============= Page 1 of 123 ============= EXH011-00989 GOVERNMENT EXHIBIT 1239 Crim. No. H-04-25 (S-2) Enron Corp. audit and Compliance Committee :;;°' October 12, 1998 ============= Page 2 of 123 ============= INTEROFFICE MEMORANDUM ROUTED TO: Rex R. Rogers Peggy B. Menchaca October 30, 1998 DATE ROUTED: j-zrc2 g )ZI 40,11114- 1 (- ?'~. -M RE: Minutes of the meeting of the Compensation and Management Development Committee of the Board of Directors of Enron Corp., held on October 12, 1998. Attached for your reading pleasure and editorial expertise are the minutes of captioned meeting. Please edit and route to the next name on the list, indicating the date routed. Thanks for your help. -42n~~-4 Peggy B. Menchaca Comments, please: Philip J. Bazelides Ed Coats \corp\n i&anaaoc E C 000050955 EXH011-00990 ============= Page 3 of 123 ============= INTEROFFICE MEMORANDUM October 28, 1998 ROUTED TO: DATE ROUTED: Rex R. Rogers ~_. James V. Derrick, Jr. t~ Peggy B.Menchaca RE: Minutes of the meeting of the Audit and Compliance Committee of the Board of Directors ofEnron Corp., held on October 12, 1998 Attached for your reading pleasure sand editorial expertise are the minutes of captioned meeting. Please edit and route to the next name on the list, indicating the date routed. Thanks for your help. Peggy B. Menchaca Comments please: Robert H. Butts Richard A. Causey Ed Coats ~ ' rninuana.doc EC 000050956 EXH011-00991 ============= Page 4 of 123 ============= y'~o Dr. Robert K. Jaedicke, Chairman Mr. Ronnie C. Chan Mr. Joc H. Foy Dr. Wendy L. Gramm Lord John Wakeham Mr. Bruce G. Willison Gentlemen and Dr. Gramm: Peggy B. Menchaca Vice President and Secretary Enron Corp. P. 0. Box 11$S Houstun, TX 77251 1 188 (71.3) 853-6474 November 4, 1998 Fax (723) 853-2534 Enclosed for each of you is a draft of the minutes for the Enron Corp. Audit and Compliance Committee meeting held on October 12, 1998. If you have any additions, corrections, or changes you care to suggest on the draft of minutes enclosed, please call me at (713) 853-6424, or drop me a line at the above address. Thanks for your time. Enclosure 11:1Audtran.doc Sincere , Natural gas. Electricity. Endless possibilities TM EC 000050951 EXH011-00992 ============= Page 5 of 123 ============= INTEROFFICE MEMORANDUM October 28, 1998 ROUTED TO: DATE ROUTED: Rex R. Rogers James V. Derrick, Jr. Peggy B. Menchaca /8-3,o - /VI RE: Minutes of the meeting of the Audit and Compliance Committee of the Board of Directors of Enron Corp., head on October 12,199F, Attached for your reading pleasure and editorial expertise are the minutes of captioned meeting. Please edit and route to the next name on the list, indicating the date routed. Thanks for your help. Comments please: Robert H. Butts Richard A. Causey Ed Coats mintrana.doc Peggy B. Menchaca EC 400056958 EXH011-00993 ============= Page 6 of 123 ============= ARTHUR ANDERSEN May '11, 1998 :1rtlull Arid •rsrn 1.I.I' Dr. Kenneth L. Lay Chairman of the Board and Chief Executive Officer Enron Corp. 1400 Smith Street Houston, Texas 77002 Dear Dr. Lay: S„it~ 1:~tX1 711 [.o,eisiana Street I 1nuston TX 77002-2786 713 237 2323 We are pleased to have been appointed as independent public accountants of Enron Corp. and subsidiaries (Enron or the Company) for the year ending December 31,1998. In connection with our appointment, we would like to confirm our understanding of the services we will provide. Our work is to consist of an audit of the consolidated balance sheet of Enron at December 31, 1998 and of the related consolidated statements of income, cash flows and changes in shareholders' equity accounts for the year then ending. We will also audit and issue separate auditor's reports on the 1998 financial statements of certain subsidiary companies, listed at Exhibit 1, where stand-alone financial statements for such companies are necessary to comply with the rules and regulations of the Securities and Exchange Commission (SEC), the Federal Energy Regulatory Commission (FERC) or to meet other obligations. The objective of our audits is to provide you with our auditor's report expressing an opinion on the financial statements referred to above. Our work is also to consist of an examination, in accordance with standards established by the American Institute of Certified Public Accountants, of management's assertion that the system of internal control of Enron Corp. for the year ending December 31, 1998, was adequate to provide reasonable assurance as to the reliability of financial statements and the protection of assets against unauthorized acquisition, use or disposition based upon current standards of control criteria. Upon completion of our examination, we will provide you with our report on the assertion referred to above. Audit Responsibilities and Limitations We will conduct ourr audits in accordance with generally accepted auditing standards. Accordingly, we will examine, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assess the accounting principles used and significant estimates made by management, and evaluate the overall financial statement presentation. Generally accepted auditing standards require that we obtain reasonable, rather than absolute, assurance that the financial statements are free of material misstatement, whether caused by error or fraud. Accordingly, a material misstatement may remain undetected. Also, an audit is not designed to detect error or fraud that is imrxmaterial to the financial statements. However, EC 000650959 EXH011-00994 ============= Page 7 of 123 ============= ARTHUR ANDERSEN Dr. Kenneth L. Lay Page 2 May 11, 1998 we will bring to your attention any material misstatements and any fraudulent or illegal acts of which we become aware during our audit. Pursuant to professional standards, in the unusual event that we are unable to complete the audit or are unable to form or have not formed an opinion, we may decline to express an opinion or decline to issue a report as a result of the engagement. Our audit and examination will include obtaining an understanding of the system of internal control over financial reporting and safeguarding of assets, testing,, and evaluating the design and operating effectiveness of the system, and such other procedures as we consider necessary in the circumstances. While an effective internal controls structure reduces the likelihood that errors or irregularities (including misappropriation of assets), may occur and remain undetected, it does not eliminate that possibility. Also, projections of any evaluation of the internal control system to future periods arc subject to the risk that the internal control system may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Accordingly, and because we use selective testing in our audit and examination, we cannot guarantee that deficiencies in the design or operation of the internal control system, if present, will be detected. However, we will design our examination of management's assertion regarding the internal control system to provide reasonable assurance of detecting material weaknesses. Material weaknesses are conditions in which the design or operation of one or more elements of the system in internal control does not reduce, to a relatively low level, the risk that errors or irregularities, in amounts that would be material in relation to the financial statements, may occur and not be detected within a timely period. Our audit and examinations are not designed to detect whether any systems are Year 2000 compliant. Further, we have no responsibility with regard to the Company's efforts to make its systems, or any other systems (such as those of the Company's vendors, service providers or any other third parties), Year 2000 compliant or provide assurance on whether the Company has addressed or will be able to address all of the affected systems on a timely basis. This is the responsibility of management. However, we will make inquiries of management regarding the Year 2000 issue, consider management's assessment of the potential impact of the Year 2000 issue on the current year's financial statements and our audit or examination, and discuss or otherwise be satisfied that senior management and the audit committee are apprised of any observations we have relative to its Year 2000 remediation plan. Management's Responsibilities and Representations The financial statements are the responsibility of the Company's management. Management is also responsible for (1) maintaining effective internal control over financial reporting and the safeguarding assets, (2) identifying and ensuring the Company complies with the laws and regulations applicable to its activities and (3) making available to us all financial records and related information and personnel with information of relevance to our work. EC 000050060 EXH011-00995 ============= Page 8 of 123 ============= ARTHUR ANDERSEN Dr. Kenneth L. Lay Page 3 May 11, 1998 As required by generally accepted auditing standards, we will make specific inquiries of management and others about the representations embodied in the financial statements and about the effectiveness of internal control. Those standards also require that we obtain from certain members of management a representation letter covering such matters. The results of our audit tests and examination procedures, the responses to our inquiries and the written representations constitute the evidential matter we intend to rely upon in forming an opinion on the financial statements and on management's assertion regarding internal control. Also, under professional standards, in order for us to examine and report on management's assertion about the effectiveness of an entity's system of internal control, management must make an assertion regarding the effectiveness of the system of internal control. While we'uiay assist management in accumulating evidence to enable them to make such an assertion, management