frevert fr hlhall -o- ,; RAC Management Rick Buy/Dave Gorte Enron Global Finance Andy Fastow/Ben Glisan ENE Management Jeff Skilling r-. `?1 Ui ta~• E EXH006-01349 5bi 4b4 '(4b F'. uez;62 Deal Name: Priscilla Sigpure E0004403893 Page 5 Date `~-/q-a/ c1 Iq of TOTAL 0,2 O ============= Page 155 of 208 ============= APR-19-2001 10:40 ENRON NORTH AMERICA PDX s:. RAC Deal Approval Sheet APPROVALS Name West Origination Jake Thomas r Regional Management Christopher Calger Technical Services Brian Redmond JEDI II Shlrley Hudler Americas Accounting Wes Colwell/Cris Sherman Americas Legal ark Haedicke J ricas Mana ement Am John Lavor t i /L Kit h g e o ou se a en c EWS Management Mark Frevert RAC Management Rick Buy/Dave Gorte Enron Global Finance Andy Fastow/Ben Glisan ENE Management Jeff Skilling i El :XH006-01350 Sb.S 4b4 S'(4u H. U2/b2 Deal Name: Priscilla Si ure Date L{ Iq o~ /mot, 10 EOO04403894 Page 5 TOTAL P.02 O ============= Page 156 of 208 ============= RAC Deal Approval Sheet Deal Name: Priscilla Appendix I - Tolling Agreement The following table summarizes the general commercial terms of the tolling agreement with Allegheny. The ,`` Variable O&M charge contemplated in the toll equals West Power Origination's estimation of variable O&M expenses including major maintenance plus a 5% contingency. Busbar delivery limits LVC II's exposure to ,~ changes in electrical transmission tariffs. The economics incorporated in this DASH assume that the plant operates at the base heat rate and capacity of the Tolling Agreement. This capacity and heat rate are the GE guarantee „u heat rates and capacities for LVC II. Although possible, it is unlikely that the capacity payment will decrease due to the results of annual periodic test and the Tolling Agreement's adjustment formula. It is expected that the actual results will be better. Given the operating performance of LVC I, whose staff will operate LVC II, LVC II is expected to make or exceed its availability and output targets. Following is a summary of the basic Term and Conditions of the Tolling Agreement. JA Capacity Payment ($/kW month $12.15 Variable O&M $3.71 escalating at CPI Term 15 Years Deliver Point Busbar LD's COD $40,000/da Guaranteed Availability Year-round 90% / Peak 95%, subject to permits Failure to meet availability and heat rate targets Adjustment to capacity payment Base Capacity 222 MW Stead State Heat Rate 7800 (Btus/kwh, HHV Allegheny Credit Rating BBB+ O EXH006-01351 E0004403895 Page 7 ============= Page 157 of 208 ============= RAC Deal Approval Sheet Appendix II -Valuation Supplement (provided by West Origination) Deal Name: Priscilla Enterprise Value ($millions) Pretax Equity Discount Rate \ Terminal $450/kW $350/kW $250/kW Value: 16% $223.6 $221.3 $219.0 17% $219.6 $217.6 $215.7 18% $216.1 $214.3 $212.6 > Ridges directional drilling >> Pipeline tie-ins and commissioning >> Power Plant commissioning on gas • Plant is currently operating on Diesel • The Project costs have increased due to: >> Complications with construction in the ridges and associated delay costs >> Inclusion of all contested EECC change orders • Requested Enron funding includes $82.8 million for Shell's potential non-participation above the $620 million budget. E0004403906 5E-3 Proprietary and Confidential EXH006-01362 ============= Page 168 of 208 ============= Cuiaba Integrated Energy Project Total Project Cost and Requested Increase Nov. '97 Sept. 99 Dec. 00 May 01 Original Project Costs $ 475.0 $ 473.0 $ 473.0 $ 473.0 Financing Costs $ 42.0 $ 47.0 $ 62.0 Subtotal $ 475.0 $ 515.0 $ 520.0 $ 535.0 Incremental Costs Turnkey and Other Construction $ 25.0 $ 64.0 $ 144.0 Ridges $ 13.0 $ 22.0 $ 41.0 Environmental $ 20.0 $ 27.0 $ 33.0 Third party Dev/Other Financing $ 41.0 $ 39.0 $ 47.0 Other Costs and Contingencies $ 6.0 $ 15.0 $ 7.0 Total Project Cost $ 475.0 $ 620.0 $ 687.0 $ 807.0 Total Project Cost Increase $ 145.0 $ 212.0 $ 332.0 Incremental Increase $ 67.0 $ 120.0 Working Capital/ Environmental $ 7.8 E0004403907 Total Increase $ 127.8 ' h $ 45 6 Enron are s S . Enron IRR Total Investment 5.40 5E-4 Proprietary and Confidential EXH006-01363 ============= Page 169 of 208 ============= Cuiaba Integrated Energy Project Sources and