============= 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 aggreg