is responsible for establishing and maintaining an effective system of internal control and for evaluating its effectiveness. Other Services In addition to our audits, we will review, in accordance with professional standards, the quarterly financial information to be included in the Company's reports to be filed with the SEC, except that, unless requested by the Company, we will not issue a report or obtain a representation letter from management. Our reviews will consist principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. These procedures are substantially less in scope than an audit made in accordance with generally accepted auditing standards and, accordingly, they do not provide any assurance that we will become aware of errors, fraud or illegal acts that would be disclosed in an audit. At the completion of each review, we will discuss the results with management. Fees and Billing Arrangement Our charges for the services described above have been previously agreed to by management and reviewed with the Audit Committee of the Board of Directors. Billings for such services will be made on a periodic basis during the year based on a schedule agreed upon by management. Of course, we will also be available to provide other accounting, tax or business advisory services as requested by Enron management throughout the year. Our charges for such services will be based upon the level of staff and time required to complete the assignment, plus out-of-pocket expenses. Other Matters Arthur Andersen LLP represents that the Firm and its personnel are independent of Enron pursuant to the rules and regulations of the American Institute of Certified Public Accountants (AICPA) and the SEC, as such term is utilized by the AICPA and the SEC. EC 000050961 EXH011-00996 ============= Page 9 of 123 ============= ARTHUR ANDERSEN Dr. Kenneth L. Lay Page 4 May 11,1998 The working papers prepared in conjunction with our audits are the property of our Firm, constitute confidential and proprietary information and will be retained by us in accordance with our policies and procedures. If you intend to publish or otherwise reproduce the financial statements together with our report (or otherwise make reference to our Firm) in a document that contains other information, you agree to provide us with a draft of the document to read and comment on before it is printed and distributed. Any additional services that you may request, and that we agree to provide, will be the subject of separate written arrangements. We look forward to our continued involvement with Enron and assure you that this work will be given our closest attention. Very truly yours, ART R A EN LLP By David B. Duncan Agreed and Acknowledged by: Richard A. Causey Senior Vice President, Chief Accounting, Information and Administrative Officer Enron Corp. Copy to: Mr. Richard A. Causey Dr. Robert K. jaedicke Mr. Ronnie C. (Ian Mr. Joe H. Foy Dr. Wendy L. Granun Lord John Wakeham Mr. Bruce G. Willison Mr. Jeffrey K. Skilling EC 000050962 EXH011-00997 ============= Page 10 of 123 ============= ARTHUR ANDERSEN Exhibit 'l Enron Corp. Stand-Alone Financial Statement Audits December 31,1998 Enron Corp. Transportation and Distribution Northern Natural Gas Company Transwestern Pipeline Company Portland General Electric Fale Safe Incorporated Trojan Nuclear Plant Boardman Coal Plant Enron Communications, Inc. Exploration and Production Enron Oil & Gas Company Enron Oil U.K. Limited Wholesale Energy Services San Juan Gas Co, Inc_ Electricidad hnron de Guatemala, S.A. Enron Europe Limited Group and Company Enrici Power Marketing Limited Enron Europe Liquids Processing Enron Gas Processing (Europe) Limited Enron Power Construction Limited (Croup and Co.) Enron Power (Europe) Limited Enron Power Operations Limited (Group and Co.) Trenron Limited Enron Europe Construction Limited Enron Gas Construction Limited Teesside Power Holding Limited Enron Power Trading Limited Enron Capital & Trade Resources Limited Enron Petrochemicals BV Wallerscote Power Operations Limited Teesside Gas Transportation Limited Enron Europe Power 1 Limited (Group and Co.) Enron Europe Power 't'ype of Report Issued SEC Form 10-K Audit Report FERC Form 2 Audit Report FERC Form 2 SEC Form 10-K Audit Report FERC Form T Audit Report Audit Report Audit Report Audit Report SEC Form 10-K Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Et 444054963 EXH011-00998 ============= Page 11 of 123 ============= ARTHUR ANDERSEN Exhibit 1 Enron Corp. Stand-Alone Financial Statement Audits December 31, 1998 Entity Type of Report Issued Wholesale Energy Services (cont.) Audit Report Enron Europe Power 2 Limited Audit Report IPG Power Audit Report Enron Engineering Services Audit Report Enrou Sutton Bridge Operations & Maintenance Limited Audit Report Wallerscote Operations & Maintenance Limited Audit Report Teesside Gas Processing Limited Audit Report Enron Gas Processing (UK) Limited Audit Report Falco UPG Limited Audit Report LPG Falco Limited Audit Report Enron Europe Operations Limited Audit Report Enron Direct Limited Audit Report Enron Sutton Bridge Limited Audit Report Sutton Bridge Power Audit Report Sutton Bridge Financing Limited Audit Report Kent Power Limited Audit Report Sutton Bridge (Generation) Limited Audit Report Bretton Power Audi t Report Enron Power Operations Teesside Audit Report Enron Gas and Petrochemicals Trading Limited Audit Report Enron Sutton Bridge 2 Limited Audit Report TGT Finance Audit Report Bretton Holdings (One) Limited Audit Report Sutton Bridge Investors 3 Audit Report Enron Shareblock Limited (Group and Co.) Audit Report Enron 1(P1 Limited (Group and Co.) Audit Report E=on KP2 Limited Audit Report Enron Europe (Sites) Holdings Limited (Group and Co.) Audit Report Enron Europe (Sites) No. 2 Limited Audit Report Rassau Power Limited Audit Report Enron Europe Power Holdings Audit Report Enron Engineering Services Audit Report Flotilla Power Limited Audit Report Flotilla Power (UK) Limited Audit Report EC 000050964 EXH011-00999 ============= Page 12 of 123 ============= Dr. Robert K. Jaedicke, Chairman Mr. Ronnie C. Chan Mr. Joe H. Foy Dr. Wendy L. Gramme Lord John Wakeham Mr. Bruce G. Willison NOTICE OF MEETING OF THE AUDIT AND COMPLIANCE COMMTJTEE ENRON CORP. Monday, October 12, 1998 A meeting of the Audit and Compliance Committee of the Board of Directors of Enron Corp. will be held at the time and place and for the purpose indicated below: DATE: October 12, 1998 HOUR: 4:00 p.m. (C.D.T.) PLACE: 50M Dining Room Enron Corp. Houston, Texas SUBJECT: Such matters as may be properly brought before the meeting. ,Dated September 16, 1998. Peggy B. Menchaca Vice President and Secretary cc: Mr. Kenneth L. Lay Mr. Jeffrey K. Skilling Mr. Richard B. Buy Mr. James V. Derrick, Jr. Mr. Richard A. Causey Mr. Andrew S. Fastow %CorpAAudnot.doc EC 000050955 EXH011-01000 ============= Page 13 of 123 ============= r - EC OOOD5~966 EXH011-01001 ============= Page 14 of 123 ============= AUDIT COMMITTEE MEETING OCTOBER 12, 1998 Endless possibilities. CONFIDENTIAL EC 000050961 EXH 011-01002 ============= Page 15 of 123 ============= ,4y-,.e e2~~ 'A', - -:~~ ,-z, /~ - 61 j Z,'O 1,, 4, 1A 17 y f/L LG~'~y aw ` Integrity I Communication Excellence Form 000-0466 (3/58) EC 000050968 EXH011-01003 ============= Page 16 of 123 ============= Co F" 297;Ez~~ t 12 a~ Form 000-U466 (M98y Respect Integrity ; Communication Excellence ` EC 000050969 --XH011-01004 ============= Page 17 of 123 ============= form 000-0466 (3198) Respect Integrity 1 Communication Excellence EC 000050970 EXH011-01005 ============= Page 18 of 123 ============= Dr. Robert K.laedicke, Chairman r/ Mr. Ronnie C. Chan ' Mr, Joe H, Foy v Dr. Wendy L. Gramm - A Lord John Wakeham Y' Mr. Bruce G. Willison V' Agenda Meeting of the Audit Committee of the Board of Directors f Enron Corp. 14 11 1';) 4.00 p. m.(C.D.T), October 12,1998 50M Dining Conference Room Enron Corp. Houston, Texas f S,Ci JJ~i ~~htnn5~~~1 2PC' ~`~xrPe~s~Gtti Approve minutes of meeting Audit Conunittee held on May 4, 1 Jacdickc. -- Update on Arthur Andersen's 1998 financial and internal control udi Duncan, Arthur Andersen LLP, and Mr. Causey. 4a-6 t Review of Crisis Management Procedures - Mr. Causcy., -i h pdate on status of Portland General Electric decommissioning of its Facility-Messrs. %Tloc and Quenn`oz. _ /Update on Enron's risk management activities - Mr. Buy. Executive Sessions. Representatives of Arthur Andersen LLP Representatives of Management. 914t-t-42-e-4-e- 7. Other Business. 8. Adjournment.c - Dr. Nuclear _ 5r- t i n 000050971 EXH 011-01006 ============= Page 19 of 123 ============= Agenda Item I s. ce C" co Mp Cs 0 a G.