Uses of Funds Budget @ Budget @ Budget @ Dec. 2000 Budget @ May 2001 Nov. 1997 Sept. 1999 with Debt All E ui with Debt Al Equity Sources Senior Funding $ 346.5 $ 365.0 $ 365.0 $ - $ 365.0 $ - SUDAM Financing $ 30.0 $ 27.7 $ - $ - $ - Partners' Capital $ 46.6 $ 98.9 $ 107.8 $ 240.7 $ 112.3 $ 224.3 Enron Capital Exposure $ 81.9 $ 125.2 $ 187.5 $ 401.2 $ 188.2 c $ 441.2 IDC: Enron portion $ 20.9 $ 20.9 December Board Contingency $ 40.0 A $ 40.0 This Request Enron Share $ 45.6 $ 45.6 Shell Non-participation (Potential) $ 82.8 $ 82.8 Total 475.0 619.1 728.0 681.9 814.8 814.8 B Uses Construction Costs $ 475.0 $ 619.1 $ 688.0 $ 641.9 $ 807.0 $ 807.0 Working Capital/Environmental Program $ - $ - $ - $ 7.8 $ 7.8 December Board Contingency $ - $ - $ 40.0 A $ 40.0 $ - $ - Total 475.0 619.1 728.0 681.9 814.8 814.8 B A BOD granted an additional $40 million for Shell non-participation and contingency. B Hermes fee refund not included since timing of such (if it occurs) is Q1 2002. C Enron to receive between $231-$253 million from senior funding (depending upon level of Shell non-participation). 5E-5 E0004403908 Proprietary and Confidential EXH006-01364 ============= Page 170 of 208 ============= Cuiaba Integrated Energy Project Recommendation • Approve additional Enron equity funds required for the completion of the Cuiaba Project in the amount of US$ 45.6 million as Enron's contribution and in the amount of US$ 82.8 million in the event Shell does not participate in the increase, for an aggregate total equity ,investment in the Cuiaba Project by ESA and/ or its affiliates in the amount of US$ 569.6 million. wNt, E0004403909 5E-6 Proprietary and Confidential EXH006-01365 ============= Page 171 of 208 ============= ENRON RISK ASSESSMENT AND CONTROL DEAL APPROVAL SHEET "' DEAL NAME: Cuiaba Additional Equity II Date DASH Completed: 4/20/01 Counterparty: Cuiaba Integrated Power Project RAC Underwriter/Analyst: Michael Tribolet/Andre Cangucu ("Cuiaba") Investment Type: Equity Business Unit: Enron Global Assets Capital Funding Source(s): Balance Sheet Business Unit Originator: Peter Weidler Expected Closing Date: N/A []Public (]Private Expected Funding Date: Ongoing []Merchant []Strategic Board Approval: (]Pending []Received []Denied ON/A ' IZlConformine ONonconforming RAC Recommendation: (]Proceed with Transaction lIReturns below Capital Price DDo not Proceed APPROVAL AMOUNT REQUESTED (in USD millions) Capital request $128.4* *Assumes Shell will not fund over $621 million project budget. EXPOSURE SUMMARY (in USD millions) This request $128.4 Previously approved capital commitment $441.2 Total Capital Exposure L 50A This does not include $806.85 million of contingent sponsor support (indemnities to lenders to obtain project financing). TRANSACTION SUMMARY The Cuiaba I integrated project consists of a 480 MW power plant, located in the city of Cuiaba in the Brasilian state of Mato Grosso (EPE), a 363 km pipeline in Bolivia (GasBol) and a 278 km pipeline in the Brasilian state of Mato Grosso (GasMat). The current ownership structure (after projected buyout of LJM's 13% interest in EPE) of the project is shown below (see - ' Exhibit I). GasBol GasMat EPE Enron 50.00% 56.25% 71.875% Shell 50.00% 43.75% 28.125% Total 100.00% 100.00% 100.000% Currently the power plant is in commercial operations in combined cycle mode using diesel fuel. The Brazilian government is reimbursing the cost of the diesel fuel. As of April 17, 2001, the project is physically complete with the exception of approximately 2,006 meters of GasMat pipeline construction through two environmentally sensitive ridges. This construction is being conducted with directional drilling. Pilot holes have been completed on both ridges. The remaining work involves the enlargement of the pilot holes to 30 inches so the 18-inch pipe can be pulled through. Once the pipeline is complete, the power plant will be commissioned on gas. The schedule calls for the pipeline to be mechanically complete by September 21, 2001, and the power plant to be fully commissioned on gas by January 10, 2002. The Cuiaba project has experienced a series of cost increases from the original $475 million projected cost in November 1997. (see Exhibit II) The