LJ~ INVESTMENT SUMMAR DEAL NAME: Margaux Dare Completed: June 28, 2000 Originated: Eriron Europe Invesmient Analyst Chris Loehr ~xpeaed Casing Dare: June 30. 2000 Investment Type: Equity Expected Funding Dare: July 6, 2000 APPROVAL AMOUNT REQUESTEn Capital Commimtenr S 10.0MM DEAL DESCfl[PTION Purchase 33% of the equity mist cemilicates in the Margaux smicrure for $10 ~i1lion. Marganx is snaonerrrarion of Enroif a equity ownership in three European power plant znvemnnenrs: Sarlux, Tnkya, and Wows Sarzvna. A brief description of each of the power plants follows: Sarlux is a 551 MW integrated combined cycle power plant in Sardinia, lmly. Sarlwc will convert heaw oil residual provided by the Sans refihtety into sy~ichecic gas, which will be fed into gas turbines to produce clecoicai power. The power will be said wider a 20 year PPA to ENEL SpA, the Italian stare-owned elecniciry generator and dist-iburar. Sarlux is currently under ccnsm±ctioa and commercial operations are expected to commence in October 2000. Trakya is a 473 MW CCOT plant located by the Sea of Marmara, Turkey. Commercial operation commenced in June 1999. There are long rum fuel supply and offbke cannacis with state-owbed eut ties. All payment and perfomunce obligazions arc backnopped by Rzpublic of turkey guaranty. Nowa Sa'-ryiia is located in southeastern Poland and is a gas.fired hut and power station with a generarin~ capacity of 116 MW and thermal generating capacity ct7O MW. The heiliry is located witt the chemical complex of Organika (stare owned chemical producer). There are long mm fuel supply and offtakeconnacts with stare-owned entities. Nowa Sarayna Ic currently tinder construction and completion is expected in early June 2000. Macgain will issue $95 million of equity oust notes, $10 million of Class A equity certificates and $15 million of Class B equity certificates. The mist notes have been razed BE by fluff& Phelps. UM and Hancock will purchase 33% and 6754, respectively> of the Class A certificrcs. LAM has agreed to let Hancock have voting eanuti over all james except those affecting expected return or the required invcsnnenraanounr. Enron will purchase 100 V. of the Class B certificates. The Margaux u-un wilt enter into a swap with Enrora Corp. oc the ash~awn from the underlying projects. ENA will talcc the floating caehflows from ~te underlying projects, and the Masgmsxmnr will receive fixed payments, subject to cenaut adjustrents, which will be used for debt and equity service. The risk of tin deal in tat the adjustments to the fixed swap payments made by Enron (due to factors described below) result in casliflows insufficient to provide a rewni of capital and a return on capital to LJM. The first fixed swap payment due December IS, 2000 is not subject to adjusnnent. The swap '>4th ENE involves the discrete a-ansfer of certain risks to Margaux. Thc amount received by Margaux under the swap will be adjusted for the foliow'w~: Sarlux: Certain variances in forced outage rate, methane price, CIP-6 Trakya; Certain variances in forced outage rare, fuel tinge, TuAcy credit event Nowa Sanyna: Certain variances in forced outage rate, fuel usage (Sec risks and mitigants secuori for further deraiL on risks n~sfeaed so Marga±t'c.) All other project risks will be bonie by Enrort Corp. The swap has a 12 ycar term, while the Margaux afructire has a 10 year term. A cash account in the structure grows by the excecs, if any, each period of the fixedrmap payments (afmra4~usmienrs. if any) over the debt and equity Serviec. Ar termination of dir swucrure, the swaps termination value (the present value of the remaining two years of payment!) is paid to Margnx and used along with any amounts in the cash account for debt and e~uiry redemption. TRANSACTION SUMMARY Ci, June 30, 2000, LJM will purchase 33% of the equity trust cerrificares in the Margaux stuCtu3e for $10 million. CASE FLOW SUMMARY Cashnaw available for distribution from she artist will b~ dim-ibured according to r.be following waterfall: I. Opcraui,~ expenses of the trust 2. Trust note interest 3. A Certiflcasc yield of 12% (subject to coverage ratios) .a, Der service reserve (until faW funded to SSO million) S. A and B Certificate yield accretion (d% ordinary yield for A. 16¶'. yield for H: subject it coverage ratio) 6. Trust note redemption 7. A 2nd H certificare redemption (pan pasati) r~o~1U¶~wENT1 ContIdentilt Treatment EXHIBIT I gequested LJM030349 i 7801 L CM,No H-O4-~25 J The A cenificarcs robe purchased by ~JM will be entitled tea cash certificate yield o~ "A and a cash ordinary yield of 4% (total 16% yield) subject to the I ictions iii the waterfall (see 'Subordinatton ot ~±icv' in