~ LU Fxl-In1 1 _n1 nn7 ============= Page 20 of 123 ============= DRAFT MJ MUTES MEETING OF THE AUDIT COMMITTEE OF THE BOARD OF Dl RECTORS ENRON CORP. May 4,1998 Minutes of a meeting of the Audit Committee ("Committee") of the Board of Directors of Enron Corp. ("Company"), noticed to begin at 3:30 p.m., but actually begun at 3:45 p.m., C.D.T., on May 4, 1998, at the Enron Building in Houston, Texas. All of the Committee members were present, as follows: Robert K. Jacdickc, Chairman Ronnie C. Chan Joe H. Foy Wendy L. Granun John Wakeham Bruce G. Willison Directors Kenneth L. Lay and Jeffrey K. Skilling, Messrs. Robert H. Butts, Richard B. Buy, Richard A. Causey, James V. Derrick, Jr., and Theodore R. Murphy, and Mesdames Rebecca C. Carter and Peggy B. Menchaca, all of the Company, and Messrs. David Duncan, Thomas 11. Bauer, and D. Stephen Goddard, all of Arthur Andersen LLP ("Arthur Andersen"), also attended the meeting. Mr. Joseph C. Dilg of Vinson & Elkins, L.L.P. joined the meeting in progress as noted below. The Chairman, Dr. Jaedicke, presided at the meeting, and the Secretary, Ms. Menchaca, recorded the proceedings. Dr. Jaedicke called the meeting to order, and Mr. Skilling reviewed recent organizational changes. He introduced Mr. Buy, Vice President and Chief Risk Officer, and Mr. Murphy, Vice President of Risk Assessment and Control Group, and noted that Ms. Carter had moved into Enron Capital Management as Vice President and would have responsibility for the credit agencies. Dr. Jaedicke noted that a draft of the minutes of a meeting of the Committee held on February 9, 1998, and a draft of the minutes of a joint meeting of the Audit and Finance Committees held on February 9, 1998, had been distributed to the Committee members. He called for any corrections or additions. There being none, upon motion duly made by Mr. Foy, seconded by Mr. Chan, and carried, the minutes of the meeting of EC oaO 50973 EXH011-01008 ============= Page 21 of 123 ============= the Committee held on February 9, 1998, and the joint meeting; of the Audit. and Finance Committee held on February 9, 1998, were approved as distributed. Mr. Duncan began the report on the 1998 financial reporting audit plan. He reviewed the schedule for communication to the Committee and reviewed the Arthur Andersen client service team for each of the key operations of the Company. He reported on ongoing high priority financial reporting risk areas, and he called upon Mr. ]3nuer, who reported on 1998 specific financial reporting risk areas. Ile discussed developments in accounting literature and answered questions from the Committee. A copy of Mr. Duncan's report is filed with the records of the meeting. Mr. Causey reported on significant current activities in business risk management. He stated that Mr. Buy had been elected as Vice President and Chief Risk Officer. He noted that the business risk manager concept had been implemented at all operating groups and was meeting regularly. He reported that the "Year 2000" plan execution was proceeding as scheduled and that a Company-wide Standard Accounting Plan design and implementation project would begin rune 1. Mr. Causcy next reported on the status of the 1998 Audit Plan by business risk area. A copy of Mr. Causey's report is filed with the records of the meeting. Mr. Duncan presented a summary of fees charged by Arthur Andersen in 1997 and 1996 for its recurring audits, accounting consultation, and other consulting services, a copy of which is filed with the records of the meeting. He answered questions from the members of the Committee. Mr. Skilling reviewed in detail proposed amendments to the Enron Capital and Trade Corp. ("ECT") Risk Management Policy (the "Policy"), a copy of which is filed with the records of the meeting. He noted that upon approval, the Policy would transition to a Company-wide policy. Mr. Buy joined in the presentation, following which a discussion ensued. Messrs. Skilling, Buy, Murphy, and Lay and Ms. Carter responded to questions presented by the Committee. Following the discussion, upon motion duly made by Dr. Gramm, seconded by Mr. Foy, and carried, the Policy was approved for recommendation to the Board of Directors, Mr. Causey updated the Committee in detail concerning the Year 2000 systems plan. He reported on the Company's internal systems, imbedded chips, and other external issues addressed in the plan. He indicated that he would keep the Committee informed on the Company's progress. 2 EC 000050974 EXH011-01009 ============= Page 22 of 123 ============= Mr. Derrick excused himself from the meeting and Mr. Dilg was invited into the meeting. Mr. Dilg stated that Vinson & Elkins had been retained to look at any possible conflict issue that could exist by virtue of the marriage of Mr. Derrick and Ms. Carriti Patman, a partner at the law firm of l3racewell & Patterson. He described the research that he had done and stated his opinion that no such conflict issues exist. Mr. Dilg answered questions from the Committee, and the Committee complimented the depth of the report and the initiation of the study by Mr. Derrick. Mr. Dilg excused himself from the meeting. There being no further business to come before the Committee, the meeting was adjourned at 4:55 p.m., C.D.T. Secretary APPROVED: Chairman 3 EC 000050975 EXH011-01010 ============= Page 23 of 123 ============= Agenda Item 2 to 0 0 o 0 0 0 C.3 Lii EXH011-01011 ============= Page 24 of 123 ============= ARTHUR ANDERSEN May 11, 1.998 Dr. Kenneth L. Lay Chairman of the Board and Chief Executive Officer Enron Corp. 1400 Smith Street Houston, Texas 77002 Dear Dr. Lay: Arthur Andersen 1 IJ' Suite 1300 '1111.ouisianu Street Houston 7X 77002-2786 7132372323 We are pleased to have been appointed as independent public accountants of Enron Corp. and subsidiaries (Eru'on or the Company) for the year ending December 31,1998. In connection' with our appointment, we would like to confirm our understanding of the services we will provide. Our work is to consist of an audit of the consolidated balance sheet of Enron at December 31, 2998 and of the related consolidated statements of income, cash flows and changes in shareholders' equity accounts for the year then ending. We will also audit and issue separate auditor's reports on the 1998 financial statements of certain subsidiary companies, listed at Exhibit 1, where stand-alone financial statements for such companies are necessary to comply with the rules and regulations of the Securities and Exchange Commission (SEC), the Federal Energy Regulatory Commission (FERC) or to meet other obligations. The objective of our audits is to provide you with our auditor's report expressing an opinion on the financial statements referred to above. Our work is also to consist of an examination, in accordance with standards established by the American Institute of Certified Public Accountants, of management's assertion that the system of internal control of Enron Corp. for the year ending December 31, 1998, was adequate to provide reasonable assurance as to the reliability of financial statements and the protection of assets against unauthorized acquisition, use or disposition based upon current standards of control criteria. Upon completion of our examination, we will provide you with our report on the assertion referred to above. Audit Responsibilities and Limitations. We will conduct our audits in accordance with generally accepted auditing standards. Accordingly, we will examine, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assess the accounting principles used and significant estimates made by management, and evaluate the overall financial statement presentation. Generally accepted auditing standards require that we obtain reasonable, rather than absolute, assurance that the financial statements are free of material misstatement, whether caused by error or fraud. Accordingly, a material misstatement may remain undetected. Also, an audit is not designed to detect error or fraud that is immaterial to the financial statements. However, EC 000050977 EXH011-01012 ============= Page 25 of 123 ============= ARTHUR ANDERSEN Dr. Kenneth L. Lay Page 2 May 11, 1998 we will bring to your attention any material misstatements and any fraudulent or illegal acts of which we become aware during our audit. Pursuant to professional standards, in the unusual event that we are unable to complete the audit or arc unable to form or have not formed an opinion, we may decline to express an opinion or decline to issue a report as a result of the engagement. Our audit and examination will include obtaining an understanding of the system of internal control over financial reporting and safeguarding of assets, testing and evaluating the design and operating effectiveness of the system, and such other procedures as we consider necessary in the circumstances. While an effective internal controls structure reduces the likelihood that errors or irregularities (including misappropriation of assets), may occur and remain undetected, it does not eliminate that possibility. Also, projections of any evaluation of the internal control system to future periods are subject to the risk that the internal control system may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Accordingly, and because we use selective testing in our audit and examination, we cannot guarantee that deficiencies in the design or operation of the internal control system, if present, will be detected. However, we will design our examination of management's assertion regarding the internal control system to provide reasonable assurance of detecting material weaknesses. Material weaknesses are conditions in which the design or operation of one or more elements of the system in internal control does not reduce, to a relatively low level, the risk that errors or irregularities, in amounts that would be material in relation to the financial statements, may occur and not be detected within a timely period. Our audit and examinations arc not designed to detect whether any systems are Year 2000 compliant. Further, we have no responsibility with regard to the Company's efforts to make its systems, or any other systems (such as those of the Company's vendors, service providers or any other third parties), Year 2000 compliant or provide assurance on whether the Company has addressed or will be able to address all of the affected systems on a timely basis. This is the responsibility of management. However, we will make inquiries of management regarding the Year 2000 issue, consider management's assessment of the potential impact of the Year 2000 issue on the current year's financial statements and our audit or examination, and discuss or otherwise be satisfied that senior management and the audit committee are apprised of any observations we have relative to its Year 2000 remediation plan. Management's Responsibilities and Representations The financial statements are the responsibility of the Company's management. Management is also responsible for (1) maintaining effective internal control over financial reporting and the safeguarding assets, (2) identifying and