capital budget required to complete the project has increased from the $688 million most recently authorized in December 2001 to a total of $814.8-million. This increase includes all costs expected to be incurred by EE&CC (as the turnkey contractor for the project) regardless of whether or not they are be passed on to the project and a contingency equal to 5% of the remaining funds to be spent. The increase is summarized below (refer to Exhibit III for additional details): Li E0004403910 :XH006-01366 ============= Page 172 of 208 ============= i n RAC Deal Approval Sheet Deal Name: Cuiaba Additional Equity II Cuiaba Integrated Project Summary Budget Comparison Enron Increase Shell $621 approved from million DASH from This December Budget Dec. 2000 Request 2000 DASH Turnkey and Change Orders 420.9 449.5 502.2 52.7 Ridges 12.9 22.2 41.0 18.8 Other Constructions 39.3 58.8 84.8 26.0 Financing Costs! Legal/ Insurance 106.8 110.3 114.6 4.3 Development Costs! Mobilization 36.4 35.7 42.6 6.9 Spare Parts 4.6 4.8 4.7 -0.1 Diesel Burned 0.0 6.6 10.1 3.5 Contingency 0.0 0.0 7.0 7.0 Total Construction 620.9 688.0 807.0 119.1 Working Capital 0.0 0.0 3.8 3.8 Environmental funding 0.0 0.0 4.0 4.0 Total Costs 620.9 688.0 814.8 126.9 ' * See reconciliation on page 3 The primary source of the cost increase is the delay in completing the Brazilian pipeline, compounded by complications drilling the ridges (see exhibit IV for additional details by project entity). The delay in completion caused commensurate W increases in the owner's and the contractor's costs. Enron's proportionate share of the budget increase requires additional funding of $81.7 million (including $4.0 million for contingency). This increase includes Enron's proportionate share of the $18.6 Million of fees paid to KFW which will be refunded if the project does not achieve financial close. Shell is expected to protest between $30 million and $50 million of change orders from EECC and other costs. They will argue that these costs should have been included in the original turnkey price. To the extent Shell prevails in this dispute, Enron will soley bear these costs on its own and they will not be charged to t the project. Shell may also elect to not participate in the budget increase above the $621 million level approved by Shell in July 2000. In this event, Shell's ownership in the Brazilian project companies will be diluted by the amount of their non- participation as noted below. In GasBol, the amounts over the Shell Approved Budget would be provided by an "Excess Shareholder Loan" that bears interest at 16% an has preferential rights over any dividend payments to any shareholder. Shell Dilution Failure to Fund over $621 million Budget Dilutes @ Full Participation $621 Million EPE 28.13% 26.68% GasMat 43.75% 23.32% GasBol 50.00% 50.00% Enron's total exposure to Shell's non-participation in the budget increase and disallowance of costs is $82.8 million. Lastly, ~'; due to the delay in the completion of the pipeline, the companies will experience some negative operating cash flow which will be required to be provided by the owners. The increase in required funds is partially offset by the incremental $40 million H:\Winword\2001\Cuiaba DASH 010420.doc Page 2 E0004403911 =XH006-01367 ============= Page 173 of 208 ============= RAC Deal Approval Sheet Deal Name: Cuiaba Additional Equity II e provided by the Board in the December 2000 meeting. In total, Enron Global Assets is requesting $ 128.4 million of funds to 4;a complete the project. The breakdown of the request is detailed below; (USD millions) EPE GaMa GasBol Total Cost to Complete $ 345.1 $ 122.8 $ 153.1 $ 621.0 ( Operational cash flow $ (11.01 $ - $ - $ 11.0 Net Cash Per $621 million Budget $ 334.1 $ 122.8 $ 153.1 $ 610.0 Equity Participation 28.125% 43.75% 50.00% Shell funding 94.0 53.7 76.5 224.3 Capital Exposure this Dash $ 391.6 $ 233.0 $ 190.3 $ 814.8 Less: Enron IDC $ (14.2) $ (3.5) $ (3.2) $ (20.9) Total Enron Capital Exposure $ 283.4 $ 175 7 $ 110.5 $ 569 6 . . Previously approved $ 441.2 This Request S 128.4 1 (USD millions) EM t GasBot 7otaI Construction Costs $ 391.6 $ 231.9 $ 183.5 $ 807.0 Operational Loans $ - $ 1.0 $ 2.8 $ 3.8 FCBC Funding $ $ - $ 4.0 $ 4.0 0~ Total Cost $ 391.6 $ 233.0 $ 190.3 $ 814.8 Shell is scheduled to seek their Board of Director's authorization prior to May 15, 2001 and after receiving this authorization Enron and Shell will negotiate how the cost overruns are apportioned between the project and the contractor (EE&CC). Additionally, the economics assume actual capital spending does not exceed $814.8 Million. There are three significant issues between EPE and Furnas, the offtaker of power. 