risks and mirigants for deraiLs of covenants). Ar the end of ihe structure (2010), the A cenificacet will receive a return of capital pan passu with the S certificate redemption, but only after repayment of the Trust Note certificates RETURN SUMMARY LJMs investment rmdet the base case assumptions and if held to mansrlrv would yield 16%. The returns are impacted by swap payment adjusmients (see risks and mirigants section as well as sensitivity section for more derail). EXIT STRATEGY It is expected thai this invesanent will be pooled with other current cashflow invemnent.s and securirized durinR the next twelve months. RISKS AND MITIGANTS Srn'crw-af risks of idargoux Risk Description/Miripnr Subordination of equity From an equity standpouu, rhe mast notes receive preference in disuiburion to the A and B cenincarcs. The waterfall limits current ~shflow diswibudon to the A certificate holded (certificate yield is subject to I .lSx LTM and I .lSx NTM coverage ratio for nit note interesi~ ordinary yield is subject to the debt service reserve being fully flanded and a l.75x life of the net notes coverage ratio being met). In addition. return of principal at the end of the ructure is made pail passu I with the B certificate redemption. The exreme subordinarion of the A certificates is mitigated by analysis of the sensitivity cases, most of which result in a 16% return and return of capital. Bullet repayment Principal repayment, if any, on the equity certificnes occurs a~ the end of the Mazgutaxmcrun in December 2010. Catastrophic events Forced outage adjusucuts rentring from any of the ptan~ being subsruwaily or entirely damaged, deaoyed or rendered unfit for normal use can be made for only three years. After ttarpoirtr. the swap payment adjusts to the original asnount, mceotavtng Enron to rebuild or repair the ant. Risks transferred under swap - Sar/ux Risk Description/Misigant Completion risk j Sarlux is currently under construction with cornrnerctal operations expected to I commence in October 2000. Margaux don not take compLetion risk on Sarlux. Qpcranng risk (Forced outage) Sarlux will convert heavy ad residual provided by the Sans refinery into synthetic gas, which will be fed into gas turbines to produce electrical power. Even though the creation of the synthetic gas is proven proprietary Texaco technology, it is, by design, a more complicated plant than the other Margaux assets. The EPC coniraaor is a consortium comprised of Snaniprogeni, Turboceenica and GenenalEjeeme. GE was chosen on the basis of its considerable syngas experience which is grrater than any other manufacturen The operating risk is farther mitigated by setting the forced outage rate higher than the other Margaux assets. To Amber limit risks related to die synthetic gas. Margaux does not take fuel usage risk. indention risk The tariff Sarlux receives uaclu&s an avoided cost component based on the price of methane in Italy. The Italian gas marker La nor deregulated, so the price of mcrhanc is set byte government and is based on a fonnrila involving the price of oil, Itaijon CPI, and other factors. A baseline forecast of the avoided cost component of Sarlux's revenues was made by an independcnt consulting finn using forecasts of the price of oil, Italian CPI, etc. Every 1% deviation from this forecas~ lowers rl2esnppaymentbynslkvyear. The independent third parry forecasts have been anaiyzed and appear reasonable for price of oil, Italian CPI, etc. In the event that the gas marker is deregulated, the baseline forecast will be reset based on the new marker prices for as. C;YtEMPl dJ'v-0033948.doc LJM030350 Pap 2 ConlidentiSI Treattuetit Requested CIP.6 ts ttte tariff paid to certatn electicity gt.. ..nrng plants that are using aiternative AiM sources. The CIP~d tariff contains an incentive portion, paid b> the Italian go'emmenr to subsidize these projects, The incentive portion of the CI?-6 tariff S tO 03 of the £0.08 tariff that Sarltn receives from ENEL. Any change in law that would affect the incentive portion of the CIP*6 uriff is borne b~ Margau.