ensuring the Company complies with the laws and regulations applicable to its activities and (3) making available to us all financial records and related information and personnel with information of relevance to our work. EC 000050976 EXH011-01013 ============= Page 26 of 123 ============= ARTHUR ANDERSEN Dr. Kenneth L. Lay Page 3 May 11, 1998 As required by generally accepted auditing standards, we will make specific inquiries of management and others about the representations embodied in the financial statements and about the effectiveness of internal control. Those standards also require that we obtain from certain members of management a representation letter covering such matters. The results of our audit tests and examination procedures, the responses to our inquiries and the written representations constitute the evidential matter we intend to rely upon in forming an opinion on the financial statements and on management's assertion regarding internal control. Also, under professional standards, in order for us to examine and report on management's assertion about the effectiveness of an entity's system of internal control, management must make an assertion regarding the effectiveness of the system of internal control. While we may assist management in accumulating evidence to enable them to make such an assertion, management is responsible for establishing and maintaining an effective system of internal control and for evaluating its effectiveness. Other Services In addition to our audits, we will review, in accordance with professional standards, the quarterly financial information to be included in the Company's reports to be filed with the SEC, except that, unless requested by the Company, we will not issue a report or obtain a representation letter from management. Our reviews will consist principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. These procedures are substantially less in scope than an audit made in accordance with generally accepted auditing standards and, accordingly, they do not provide any assurance that we will become aware of errors, fraud or illegal acts that would be disclosed in an audit. At the completion of each review, we will discuss the results with management. Fees and Billine Arranl;ements Our charges for the services described above have been previously agreed to by management and reviewed with the Audit Committee of the Board of Directors. Billings for such services will be made on a periodic basis during the year based on a schedule agreed upon by management. Of course, we will also be available to provide other accounting, tax or business advisory services as requested by Enron management throughout the year. Our charges for such services will be based upon the level of staff and time required to complete the assignment, plus out-of-pocket expenses. Other Matters Arthur Andersen LLP represents that the Firm and its personnel are independent of Enron pursuant to the rules and regulations of the American Institute of Certified Public Accountants (AICPA) and the SEC, as such term is utilized by the AICPA and the SEC. EC 000050979 EXH011-01014 ============= Page 27 of 123 ============= ARTHUR ANDERSEN Dr. Kenneth L. Lay Page 4 May 11,199E The working papers prepared in conjunction with our audit$ are the property of our Firm, constitute confidential and proprietary information and will be retained by us in accordance with our policies and procedures. If you intend to publish or otherwise reproduce the financial statements together with our report (or otherwise make reference to our Firm) in a document that contains other information, you agree to provide us with a draft of the document to read and comment on before it is printed and distributed. Any additional services that you may request, and that we agree to provide, will be the subject of separate written arrangements. We look forward to our continued involvement with Enron and assure you that this work will be given our closest attention. Very truly yours, ART R A ~FN LL.P By David B. Duncan Agreed and Acknowledged by; P--~ el - Richard A. Causey 1 Senior Vice President, Chief Accounting, Information and Administrative Officer Eru•on Corp. Copy to: Mr. Richard A. Causey Dr. Robert K. Jaedicke Mr. Ronnie C. Chan Mr. Joe H. Foy Dr. Wendy L. Grarntn Lord John Wakeham Mr. Bruce G. Willison Mr. Jeffrey K. Skilling EC 000050980 EXH011-01015 ============= Page 28 of 123 ============= ARTHUR ANDERSEN Exhibit 1 Enron Corp. Stand-Alone Financial Statement Audits December 31, 1998 Entity pe of Report Issued Enron Corp. SEC Form 10-K Transportation and Distribution Northern Natural Gas Company Audit Report FERC Form 2 Transwestern Pipeline Company Audit Report FERC Form 2 Portland General Electric SEC Form 10-K Audit, Report FERC Form I Fate Safe Incorporated Audit Report Trojan Nuclear Plant Audit Report Boardman Coal Plant Audit Report Eiuon Communications, Inc. Audit Report Exploration and Production union Oil & Gas Company SEC Form 10-K Enron Oil U.K. Limited Audit Report Wholesale Energy Services San Juan Gas Co, Inc. Audit Report )s1er•tricidad Enron de Guatemala, S.A. Audit Report Enron Europe Limited Group and Company Audit Report Enrici Power Marketing Limited Audit Report Enron Europe Liquids Processing Audit Report Enron Gas Processing (Europe) Limited Audit Report Enron Power Construction Limited (Group and Co.) Audit Report Enron Power (Europe) Limited Audit Report Finron Power Operations Limited (Group and Co.) Audit Report Trenron Limited Audit Report Enron Europe Construction Limited Audit Report Enron Gas Construction Limited Audit Report Teesside Power Holding Limited Audit Report Enron Power Trading Limited Audit Report Enron Capital & Trade Resources Limited Audit Report h nron Petrochemicals BV Audit Report Wallerscote Power Operations Limited Audit Report Teesside Gas Transportation Limited Audit Report Enron Europe Power I Limited (Group acid Co.) Audit Report Enron Europe Power Audit Report EC 000050981 EXH011-01016 ============= Page 29 of 123 ============= ARTHUR ANDERSEN Exhibit 1 Enron Corp. Stand-Alone Financial Statement Audits December 31, 1998 Entity Wholesale Energy Services (cont.) Enron Europe Power 2 Limited IPG Power Enron Engineering Services Enron Sutton Bridge Operations & Maintenance Limited Wallerscote Operations & Maintenance Limited Teesside Gas Processing Limited Enron Gas Processing (UK) Limited Falco UPG Limited UPG Falco Limited Enron Europe Operations Limited Enron Direct Limited Enron Sutton Bridge Limited Sutton Bridge Power Sutton Bridge Financing Limited Kent Power Limited Sutton Bridge (Generation) Limited Bretton Power Enron Power Operations Teesside Enron Gas and Petrochemicals Trading Limited Enron Sutton Bridge 2 Limited TGT Finance Bretton Holdings (One) Limited Sutton Bridge Investors 3 Enron $hareblock Limited (Group and Co.) Enron KPI Limited (Group and Co.) Enron KP2 Limited Enron Europe (Sites) Holdings Limited (Group and Co.) Enron Europe (Sites) No. 2 Limited Rassau Power Limited Enron Europe Power Holdings Enron Engineering Services Flotilla Power Limited Flotilla Power (UK) Limited Type of Report Issued Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report "' Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audi t Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report Audit Report EC 000050982 EXH011-01017 ============= Page 30 of 123 ============= j fT1fl1 EC 000050983 EXH011-01018 ============= Page 31 of 123 ============= a c c .P-4 v)' ARTHUR Likelihood ©PlenrooE-ffort ANDERSEN ..."'~ "pot status Q a~ w EXH011-01019 ============= Page 32 of 123 ============= • Business Risk Manager Roles Operating Well; Control Database Nearing Completion • Previously Noted "Blocking and Tackling" Areas Receiving Focus Extensive In-Process Systems Activities Ongoing '7• Y2K *Security `~•SAP ~''Trading 'Recovery • Remote Location Risk Assessment Enhancements • Policy and Standard Development Activity in Legal and Environmental Areas -- ~% M C7 0 0 Q cm C1 012Ve ~ ARTHUR ANDERSEN ' EXH 011-01020 ============= Page 33 of 123 ============= • Start-Up Costs SOP and Related Company Activities • Monetization - R~ ulemakin Monitoring Activities • Acquisition Related Activities • Continued Evolution of Mark-to-Market and Fair Value Methodologies • Recent SEC Initiatives M ARTH C= ANDERSEN 00 M EXH 011-01021 ============= Page 34 of 123 ============= Levitt Speech Five Popular Earnings Management Practices • "Big Bath" restructuring charges • Creative Acquisition Accounting • Miscellaneous "Cookie Jar Reserves" • Materiality Revenue Recognition m C) CD 0 0 Q fjo -3 EXH 011-01022 ============= Page 35 of 123 ============= AA - Arthur Andersen SEC PracUcelo8. SEC Staff Views SEC Staff Speeches, Various The Numbers Game, Arthur Levitt, Chairman SPCH.T.1998.Levitt. REMARKS BY CHAIRMAN ARTI TUR LEVTI"T SECURITIES AND EXCHANGE COMMISSION THE "NUMBERS GAME" NYU CENTER FOR LAW AND BUSINESS, NEW YORK, N.Y. SEPTEMBER 28,1998 Thank you very much. Dean Daly, Dean Sexton and to everyone gathered this evening, thank you for welcoming me tonight I am honored to be here on such an auspicious evening for both NYU and Bill Allen. The creation of the Center for Law and Business recognizes an important truth: we cannot continue to view the worlds of business and law as parallel but separate Universes. And NYU could not have selected a more qualified or thoughtful individual than Bill as its first director. His leadership of the Delaware Court of Chancery -- acknowledged as the nation's most influential arbiter of corporate law - confirmed his reputation as a great thinker who effortlessly bridges the worlds of law and business. I've heard from friends on Wall Street that it's a far less stressful experience to hear Bill lecture in front of a classroom than from his former seat on the bench. Seven months ago, l expressed concerns about selective