1. Furnas has refused to sign the consent to assignment required by the PPA. This consent is condition for financing. r~Y 2. Regulations promulgated in mid-1998 (a year after Enron won the bid) require power generators to enter into grid interconnection agreements which, if applicable would expose the project to penalties and dispatch conditions not envisioned and priced in the PPA. These include: 1) a requirement to purchase backup energy at the prevailing spot prices when the plant is not available; 2) the absorption of future changes in transmission costs; 3) liability for civil-damages due to electricity outages caused by other generators. This exposure is volatile and unpredictable. The existing PPA with Furnas provides the power plant with minimum penalties for not meeting its availability requirements and also protects the plant from anything not within its direct control. Furnas wishes to shift this exposure to EPE. The regulator recently fined EPE for non-compliance with this regulation. The fine, now being contested, if not reversed, creates an event of default under which EPE can terminate the contract and force Fumas/Eletrobras to buy the plant. 3. EPE has significant claims of Force Majeure due to governmental intervention and /or inaction. Under the PPA, the additional cost directly associated with these claims may be recoverable through a tariff increase. E0004403912 H:\Winword\2001\Cuiaba DASH 010420.doc Page 3 XH006-01368 ============= Page 174 of 208 ============= RAC Deal Approval Sheet Deal Name: Cuiaba Additional Equity II Ultimately, these issues will result in one of three outcomes, 1) The regulator will agree the PPA takes precedent over the new rules and Furnas complies with the PPA resulting in the appropriate conditions to achieve financial close and partial recovery of the cost overruns, or 2) the PPA is mutually renegotiated, or 3) the PPA is terminated and Enron retains the plant and resells the capacity to other off-takers or alternatively Enron sells the plant to Furnas. Gas Supply Issues: The Gas Supply Agreement with YPF (GSA) can be terminated by buyer or seller if all conditions precedent are not met by May 4, 2001. The non-fulfilled conditions precedent are: (i) occurrence of Financial Closing with respect to the integrated project; and (ii) completion of all Commissioning Activities on gas. Enron has verbally notified YPF that it intends to terminate the GSA and is now in the process of renegotiating the GSA with YPF to obtain: (i) gas contract pricing consistent to current Bolivian gas market conditions and, (ii) the flexibility required to address the current situation of the PPA (see above). The PV differential between the pricing in the YPF GSA and current Bolivian gas market conditions is between $30 and $50 Million. YPF has not shown a sense of urgency to come to terms and the deal team is actively soliciting alternate suppliers. TRANSACTION SOURCES AND USES OF FUNDS (in millions) Assuming all equity financed Sources Uses This request $128.4 Construction costs $807.0 Enron capital previously Working Capital 3.8 approved 441.2 Environmental program 4.0 Interest to Enron on IDC 20.9 Shell capital 224.3 Total $814.8 Total $814.8 RETURN SUMMARY RAC's probabilistic models used a capital price of 22.0%. Assuming no Shell participation, but a dillution of their equity, the o project has a negative NPV of ($244,052,000). Probabilistic DCF b Component Cumulative IRR PV @ Capital Price Cash Outflows + Outstanding NA $ (569,184) Fees -19.00% $ (23,678) Ongoing Cash Flows 5.38% $ 348,810 Terminal Value 5.38% $ - Total 5.38% $ (244,052) Semivariance - +/- 1.352 0% 60 IRR Distribution . P5 50.0% 40.0% Ex cted 30.0% 20.0% 5 10.0% 0 0% . sฐ se s@ e s se W ae se se