\ The total repeal of the incentive portion of the tariff would reduce the swap pas men: by £35.1 million per year. The risk of repeal of the incentive is mitigated ny risc results of a recent challenge in 1999 by a consumer advocate group. The challenge was taken to the Italian Council State, which passed judgiment that the incentive portion of CIP-6 cannoc be changed. In ad~i:ion, as long as the incentive is nor repealed before 2005, there is sufficient cash flow under the base case asstm\ptsons to provide the expected return arid rerurn of capital to he A certificate holders. Risks transferred under swap - Tratvo Risk 1 Description/Mitigant Operatng risk (Forced outage and Fuel Operating risk for the Traicya plant is minimal due to rite standard design of the Usage) plant and the operating history to due. Credn risk The Republic ofTurkey is currently rated B~ by S&P, SI by Moody's. and SB- by Duff& Phelps. All three raring agencies believe the outlook for Turkey is positive. The swap payment will be reduced 120 miflion per year under the following Credit Event scenarios: (I)b, the event that Turkey defaults on foreign currency denominated debt of a principal amount equal to or greater than £40 million; or (2} In the event that Turkey is downuaded by both Moody's and S&P below Cani and CCC+, respectively. ANn Trays is not receiving ax least 95$'. of amounts which s~ere due and payable under the current PPA. Once the Credit Event has been remedied, the swap payment is adjusted upward by £20 million per year to the original amounL The endit risk of Turkey is mitigated by the counnys need for forei~ invemnent to meet their IMP goals and to assure their pending membership in the EU. Also, assuming that Turkey needs the power from Traicva. conneetleg the county downoadc risk and the plant payment risk allows swap payments to continue unadjusted if the coutiny is downraded bat die utility, TEll, is still buying the power In addition the swap payment is not adiusted if TEll renegotiates the PPA to reduce the tariff, suite the 95% receiptS reQuirement Is tied to the ??A. us amended or modified. [Risks transferred under swap - Nowo Sarryna Risk Descrtptionflvlirigant Completion risk Nowa Sarzyua is currently under conswucrson and is expected to commence commercial operations itt early June 200& Margau% does not take completion risk on this asset. Operating risk (forced outage and Fuel During resting, the stern wrbane rotor was damaged but nonetheless tested within Usage) expected parameters. Replacement of the Steam nirbine rotor is planned in April 200 t. To the extent thu a forced outage is caused by the damaged turbine rotor within the (star two yuan of operation (before replacement), the swap payment will not be affected. After raplacement. the turbine will be covered by die standard r~o year warranty from the manufacturer. Therefore, tic forced ou~!e risk is mitigated until 2003. Note: The maxunuin swap adj usmient relatee to Nowa Sar'na cannot exceed 13)61 million peryes.r, or 8.7% of the fixed swap payment. Therefore, the operating performance of Nowa Sarzyrrn will have a minimal impact on certificate returns. LJMO3O3Sl C:\TEMMi43v..~3394m50~ Pa4e Corulidentlal Treatment Requested ClP~6 risk SENSITIVITY At the end ot the Ntar~au:t stricture under the base case assumptions, te buildup of cash and the tennination vait~e of the swap pro~'idc return of capital. DLJ ran IS sensitivity cases asswning differern combinations of operating risks. inde~zaon risks, CTCdLt risks, etc. (ail the risks outlined above) at single plants and occurring jointly at n,uhiplc plants. Other than those cases involvins the repeal otCT?-6 or Turkey credit events, the swap adjustrents do not result in significanT impairments to equity returns These rue risks impact equity returns the most and are described in more detail be Low rrak~a Turkey Cred,r Risk The swap payment adiusonent is £2D million per year until the credit event is remedied. The sensiziviry cases show that as long as the credit event is temporary (in the DU example, lasting from years 3-5) the certificate returns are nor afiteted Nowever. if the credit event occurs early in the life of the sn~cn±rc and is not remedied, the equity is irnpaxred rcemfieatcs receive rerur~ on, but riot renjrn of capital). This Inner case (a 'pennanen¶" credit event) seems unlikely given Turkeys need (or rorei~n nvesrntenc, the country's desire to join the EU and the need for the power from the plant. Sorha CIP-6 Rrk The swap payment adjunn,ieni is S3$.i million per year if the incentive component of CIP-6 is repealed entirely. The scnsitivirv cases show that the incm,tive enniponent would have in remain in place until at inst 2005 if the expected cenifleate renarn2 are to be aehteved. Given the results of the reant challenge to the incentive, it seems likely that if the incentive were challenged again in the near fixture, and the tonsurner advocse goup prevailed, the government might decide to phase out the subsidy over some period. I±~ for example, the subsidy was cut in half foriwo years sunirtgin 2003, then repealed entirely in 2005, the expected return would be achieved and the capital would be returned in 2010, L3M030332 Confidential Tentmnent Requested C \TEMr)43~-oo3294sd0~ Pa:c 4