to: Year End 2000 Accounting Files Ftoiii: Georganne Hodges Subject: December31, 2000 as & Power Curve Adjustments for ENA O~dn~eot Gi isiness Nialysis & Reporting Oate: F ~bruary 22. 2001 During the U*d quarter of 2000 US natural gas and power prices began expec response to certain market conditions that wetTe present.. pdmai~ily in the Western half of I volatility continued to be present in the fourth quarter. peaking the month of December. of volatilit (primarily December) ENA held significant tixed price and basis positions, prima unprecedented daily swings were noted in ENXs mark to market portfo(io valuation. swings led us to question the realizability of many of ENA's po~itions at the current forwa impact of position and price movements on our mark to market portfolio valuation througho consulting with ENA Trading Management (see attachment .1). we conduded that the De 'M-ieni applied to EI4P's December 29 fixed price and basis 'ositions would not property -ealizable value. In order to determine the amount of reserve needed to property state our gas and p realizable value, again were reviewed trends from the month of December (Attachment ~nagement. Management believes that although the Western Power markets have s~ ..00. that the gas markets and related forward curves wer... where we needed to focus were pointed to EHA's overall fixed price exposure to nat cral gas and the Western Sc positions. Attachment II shows the impact of the curve mc *mqnt during the most volatile of December 8 - December 1 3l1~~ on ENA's positions dunn4 that period. Applying the curv~ for the three gas positions shows that ENA's mark to market o~rt(olio value would have d that week. The relationship between ENA's significant shortening of its fixed price position in both the fixed price curves and the basis curves in the west is the relationship that ma relative to the aventual close out of the positions. Attachment Il simulates the valuation change that coisld occur again relative te positions for the three locations by applying the curve ship' from the single largest day n period to these positions. This simulation suggests that Er" ~\ could experience a valuation day if that price movement were to occur again. On December 29, 2000 ENA recorded a curve valuation reserve of $369 Millior7i r 80% of the worst-case scenario discussed above. ENA Management believes this is aooni gas and power portfolio at a realizable value. Heipeci l41tCgftly con~.,,~c.auon EXHOO9-00585 lencirig significant volatility in ie United Slates. This hyper- During these extreme periods ily in natural gas. Asa result. he magnitude of these daily d curves. After reviewing the it the month of December and ember 29 unadjusted curves tate ENAs total portfolio at a ~wer portfolio at the estimated and consulted ENA Trading en significant volatility in late ur attention. Specifically, we Cal and PGE Citygate basis veek of December. the period movemeg~ to ENAs portfolio ~cfined b~$950 Mzltk4duning during this week and the drop lagement is concerned about ENNs December 29. 2000 lovement from the December decline of $455*tillion in one ) I nteroffi :e Memorandum is amount represents roughly oriate to property state ENAs (:OIMIU)t&NTIAL REQUESTtD ~Y ARTIIUI( Ario~;RsEr LLr. r.xceller~ce ENRON NORTH AM~ C '~ I I AL~L{Olii..U~41A I .~ ~44~6- ~s EXHOO9-00586 4I~ QTh 2~ *-1. ''l Enron t'~octh America 1h1~Q41 -1216 -12111 -12112 * 1313 v~1 P*21Cu~ -12,9 -12111 -12112 -12113 64114~ -I211l.IL$l481I?19p01. -12112151440012111)104.. -121)315)9400 12112 poo So~i 6.40. P~o~ -1211 = -1~I * 12112 -12111 6.441. CW10. -92,9 - 12111 -12112 -12/13 1.11. - 12111 1576400 1249 p01. - 121121.11140012111 p04. 606CC o.... 6400004 - 12,9 - 12(11 - 12112 - 121(1 POE 6.441. 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I o*lUocW .12129 640404015 So.~E£4d. 6.441004 - (2f21 12111 C..lw 31.41 ~1.d MTh 96~4y PeE CC £~o1. 60.16.01 .12129 12111 Cu.w 52.41 E~.o1=d 106)4 46196~.4y (2k' r,&* C.... 4415410049.4(7 22 (57) 43 52 120 (31) 140 (2.051 (1261 (291) (6.30) (2212 000 3 4 13 404 (2) (6; 1(6 (1500) ($001 (326) (I 14) 0.00 000 (14500; (14000) (12964) (1122)2) 10.00 5000 (1237 14) 6 4 9 1 13 11 50 ((1252 (5.00) (220) (1.17) 400 000 (6103)0) (:140 00) (129(44 (5112) 5000 1000 11146 IS) (1113 III ~ (149641 (1139.34) 112624) 1000 2 I(lAlSllIIX ((:6 9UES1rn CV AI(11(UI( ANIlE )lSI.N 1.(P EXHOO9-00587