O 00 O O M l~ M O1 r- Vl h 00 N O 00 0 O N D N O r- O 00 t~ N '7 D ~T M N O M D N Despite the large cost overruns, RAC also ran a present value secenario to measure the go-forward economics, from the $621 million budget level, treating past capital contributions as sunk costs. A present value of positive $131,113,000 results. Probabilistic DCF b Component Cumulative IRR PV @ Capital Price Cash Outflows + Outstanding NA $ (194,019) Fees -14.20% $ (23,678) Ongoing Cash Flows 66.57% $ 348,810 Terminal Value 66.57% $ - Total 66.57% $ 131,113 E0004403913 H:\Winword\2001\Cuiaba DASH 010420.doc =XH006-01369 0% 6 IRR Distribution 0. - 50.0% F5 40.0% 30.0% 20.0% 10.0% Expected P95 0% 0 . tฐ tฐ s C, 00 \C s - C` to V N N O N O l~ 00 00 V t~ C 01 00 N . 00 V) 00 O t~ R \D O\ M O ' 00 r- " 1 'n 'cY' 06 M O N M N -. N M v '.D r- 00 ============= Page 175 of 208 ============= r-• RAC Deal Approval Sheet Deal Name: Cuiaba Additional Equity II ell To illustrate the sensativities to the different senarios, RAC also ran a deterministic model. Assuming Shell did not contribute additional equity and Enron was unable to dillute Shell, the NPV fell another $18,886,000. However, if Shell participated fully in the equity contribution, the NPV would increase $48,169,000 CASH FLOW SUMMARY The net present value scenario is presented below: Cash Flow Summary t Terminal Value $400,000 l Ongoing $200,000 Fees Outflows 1 ฎOutflows $0 41- $(200,000) A Cumulative P95 $(400,000) -f -Cumulative P5 $(600,000) "---"-- Expected cumulative cash flows $(800,000) 00 00 .11 ,^ c~1 ~~ q1 \• 1 1 ti ti Years W Ln TRANSACTION UPSIDES/OPTIONALITY The deal team is actively negotiating both the PPA and the Gas Supply Agreement. As much of the cost overruns as possible will be recovered through reductions in the gas supply costs and increases in the power tariff. However, even if the deal team is successful in reducing the cost gas to market and increasing the tariff as permitted by the PPA, the project returns will be below Enron's capital price. 1ti The initial project concept contemplated a low cost expansion of the pipeline. Additional generation of sufficient capacity to '; recover the economics of the pipelines (Cuiaba II) will require a new 800 KM, 500 kV transmission line. The cost of this line is between $250 Million and $400 Million. The line is under study by the Government. as an strategic investment, but at this date a timetable has not been established for its construction. EXIT STRATEGY While this project has a positive expected internal rate of return is unlikely that Enron will be able to sell either the power plant or the Brazilian pipeline at a price that exceeds its book value of these assets. Should the OPIC and KFW $365 Million financing ultimately close, Enron may sell its interest in the Cuiaba Project to third parties, subject to certain conditions and hold restrictions contained in the OPIC and KFW financing. Specifically, Enron must maintain at least 25% ownership (direct or indirect) in each of the project companies and Enron and/or Shell must maintain control (greater than 50%) of each of the project entities. Given the foregoing, Enron may sell down to a 25% interest in each i .;. of the operating companies to a US domestic or foreign entity so long as Enron and/or Shell maintain control. Lender consent would be required for Enron to completely exit the project and the buyer would need to be a US entity pursuant to OPIC's US sponsorship requirements. In addition, Shell has a right of first refusal with respect to any sale by Enron of its interest in the project entities. s E0004403914 H:\Winword\2001\Cuiaba DASH 010420.doc Page 5 EXH006-01370 ============= Page 176 of 208 ============= p U i . 