disclosure. Through conference calls or embargoed press releases, analysts and institutional investors often hear about material news before it is made public. In the interval, there is a great deal of unusual trading. The practice had been going on for a long time. And, while everyone was aware of it, and most were extremely uncomfortable with it, few spoke out. As the investor's advocate, the SEC did and we will continue to do so. Well, today, I'd like to talk to you about another widespread, but too little-challenged custom: earnings management This process has evolved over the years into what can best be characterized as a game among market participants. A game that, if not addressed soon, will have adverse consequences for America's financial reporting system. A game that runs counter to the very principles behind our market's strength and success. Increasingly, I have become concerned that the motivation to meet Wall Street earnings expectations may be overriding common sense business practices. Too many corporate managers, auditors, and analysts are participants in. a game of nods and winks. In the zeal to satisfy consensus earnings estimates and project a smooth earnings path, wishful thinking may be winning the day over faithful representation. As a result, I fear that we are witnessing an erosion in the quality of earnings, and therefore, the quality of financial reporting. Managing may be giving way to manipulation; Integrity may be losing out to illusion. Many in corporate America are just as frustrated and concerned about this trend as we, at the SEC, are. They know how difficult it is to hold the line on good practices when their competitors operate in the gray area between legitimacy and outright fraud. EC 000050988 EXH 011-01023 ============= Page 36 of 123 ============= A gray area where the accounting is being perverted; where managers are cutting corners; and, where earnings reports reflect the desires of management rattier than the underlying financial performance of the company. 'T'onight, I want to talk about why integrity is financial reporting is under stress and explore five of the more common accounting gimmicks we've been seeing. Finally, I will outline a framework for a financial community response to this situation. This necessary response involves improving both our accounting and disclosure rules, as well as the oversight and function of outside auditors and board audit conunittees. I am also calling upon a broad spectrum of capital market participants, from corporate management to Wall Street analysts to investors, to stand together and re-energize the touchstone of our financial reporting system: transparency and comparability. This is a financial conununity problem. It can't be solved by a government mandate: it demands a financial community response. THE ROLP OF FINANCIAL REPORTING IN OUR ECONOMY Today, America's capital markets are the envy of the world. Our efficiency, liquidity and resiliency stand second to none. Our position, no doubt, has benefited from the opportunity and potential of the global economy. At the same time, however, this increasing interconnectedness has made us more susceptible to economic and financial weakness half a world away. The significance of transparent, timely and reliable financial statements and its importance to investor protection has never been more apparent. The current financial situations in Asia and Russia are stark examples of this new reality. These markets are learning a painful lesson taught many times before: investors panic as a result of unexpected or unquantifiable bad news. If a company fails to provide meaningful disclosure to investors about where it has been, where it is and where it is going, a damaging pattern ensues. The barrel between shareholders and the company is shaken; investors grow anxious; prices fluctuate for no discernible reasons; and the trust that is the bedrock of our capital markets is severely tested. THE PRESSURE TO "MAKE YOUR NUMBERS" While the problem of earnings management is not new, it has swelled in a market that is unforgiving of companies that miss their estimates. I recently read of one major U.S. company, that failed to meet its so-called "numbers" by one penny, and lost more than six percent of its stock valve in one day. I believe that almost everyone in the financial community shares responsibility for fostering a climate in which earnings management is on the rise and the quality of financial reporting is on the decline. Corporate management isn't operating in a vacuum. In fact, the different pressures and expectations placed by, and on, various participants in the financial community appear to be almost self-perpetuating. This is the pattern earnings management creates: companies try to meet or beat Wall Street earnings projections in order to grow market capitalization and increase the value of stock options. Their ability to do this depends on achieving the earnings expectations of analysts. And analysts seek constant guidance from companies to frame those expectations. Auditors, who want to retain their clients, are under pressure not to stand in the way. ACCOUNTING HOCUS-POCUS EC 000050989 EXH 011-01024 ============= Page 37 of 123 ============= Our accounting principles weren't meant to be a straitjacket. Accountants are wise enough to know they cannot anticipate every business structure, or every new and innovative transaction, so they develop principles that allow for flexibility to adapt to changing circumstances. That's why the highest standards of objectivity, integrity and judgment can't b e the. exception. They must be the rule. Flexibility in accounting allows it to keep pace with business innovations. Abuses such as earnings management occur when people exploit this pliancy. Trickery is employed to obscure actual financial volatility. This, in turn, masks the true consequences of management's decisions. These practices aren't limited to smaller companies struggling to gain investor interest, It's also happening in companies whose products we know and admire, So what arc these illusions? Five of the more popular ones I want to discuss today are "big bath" restructuring charges, creative acquisition accounting, "cookie jar reserves," "immaterial" misapplications of accounting principles, and the premature recognition of revenue. "Big Bath" Charges Let me first deal with "Big Bath" restructuring charges. Companies remain competitive by reg uhnrly assessing the efficiency and profitability of their operations. Problems arise, however, when we see large charges associated with companies restructuring. These charges help companies "clean up" their balance sheet - giving them a so-called "big bath." Why arc companies tempted to overstate these charges? When earnings take a major hit, the theory goes Wall Street will look beyond a one-time loss and focus only on. future earnings. And if these charges are conservatively estimated with a little extra cushioning, that so-called conservative estimate is miraculously reborn as income when estimates change or future earnings fall short. When a company decides to restructure, management and employees, investors and creditors, customers and suppliers all want to understand the expected effects. We need, of course, to ensure that financial reporting provides this information. But this should not lead to flushing all the associated costs -- and maybe a little extra - through the financial statements. Creative Acquisition Accounting Let me turn now to the second giuunick. In recent years, whole industries have been remade through consolidations, acquisitions and spin-offs. Some acquirers, particularly those using stock as an acquisition currency, have used this environment as an opportunity to engage in another form of "creative" accounting. I call it "merger magic." I am not talking tonight about the pooling versus purchase problem. Some companies have no choice but to use purchase accounting -- which can result in lower future earnings. But that's a result some companies are unwilling to tolerate. So what do they do? They classify an ever-growing portion of the acquisition price as "in-process" Research and Development, so -- you guessed it -- the amount can be written off in a "one-time" charge removing any future earnings drag. Equally troubling is the creation of large liabilities for future operating expenses to protect future earnings - all under the mask of an acquisition. EC DOWN EXH 011-01025 ============= Page 38 of 123 ============= Miscellaneous "Cookie jar Reserves" A third illusion played by some companies is using; unrealistic assumptions to estimate liabilities for such items as sales returns, loan losses or warranty costs. In doing so, they stash accruals in cookie jars during the good times and reach into them when needed in the bad times. I'm reminded of one U.S. company who took a large. one-time loss to earnings to reimburse franchisees for equipment. That equipment, however, which included literally the kitchen sink, had yet to be bought. And, at the same time, they announced that future earnings would grow an impressive 15 percent per year. "Materiality" Let me turn now to the fourth gimmick - the abuse of materiality - a word that captures the attention of both attorneys and accountants. Materiality is another way we build flexibility into financial reporting. Using the logic of diminishing returns, some items may be so insignificant that they are not worth measuring and reporting with exact precision. But some companies misuse the concept of materiality. They intentionally record errors within a defined percentage ceiling. They then try to excuse that fib by arguing that the effect on the bottom line is too small to matter. If that's the case, why do they work so hard to create these errors? Maybe because the effect cart matter, especially if it picks up that last penny of the consensus estimate. When