4 RAC Deal Approval Sheet RISK MATRIX Deal Name: Cuiaba Additional Equity II DESCRIPTION MITIGATION/COMMENTS PPA is terminated If the PPA is terminated due to a Furnas default, Enron has the option of retaining ownership or sell the plant to Furnas for approximately $360 Million. This creates approximately $211.5 million of value for Enron's investment in this project relative to Furnas performing pursuant to the PPA. This is due to the lower discount rate of 11.5% used to calculate the damage and that only revenue is used for this calculation. Once the prepayment is made, Fumas/Eletrobras would be obligated to assume the project contract including the gas supply agreement. This process is likely to be contested by Furnas and involve a lengthy process with the decision ultimately being made by an arbitrator, in Paris, France, with the award being enforced by the Brazilian court. Senior debt financing does not occur Cost to obtain financing has been capitalized and is included in the $814.8 million budget. If P party financing is not achieved, such costs (total of $30.3 million) would have to be written-off . Construction risk & continued cost overruns All currently anticipated cost overruns of completing the project are captured in the capital request presented in this DASH. While additional overruns are not impossible, EPE and GasBol are complete. GasMat is 91% complete in terms of dollars expensed vs. dollars anticipated to complete. There were previously mechanical issues with the Siemens turbines. If gas is not supplied by year-end 2001, the Siemens performance guaranty will lapse. Gas Supply The Gas Supply Agreement is under renegotiation, if YPF does not react in a timely manner and/or is not willing to achieve a reasonable compromise, then Enron intends to terminate the contract and seek alternative suppliers. There are over 50 Tcf of certified reserves in Bolivia and only 7 tcf of market, however, in Bolivia, certified reserves includes probable reserves. Proved, uncommitted reserves total approximately 2.5 tcf and there are a limited number of producers with which to negotiate replacement supply. This project requires 428.7 Tcf over the 19 year PPA. The current contract price of $1.36 per MMBTU compares to current market price of $1.00 per MMBTU. Results of a solicitation for 6-month gas supply produced very favorable results and Enron has purchased a 12-year gas supply of lesser quantity at a very favorable price ($1.00 per MMBTU). There is a risk that YPF will initiate an arbitration process in the event Enron terminates the agreement. E0004403915 H:\Winword\2001\Cuiaba DASH 010420.doc Page 6 N h EXH006-01371 ============= Page 177 of 208 ============= RAC Deal Approval Sheet Deal Name: Cuiaba Additional Equity II Partner funding There will be a significant debate with Shell on who is responsible for the cost overruns. This DASH assumes that Shell will not fund any project expenditures above $621 million project budget that it approved in July 2000. Shell's position is that some of the proposed change orders are included in the EE&CC turnkey contract that was budgeted in total in the $621 million budget. Per the Shareholder Agreements, in the event that Enron/Shell can not agree on the Budget, the following occurs: • Brazilian project companies (EPE and GasMat): Shell percentage shall be reduced (I) the total amount contributed by Shell to such project entity divided by (II) the total amount contributed to such project entity by all its shareholders. • Bolivian project company (GasBol): Enron would fund the Shell portion of the increase via "Excess Shareholder Loans" that accrue interest at 16% per annum. The principal and interest shall be repaid by GasBol prior to any distributions to any shareholders (either dividends, repayment of capital, etc.) Legal risk it The legal risks with respect to the PPA with Furnas and the Shell funding are very significant, and the outcome is difficult to predict KEY SUCCESS FACTORS NA Poor Excellent Core Business X Strategic Fit X U side/O tionalit X Management NA Risk Mitigation X OTHER RAC COMMENTS: This DASH request assumes Shell is unwilling to approve change orders over the $621 million project cost level. To the extent that Shell balks at additional funding over this level, this DASH request is for the funding of EE&CC's construction loss or ;. EGA's increased project costs and owenership. Assuming no incremental capital contribution by Shell, the net present value of the project is a negative ($244,052,000) at a capital cost of 22.0%. While the net present value is hugely negative, the present value of this incremental investment decision is a positive $131,113,000. As well, depending on how the scope of change orders are interpreted by Shell and ~" Enron, EE&CC may be contractually obligated to finish the work. MILESTONES: Complete pipeline on Ridge 10 July 11, 2001 >: Gas contract renegotiated September 21, 2001 • Pipeline mechanically complete September 21,2001 + IBAMA operating license for GasMat October 6, 2001 • Gas available at plant November 11, 2001 E0004403916 • PPA status December 31, 2001 • Plant Commissioned on Gas January 10, 2002 H:\Winword\2001\Cuiaba DASH 010420.doc Page 7 W EXH006-01372 ============= Page 178 of 208 ============= E=NKUN ~3UU I H HMLK1(_H I- ax: r'1S-b!!b-(U~~ RAC Deal Approval Sheet 2 APPROVALS Name Slgnatur Date 1 Region Originator Peter Weidler Za o CEO - EGA Rebecca McDonald i Z-4 -A EWS Legal Mark Haedicke RAC Management Dave Gortc c. ~' Enron Global Finance Andy Fastow or Ben Glisan Office of the Chairman Jeffrey Skilling ui Z S :ra C:\WMDOWS\TEMP\Cuioba DASH 010420.doc Hpr 25 2UU1 1 :52 F.02 Deal Name: Culabd Additional Equity II E0004403917 Peg8 iB v to to PYI400A-c 1I7'i ============= Page 179 of 208 ============= f dx • r 1J-o!40-('J tiJI LU LVU.L 10 •zz r. UL De*l Name. Cuisb6 Additional Equity IT tINKUI`I JUU I h HI"ItKII-H N -kC De it Approval Sheet Y P"R L O . B A S Rel ion On ;inator CE,-?-EG b Lcga ,: RA, 'Management Enr •a Glok al Finance Offi'cof0:Chatrmut Name Signa u Dat Peter Weidler LQ a T Rebecca M, Donald LU Mark Hacdecke ?r Dave Gone 40. a,:o-1 Andy Fastow or Ben Gltsan Jeffrey Ski] lin ~lp I V e- hc,{ e„ P.). E0004403918 C:1W1 ;DOWS' TPM?' uirba DASH 01 o42O.daC E d ELEOZEZ99ti 'ON/LI: 6 1 '1S/6I~61 10 OZ 191) cv1..InnF_n1' 7 t Page 8 I6t -979-E IL MI J IVD .1 .03 NOU ============= Page 180 of 208 ============= ~frii c f'[ E0004403919 Page 8 EXH006-01375 ============= Page 181 of 208 ============= (fit '~:A .NKIJN :,UU I H HMbKI LH I- ax : (1.5-b4b- (UI313 RAC Deal Approval Sheet Global Finance Summary (addendum to DASH) 1. Transaction Summary Total Deal/Project Capital Commitment through Completion Less: Financings (OPIC/KfW project financing) Less: Syndications Net Enron Investment (funding to date plus future funding to Completion) Hpr 2.5 2UU1 1,, :52 h . 01 Deal Name: Culabg Additional Equity II Amount (S millions) $569.8 -0- $569.8 2. Investment terms and pricing: 0 Market 0 Above Market X0 Below Market Describe (if necessary): (Investment returns below RAC capital pricing for Bolivia/Brazil investments.) 3. Financing terms and pricing; ฎ Market 0 Above Market 0 Below Market Describe (if necessary): OPIC (10.71%, 15 years). KfW three tranches (7.04%, 15 years, 7.48%, 15 years and 9.27%, ~" 11 years). Negotiations with the Lenders to extend their commitments until year end 2001 should be concluded favorably by the end of April, 2001. 4. Legal or practical liquidity restrictions: 0 Unrestricted 0 Legally Restricted 0 Practically Restricted Describe (if necessary): Enron to maintain 25% minimum hold in project (OPIC requirement) and Shell and Enron must maintain control of project (OPIC/KfW requirement). 5. Any recourse to Enron (other than investment): 0 Recourse 0 No Recourse Describe (if any): Debt becomes recourse to Enron (pursuant to put agreement) if replacement fuel arrangement satisfactory to OPIC/KfW lenders is not dclivered before March 2003. 6a. Business unit Intent to syndicate; 0 None 0 Partial 0 All Describe (if necessary): See "hold" comment below. 6b. Intended Enron hold period: Long-term hold in strategic project. Business unit may sell all or a portion of its investment in the Cuiab:t Integrated Project. however, timing an amount of sell down unknown presently. To sell down below 25%, consent needed from lenders (OPIC/KfW) and must be sold to party satisfying OPIC U.S. sponsorship requirements per charter. 