either management or the outside auditors are questioned about these clear violations of GAAP, they answer sheepishly, "It doesn't matter. It's immaterial." lit markets where missing an eansiiigs projection by a penny can result in a loss of millions of dollars in market capitalization, I have a hard time accepting that some of these so-called non-events Simply don't matter. Revenue Recognition Lastly, companies try to boost earnings by manipulating the recognition of revenue. Think about a bottle of fine wine. You wouldn't pop the cork on that bottle before it was ready. But some companies are doing this with their revenue - recognizing it before a sale is complete, before the product is delivered to a customer, or at a time when the customer still has options to terminate, void. or delay the Sale. ACTION PLAN Since U.S. capital market supremacy is based on the reliability and transparency of financial statements, this is a financial community problem that calls for timely financial community action. Therefore, I am calling for immediate and coordinated action: technical rule changes by the regulators and standard setters to improve the transparency of financial statements; enhanced oversight of the financial reporting process by those entrusted as the shareholders' guardians; and nothing less than a fundamental cultural change on the part of corporate Management as well as the whole financial community. This action plan represents a cooperative public..private sector effort. It is essential that we work together to assure credibility and transparency. Our nine point program calls for both regulators and the regulated to not only maintain, but increase. public confidence which has made our markets the envy of the world. I believe this problem calls for immediate action that includes the following specific steps EC 000050991 EXH 011-01026 ============= Page 39 of 123 ============= Improving the Accounting Framework First, I have instructed the SEC staff to require well-detailed disclosures about the impact of changes in accounting ussurnplions. This should include a supplement to the financial statement showing beginning and ending balances as well as activity in between, including any adjustments. This will, I believe, enable the market to better understand the nahire and effects of the restructuring liabilities and other loss accruals. Second, we ate challenging the profession, through the AICPA, to clarify the ground rules for auditing of purchased R&D. We also are requesting that they augment existing guidance on restructurings, large acquisition write-offs, and revenue recognition practices- It's bone for the accounting profession to better qualify for auditors what's acceptable and what's not. Third, I reject the notion that the concept of materiality can be used to excuse deliberate misstatements of performance. I know of one Fortune 500 company who had recorded a significant accounting error, and whose auditors told them so. But they still used a materiality ceiling of six percent earnings to justify the. error. I have asked the SEC staff to focus on this problem and publish guidance that emphasizes the need to consider qualitative, not just quantitative factors of earnings. Materiality is not a bright line cutoff of three or five percent. It requires consideration of all relevant factors that could impact air investor's decision. Fourth, SEC staff will immediately consider interpretive accounting guidance on the do's and don'ts of revenue recognition. The staff will also determine whether recently published standards for the software industry can be applied to other service companies. Fifth, I am asking private sector standard setters to take action where current standards and guidance are inadequate. I encourage a prompt resolution of the EASB's projects, currently underway, that should bring greater clarity to the definition of a liability. Sixth, the SEC's review and enforcement teams will reinforce these regulatory initiatives. We will formally target reviews of public companies that announce restructuring liability reserves, major write-offs or other practices that appear to manage earnings. Likewise, our enforcement team will continue to root out and aggressively act on abuses of the financial reporting process. Improved Outside Auditing in the Financial Reporting Process Seventh, I don't think it should surprise anyone here that recent headlines of accounting failures have led some people to question the thoroughness of audits. I need not remind audiiois they are the public's watchdog in the financial reporting process. We rely on auditors to put something like the good housekeeping seal of approval on the information investors receive. The integrity of that information must take priority over a desire for cost efficiencies or competitive advantage in the audit process- High quality auditing requires well-(shied, well-focused and well-supervised auditors. As I look at some of the failures today, I can't help but wonder if the staff in the trenches of the profession have the training and supervision they need to ensure that audits are being done right. We cannot permit thorough audits to be sacrificed for re-engineered approaches that are efficient, but less effective. I have just proposed that the Public Oversight Board form a group of all the major constituencies to review the way audits are performed and assess the impact of recent trends on the public interest. Strengthening the Audit Committee Process EC 000050992 EXH 011-01027 ============= Page 40 of 123 ============= And, finally, qualified, corn mifted, independent and tough- minded audit conunit[ees represent the most reliable guardians of the public interest. Sadly, stories abound of audit committees whose members lack expertisee in the basic principles of financial reporting as well as the mandate to ask probing questions. In fact, I've heard of one audit committee that convenes only twice a year before the regular board meeting for 15 minutes and whose duties are limited to a perfunctory presentation. Compare that situation with the audit committee which incets twelve times a year before each board meeting; where every member has a financial background; where there are no personal ties to the chairman or the company; where they have their own advisers; where they ask tough questions of management and outside auditors; and where, ultimately, the investor interest is being served. The SEC stands ready to take appropriate action if that interest is not protected. But, a private sector response that empowers audit committees and obviates the need for public sector dictates seems the wisest choice. I am pleased to announce that the financial community has agreed to accept this challenge. As part eight of this comprehensive effort to address earnings management, the New York Stock Exchange and the National Association of Securities Dealers have agreed to sponsor a "blue- ribbon" panel to be headed by John Whitehead, former Deputy Secretary of State arid retired senior partner of Goldman, Sachs, and Ira Milistein, a lawyer and noted corporate governance expert. Within the next 90 days, this distinguished group will develop a series of far-ranging recommendations intended to empower audit committees and function as the ultimate guardian of investor interests and corporateo accountability. They are going to examine how we can get the right people to do the right things and ask the right questions. Need for a Cultural Change Finally, I'm challenging corporate management and Wall Street to re-examine our current environment. I believe we need to embrace nothing less than a cultural change. For corporate managers, remember, the integrity of the numbers in the financial reporting system is directly related to the long-term interests of a corporation, While the temptations are great, and the pressures strong, illusions in numbers are only that - ephemeral, and ultimately self-destructive. To Wall Street, I say, look beyond the latest quarter. Punish those who rely on deception, rather than the practice of openness and transparency. CONCLUSION Some may conclude that this debate is nothing more than an argument over numbers and. legalistic terms. I couldn't disagree more. Numbers in the abstract are just that -- numbers. But relying on the numbers in a financial report arc livelihoods, interests and ultimately, stories: a single mother who works two jobs so she can save enough to give her kids a good education; a father who labored at the same company for his entire adult life and now just wants to enjoy time with his grandchildren; a young couple who dreanis of starting their own business. These are the stories of American investors. Our mandate and our obligations are clear. W e must rededicate ourselves to a fundamental principle: markets exist through the grace of investors. Today, American markets enjoy the confidence of the world. I low many half-truths, and how much accounting sleight-of-hand, will it take to tarnish that. faith? EC 000050993 EXH 011-01028 ============= Page 41 of 123 ============= As a former businessman, [ experienced all kinds of markets, dealt with a variety of trends, fads, fears, and irrational cxnberances_ I learned that some habits die hard. But, more than anything else, I learned that progress doesn't happen overnight and it's not sustained through short nits or obfuscation. it's induced, rather, by asking hard questions and accepting difficult answers. For the sake of our markets; for the sake of a globa.tized economy which depends so much on the reliability of America's financial system; for the sake of investors; and for the sake of a larger commitment not only to each other, but to ourselves, T ask that we join together to reinforce the values that have guided our capital markets to unparalleled supremacy. Together, through vigilance and trust, I know, we can succeed. Thank you. 01998 Arthur Andersen, All Rights Reserved. EC O o 3994 EXH 011-01029 ============= Page 42 of 123 ============= '~ Agenda Item 3 41 , EXH011-01030 ============= Page 43 of 123 ============= Top Ten Kidnap Countries r" C) 0 4 a, Country Total Since 1997 Total Enron Presence 1991 Colombia 3808 887 E Brazil 517 62 E Pakistan 439 - E Philippines 445 56 E Mexico 517 237 E USA 194 23 E Guatemala 169 8 E Venezuela 105 24 E India 88 7 E Ecuador 53 - - &.