6c. Likely Syndication Market: 0 Industry/Strategic Partner 0 Direct Private Equity 0 Capital Markets 0 JEDI 1 0 JEDI 2 0 Enserco 0 LJM 1 or 2 0 Condor 0 Other: OPIC/KFW 0 Margaux S365 million 6d. Is this a JEDI 2 "Qualified Investment" 0 Yes X0 No Global Finance Representative: ~' ''= IZ Signature Name (Printed) Date Name: Peter Anderson C:\DOCUM6-I\pandcrs2\LOCALS-I\Temp\Cuiaba DASH 010419.doc E0004403920 Page 9 W LO EXH006-01376 ============= Page 182 of 208 ============= f RAC Deal Approval Sheet Deal Name: Cuiaba Additional Equity II EXHIBIT I - PROJECT DESCRIPTION Project Description: The Cuiaba Project is an integrated energy project comprised of a 480MW gas-fired combined cycle power plant in the state of Mato Grosso in Western Brazil and two connected pipeline segments totaling 641 km from Bolivia to Brazil which will supply gas to the power plant. The integrated power plant and pipeline project consists of three individual project companies: (1) Gas Oriente Boliviano (GasBol) - the Bolivian pipeline segment, (2) GasOcidente do Mato Grosso (GasMat) - the Brazilian pipeline segment and (3) Empresa Produtora Energia (EPE) - the thermal power plant. Transredes, S.A. (TRSA) was originally a participant in the project along with Enron and Shell, however given Transredes limited liquidity, they sold their interests to Enron and Shell. Gas will be supplied to the plant by Transborder Gas Services (TBS) which has contracted for gas with YPF and Transredes, GTB, GasBol, and GasMat for gas transportation.. Gas will be transported by the YABOG (Transredes) and Bolivia-Brazil (GTB) pipelines and then by GasBol and GasMat to the plant. The current ownership structure of the Cuiaba Project is shown below. GasBol GasMat EPE TBS Enron 50.000% 56.250% 58.875% 72.500% LJM 0.000% 0.000% 13.000%* 0.000% Shell 50.000% 43.750% 28.125% 27.500% Total 100.000% 100.000% 100.000% 100.000% * Enron has entered into a definitive Agreement with UM to purchase its share for $13.2 MILLION plus cancellation of $19.3 MILLION in debt. Deal expected to close bt May 30, 2001, but could close earlier pending receipt of right of first offer waiver from Shell. Pursuant to a 20 year PPA executed in May 1997 with Eletronorte and Eletrobras, 100% of EPE's output will be sold to Furnas, a regional generating company owned by Eletrobras, which will in turn sell the power to Cemat, the local distribution IZO '' company. In May 1999, the PPA was transferred directly to Furnas as part of the privatization process with no material W I changes to the PPA. Fumas' obligations for tariff adjustments and revenue protection provided for in the PPA (including in inflation and exchange rate adjustments) are guaranteed by Eletrobras. The project is being constructed by Superior Construction Company, an Enron affiliate, under a single turnkey EPC contract which guarantees the completion of the power plant and pipelines. The major subcontractor under the EPC contract is Siemens A.G., which provided the two combustion turbines and one steam generator required. If the guaranteed capacity is not available on due dates or capacity tests fail to reflect guaranteed levels as set forth in the PPA, EPE will become liable for penalties for delay damages. Penalties are essentially offset by the guaranties for completion and performance contained in the turnkey EPC contract. As of 30 January 2001, combined cycle commissioning on diesel fuel to 480 MW was completed. It is foreseen that once natural gas is available at the site Siemens will return to complete combined cycle commissioning on natural gas. That effort scheduled to commence in November 2001 and will last an estimated sixty (60) days. Commencement of combined cycle power operations on natural gas is schedule for January 2002. The Bolivian pipeline is 100% complete and line packed while the Brazilian pipeline with the exception of the two remaining ridges is 100% complete. Gas is scheduled to arrive at the plant in November 2001. The $365 Million of financing committed by OPIC and KFW remains available subject to the satisfaction of several condition precedent's. The most problematic appears to be the Furnas' consent, referred to above, which at this point has no resolution in sight. OPIC has confirmed that it is willing to begin closing due diligence at any point that we feel that the issue with Furnas is moving to resolution. H:\Winword\2001\Cuiaba DASH 010420.doc E0004403921 Page 10 EXH006-01377 ============= Page 183 of 208 ============= RAC Deal Approval Sheet EXHIBIT II Project Cost History Deal Name: Cuiaba Additional Equity II Original - November 1997 EPE GasMat GasBol Total Capital cost (USD 000) $ 280,000 $ 195,000