-~ 1 EXH011-01031 ============= Page 44 of 123 ============= Demands Cash 92% Publicity 2% Release of Prisoners 2% r" F- Welfare/other 4% Q EXH 011-01032 ============= Page 45 of 123 ============= Kidnaps of Foreign Nationals from 1992 Demands (US$ Equivalent) C'1> C= 0 0 C' 0 Ca UP to 50,000 50,001-100,000 100,001-500,000 500,001-1,000,000 1,000,001-2,000,000 2,000,001-5,000,000 5,000,000+ 0 10 20 30 40 50 60 3 EXH011-01033 ============= Page 46 of 123 ============= Kidnaps of Foreign Nationals from 1992 Payments (US$ Equivalent) I1 d COP EXH 011-01034 UP to 50,000 50,001-100,000 100,001-500,000 500,001-1,000,000 1,000,001-2,000,000 2,000,001-5,000,000 5,000,000+ 0 5 10 15 20 ============= Page 47 of 123 ============= Aj d I 0 4 Ending of Negotiations by % Since 1991 Release w/o Payment 4% Rescue 27% Released after Payment 19% Outcome Unknown 28% Escape 4% Death 18% 5 EXH011-01035 ============= Page 48 of 123 ============= M C 0 C2 C:' 0 C-9! Ending of Expatriate Kidnaps b y % Since 1991 Rescue 14% Outcome Unknown 28% 71.1 Released after Payment 49% Escape 3% Death 6% 6 EXH 011-01036 ============= Page 49 of 123 ============= Legal Preparations Commissioned Report of Kidnap Laws in High Risk Countries T C7 0 O C* j "Kidnap Legislation" I Level of Threat I Relevant Legislation I Practical Applications Brazil Colombia Ecuador Guatemala Mexico Venezuela India Philippines (April 1997) EXH 011-01037 ============= Page 50 of 123 ============= Organizational Preparation Decision Making Authority, 0,o 7-e- Crisis Management Committee - (Kidnapping -- Extortion -- Death Threats)i~~ Objectives: Minimize Death & Injuries Terminate incident as Quickly as Possible Prevent Minor Incident From Becoming Major ! Return to Normal Operations Quickly ti Kidnappings: Safe Return of Victim m C13 a v 0 w Incident Management) ;Outside Consultan Team 8 EXH011-01038 ============= Page 51 of 123 ============= Training Preparations I Crisis Committee Simulations t 20 January 1998 t 2 February 1996 I Crisis Committee Chairman Briefing Session 1 Scheduled (6 November 1998) m C7 O .p 0 Crisis Committee Chairman Alternate I Briefing (5 May 1998) a Background I Former National Intelligence Officer for Counterterrorism ~ --~- € 9 EXH011-01039 ============= Page 52 of 123 ============= Consciousness Raising & Dissemination of Information I too.; Crisis Committee Chairman Memo to Country Managers (22 June 1998) Scheduled Talk on Kidnappings at Management Conference (18/19 November 1998) Expat Briefings (by Corporate Security) International Bulletin (Weekly, 250 Addressees, by Corporate Security) Briefing Books for Travelers (135, by Corporate Security) Travel Security Briefings (Corporate Security) Avoiding Kidnapping & Hostage Survival Videos (Consultant) EXH 011-01040 ============= Page 53 of 123 ============= Insurance rlPf Q D O CCL~ 11 EXH 011-01041 ============= Page 54 of 123 ============= Agenda Item 4 0 0 T C= 0 0 0 s3 LU EXH 011-01042 ============= Page 55 of 123 ============= S TROJAN NUCLEAR PLANT DECOMMISSIONING PROJECT 1998 FALL UPDATE 0 co EXH 011-01043 ============= Page 56 of 123 ============= DECOMMISSIONING PERSPECTIVE Industry Trojan Was First Large (>1000MW) US Operating Reactor to Shutdown Early Based on Economics ~- Question at that Time was When to Proceed with Decommissioning y Economics Favored Early Decommissioning Nuclear Regulation r y NRC Decommissioning Rule Did Not Exist at Shutdown. Was Effective August 28, 1996 Oregon Regulation y Oregon Administrative Rules Related to Decommissioning Implemented June 28, 1994 y Rate Case UE-88 in 1995 Allowed 100% Recovery of Decommissioning Costs, 87% Recovery of Investment r 0 CA 0 O eo oe EXH 011-01044 ============= Page 57 of 123 ============= TROJAN DECOMMISSIONING STRATEGY Project Management r y PGE Would Project Manage the Decommissioning f Area by Area Decommissioning Cost Estimate r Detailed Work Breakdown Structure Project Management Infrastructure Labor Costs Performance Incentives for Decommissioning Contractor and Employees f Special Labor Arrangements Permit Non-Skilled Labor to Perform Decommissioning Activities Radioactive Waste Disposal Costs Radioactive Waste Disposal Rates are Low and Fixed through 2001 Motivation and Retention i- Trojan Incentive Plan Tied to Key Decommissioning Milestones r" C7 0 0 a r Contracts for Key Personnel EXH 011-01045 ============= Page 58 of 123 ============= Transition Period Large Component Removal Project ISFSI Implementation Reactor Vessel Removal Project Decontamination & Dismantlement Final Radiation r M Survey c) C= Non-Contaminated 29 Building C= Demolition DECOMMISSIONING SCHEDULE I 'zz~7~ EXH 011-01046 1992 1993 19941995 1996 1997 1998 1999 2000 2001 2002 2003 12018 2019 2020 ============= Page 59 of 123 ============= LU C) z 45 0 J W IUL r0 0 0 ZZ Z Lu a O _ z LU Q~ W Oz LU I. LU 10 z 2022 2021 2020 2019 -2018 2017 -2016 2015 2014 -2013 2012 -2011 -2010 2009 2008 2007 2006 -2005 2004 2003 2002 2001 2000 -1999 1998 -1997 1996 1995 -1994 1993 i EC 000051012 z N V 0 X w a o o © a ~O et w 00 N ============= Page 60 of 123 ============= DECOMMISSIONING POTENTIAL COST INCREASES ISFSI Loading Delayed Due to Protracted Regulatory Approvals or Fabrication Delays Potential Increase: $8-10 Million per Year Expedite Resolution of Regulatory Issues Provide Close Oversight of Fabricators Award Basket Fabrication to Multiple Vendors Implementation of Modular Spent Fuel Cooling System Facilities Acceleration of Additional Decommissioning Activities Reactor Vessel And Internal Removal Project is Delayed or Disapproved Potential Increase: $1-15 Million M C) 0 T 0 W Expedite Resolution of Regulatory Issues Maintain Containment Building Activities Off of the Decommissioning Project Critical Path. If Segmentation Is Required, Contract Award and Fabrication of Tooling Must Commence In Early 1999 EXH 011-01048 ============= Page 61 of 123 ============= cam-' DECOMMISSIONING POTENTIAL COST INCREASES Spent Fuel On-Site Beyond 2018 Due to USDOE Delays i Potential Increase: $3-5 Million Per Year Support High Level Waste Legislation Reform Prompt USDOE to Provide Priority Acceptance of Spent Fuel From Permanently Shutdown Reactors Pursue Litigation/Settlement with USDOE to Compensate PGE for Increased Costs y Seek Rate Recovery if Costs are Not Recovered From USDOE Radwaste Disposal Costs Escalate Potential Increase: $1-5 Million Current Prompt Decon Strategy Disposes of Radwaste While Rates are Low and Rate Increases are Regulated Mitigate Impact by Improving Waste Package Density, Volume Reduction and Material Decontamination rn a ER O MARSSIM Final Termination Survey Technical Debate Slows Survey Process A- Potential increase: $1-5 Million Delay Surveys to End of Project Seek NEI Support to Resolve Issues EXH 011-01049 ============= Page 62 of 123 ============= cam' DECOMMISSIONING POTENTIAL COST DECREASES ISFSI Operating Costs Lower Than Estimated > Potential Savings: $1 Million Per Year for up to 20 Years > May be Offset by DOE Delay in Accepting Fuel Embedded Pipe Decontaminated and Not Physically Removed Potential Savings: $1-40 Million > Due to Change to Dose Pathways Site Release Criteria Non-Radiological Decontamination Less Expensive than Budget Potential Savings: $1-8 Million Due to Change to Dose Pathways Site Release Criteria Building Demolition Costs Less than Projected Potential Savings: $1-6 Minion More Efficient Demolition Techniques Employed m C= r 0 Cn EXH011-01050 ============= Page 63 of 123 ============= REACTOR VESSEL AND INTERNALS REMOVAL PROJECT STRATEGY Radiation Exposures Reduction Occupational Workers 56% Transportation Workers 92% Burial Site Workers 96% General Public 96% Increased Transportation Safety by Reducing Shipments From 50 Unrestricted Truck Shipments to I Controlled Barge/Land Shipment Reduces Risk of Cutting Operations 1) Personnel Contaminations, 2) Airborne Problems, 3) Generation of Radioactive Wastes and 4) Plant Cleanup Concerns Reduces Costs by $15 Million M Q 0 0 4M Removes Concern of Long Term Storage of Greater Than Class C (GTCC) Waste; Eliminates GTCC Waste Disposal Costs Capitalizes on Similarity of Large Component Removal (LCR) Project ~. EXH011-01051 ============= Page 64 of 123 ============= REACTOR VESSEL AND INTERNALS REMOVAL PROJECT RISKS Project Approval Delayed; Legal Challenges Impact Project 31- Use Multiple Shifts, Overtime, Parallel Activities to Recover Delay Time Unable to Meet August 1999 Shipment Date y Store Reactor Vessel Outside of Containment Building to Allow Dismantlement and Decontamination of Refueling Cavity and Refueling Water Storage Tank. Make Reactor Vessel Shipment In July 2000, Project Disapproved by Washington Department of Health, Oregon Office of Energy or Nuclear Regulatory Commission J1_ Determine Basis of Disapproval and Revise Project Approach or Provide Additional Information y Proceed With Alternative Cutting Up of Reactor Vessel Internals, One Piece Disposal of Reactor Vessel and Storage of Greater Than Class C Waste On-Site r" C) d 0 0 d Cs' Q EXH 011-01052 ============= Page 65 of 123 ============= INDEPENDENT SPENT FUEL STORAGE INSTALLATION (ISFSI) STRATEGY Provide Lowest Fuel Management Costs Until USDOE Accepts Spent Fuel for Repository "Dual Purpose System"- Licensed for Storage & Transportation (Unique). Fuel is Packaged and Licensed for Shipment Capital Investment Offset by Lower Dry Storage O&M (Approximate Differential $6 Million Per Year) Protect PGE Against Further Delays in USDOE Geologic Repository Development Allows Full-Scale Dismantlement and Decontamination System Has No Moving Parts r r~ 0 0 0 c Ss, a co EXH011-01053 ============= Page 66 of 123 ============= cam' INDEPENDENT SPENT FUEL STORAGE INSTALLATION I (ISFSI) RISKS BNFL Fuel Solutions Does Not Perform Satisfactorily PGE Provides Management and Direction BFS Forfeits Incentives BFS Breech of Contract; PGE Continues Project With Own Resources ISFSI Approval Delayed Past April, 1999 Continue Remaining Decommissioning Work In Fuel Building Expedite NRC!State Project Approval Fabrication Delays Impact Fuel Loading Operations t Utilize Two Basket Fabricators Provide Full Time In-Shop PGE Engineering and QC Oversight C13 0 0 a c Gf EZ 1 CAD EXH 011-01054 ============= Page 67 of 123 ============= cam-' INDEPENDENT SPENT FUEL STORAGE INSTALLATION (1SFSI) RISK (Contd) State of Oregon Does Not Permit Prompt Decommissioning of Spent Fuel Pool Due to NRC Delays in Review and Approval of Part 71 Transportation Application Continue Remaining Decontamination Work Expedite NRC Approvals of Transportation Certificate of Compliance NRC Requires Ultrasonic Inspection of Basket Closure Welds vs. Surface Inspection r Trojan Would Develop UT Inspection Technology Prior to Use Fuel Loading Delays Experienced Minimized through Readiness Reviews, Pre-Operational Test Program Potential Reduced by Lessons Learned Program, Site Visits to Other Plants r All Critical Equipment Has Redundancy Increase Resources (Crew Size, Number of Crews) M a 0 0 0 C= N EXH011-01055 ============= Page 68 of 123 ============= T O C ..a A 1V J TROJAN NUCLEAR PLANT DECOMMISSIONING INTRODUCTION EXH 011-01056 ============= Page 69 of 123 ============= TROJAN Plant Owners i Portland General Electric (67.5%) 30. Eugene Water and Electric Board (30%). Pacific Power and Light Company (2.5%) t BPA has Joint Billing Agreement with EWEB for Its Ownership Share Location: 634 Acres including industrial Areas, Recreational Park and Office Buildings Adjacent to the Columbia River, 42 Mites North of Portland Size: 1130 Mwe (Net) Type: 4-Loop Westinghouse PWR 3423 MW (th) History Construction Start: Received Operating License: Initial Criticality: y Commercial Operation: Permanent Shutdown: Possession Only License cs °o Cons C= Electrical Generation : $83.5 Billion KWh February 1970 November 1975 December 1975 May 1976 January 1993 May 1993 EXH 011-01057 ============= Page 70 of 123 ============= TROJAN (Contd) Reason for Premature Retirement: Least Cost Planning Process Conducted in 1990 and 1992 Plentiful, Low-Cost Natural Gas Supplies A Regional Surplus of Inexpensive Hydroelectric Power Reduced Expectations of Plant Reliability Escalating Steam Generator Inspection and Repair Costs Regulatory Uncertainty Regarding the Safety of the Steam Generators rrs 4 a 0 ca, w EXH011-01058 ============= Page 71 of 123 ============= DECOMMISSIONING REQUIREMENTS DECOMMISSIONING is the Removal of Radioactivity to a Level that Permits Release of the Property for Unrestricted Use and Termination of the License DECON Is the Prompt Removal or Decontamination of Facilities to a Level that Permits Release for Unrestricted Use Shortly After Cessation of Operations SAFSTOR is Where the Facility Is Placed and Maintained in a Dormant Condition and Decontamination and Dismantlement is Deferred up to Sixty Years PGE Selected the DECON Alternative due to: Lower NPV Cost ($435 Million vs. $490 Million for "Wet SAFSTOR 2018") ~- Reduced Risk to Escalations in Radioactive Waste Disposal Costs or Future Unavailability of a Disposal Site Minimizes the Duration of Low-Level Radioactive Waste at the Site C7 0 0 a J PGE Selection of DECON Alternative Reviewed and Approved by the Oregon Office of Energy PGE Selection of DECON has been Reviewed by the Nuclear Regulatory Commission per Approval of the Trojan Decommissioning Plan EXH011-01059 ============= Page 72 of 123 ============= cam-' Transition Period Large Component Removal Project ISFSI Implementation Reactor Vessel Removal Project Decontamination & Dismantlement rn Final Radiation Survey C= a 0 c° Non-Contaminated Building CA Demolition DECOMMISSIONING SCHEDULE EXH 011-01060 1992 1993 19941995 1996 1997 1998 1999 2000 2001 2002 2003 ~ 2018 2019 2020 ============= Page 73 of 123 ============= DECOMMISSIONING STATUS Licensing Decommissioning Plan (D-Plan) Approved by NRC and Oregon Office of Energy = Post Operating License (POL) Issued by NRC Permanently Defueled Technical Specifications (POTS) Issued by NRC RVAIR Project NRC Approval Expected in October 1998 ISFSI Part 72 License Expected in April 1999 = State Rulemaking in Progress for Site License Termination Criteria Site Termination Survey Plan Being Reviewed by NRC License Change Amendments to Reflect Fuel in Dry Storage Submitted to NRC License Termination Scheduled for 2002 Activities Steam Generators, Pressurizer, RCS Piping and Pumps Removed rn C7 a 0 ~i O N QM Y Completed All RVAIR Project Field Activities Supporting Grouting = ISFSI Components On-Site November 1998 to Support Pre-Operational Testing = Spent Fuel Pool Cooling by Modular Air Cooled System = Equipment Removal 65% Complete Commenced Embedded Pipe Remediation ~- Preparing for Surface Decontamination Phase EXH 011-01061 ============= Page 74 of 123 ============= cam-' DECOMMISSIONING TRUST FUND > Trojan Co-Owners Separately Collect and Maintain Funds for the Decommissioning of the Plant > T Trust Fund per 10CFR50.75. BPA, as a Governmental Agency, Self-Guarantees their Decommissioning Funds and Pays Expenses on an On-Going Basis Per 1995 PUC Order Related to the 1993 General Rate Request the Company is Authorized to Collect $14M Annually Through 2011 from Customers for Decommissioning Costs Because Trojan was Shutdown Prematurely, the Trust Funds Currently Contain only a Portion of the Total Amount Needed for Prompt Decommissioning 21- Prior to Commencing DECON, Each Co-Owner Must Secure a Financial Assurance Mechanism, and it Must be Maintained Until Termination of the Part 50 License r„ C) 0 0 > Co-Owner's Trust Fund Balance is Projected to be Reduced to a Point Where it will be C° Necessary to Provide Bridging Funds to Complete Activities EXH 011-01062 ============= Page 75 of 123 ============= DECOMMISSIONING COST ESTIMATE (1997 Dollars - PGE SHARE) Radiological Decommissioning Large Component Removal $12,095,143 RX Vessel & Internals Removal $17,480,961 Building Decontamination Containment $ 8,149,230 Fuel/Auxiliary Building $14,148,300 Outside Structures $ 1,2119,111 LLRW Disposal $19,724,105 Staff $35,126,249 Corporate Overheads $21,939,946 Materials/Services/PI ant Mods $17,581,905 Site Termination Survey $12,770,015 $160,2114,965 m C-3 C= 0 Cn O co EXH 011-01063 ============= Page 76 of 123 ============= DECOMMISSIONING COST ESTIMATE Dry Fuel Storage 1SFSI Project $37,173,794 1SFSi Operations $47,211,248 ISFSI Decommissioning $ 5~, ;300874 $89,685,916 Non-Radloloqical Decommissionin Remediatlon $ 9,579,1 17 Building Demolition $23,700,859 Materials $ 363,392 Staff $ 2,381,476 $36,024,843 Finance Letter of Credit $ 496,000 Bridge Loan $11,169,000 c $11,665,000 C= d 0 j Total Trojan Decommissioning $297,590,724 'c EXH 011-01064 ============= Page 77 of 123 ============= v Quantities of Radwaste Activity (Ci) y Structures 0.031 Systems 1070.52 Activation 4,200,000.0 Projected Radiation Exposure Person-Rem1 y Steam Generators 138 Reactor Vessel and Internals 50 y Dismantlement 336 y Fuel Management 9 Fuel Transfer to ISFSI 58 ~- Total 591 M C.) 0 = 0 0 C,' 0 cra Volume (Cf1 22,502 19,220 10,374 EXH 011-01065 ============= Page 78 of 123 ============= I SITE RADIOLOGICAL RELEASE CRITERIA Current Site Release Criteria Surface Contamination: 5000 dpmll00cm2 (RG1.86) Direct Radiation: Soil/Groundwater: 5 MicroRem1Hr above Background <15 mRemlYr Proposed Site Release Criteria Restrict Dose to an Average Member of the Public Following Unrestricted Release of a Site to a Maximum Total Effective Dose Equivalent (TEDE) Limit of 25 Mrem Per Year for Residual Radioactivity that is Distinguishable from (Natural and Anthropogenic) Background. r C`7 0 0 0 0 ('I 0 ca EXH 011-01066 ============= Page 79 of 123 ============= REACTOR VESSEL AND INTERNALS REMOVAL PROJECT OVERVIEW AND ALTERNATIVES Shipment of Reactor Vessel with Internals Installed Prepare as Own Shipping Package Remove from Containment Transport from Trojan to the US Ecology Facility }- Disposal at US Ecology Disposal Site Alternatives Segment Reactor Vessel Internals Storage of Highly Activated Material in ISFSI Shipment of Remainder for Disposal Y Whole or Segmented Removal of Reactor Vessel for Disposal T C) C* O O ci1 1 O CA) N EXH 011-01067 ============= Page 80 of 123 ============= REACTOR VESSEL AND INTERNALS REMOVAL PROJECT STRATEGY Radiation Exposures Reduction Occupational Workers 56% - Transportation Workers 92% r Burial Site Workers 96% r General Public 96% Increased Transportation Safety by Reducing Shipments From 50 Unrestricted Truck Shipments to One Controlled Barge/Land Shipment Reduces Risk of Cutting Operations 1) Personnel Contaminations, 2) Airborne Problems, 3) Generation of Radioactive Wastes and 4) Plant Cleanup Concerns Reduces Costs by $15 Million Removes Concern of Long Term Storage of Greater Than Class C (GTCC) Waste; Eliminates GTCC Waste Disposal Costs C Q Capitalizes on Similarity of Large Component Removal (LCR) Project W CIY~ EXH 011-01068 ============= Page 81 of 123 ============= STATUS Licensing Submitted Safety Analysis Report and License Application to NRC f Responded to Requests for Additional Information (RAIs) Submitted Revised Safety Analysis Report (SAR) to NRC Staff Position Paper Submitted to Commissioners Oct 05, 1998 ]I- 10 Day Review Period Transportation Safety Plan Submitted to Oregon Office of Energy (OOE) Decommissioning Plan Change Reflecting RVAIR Submitted to OOE V.- EFSC Vote Expected Oct 16, 1998 Submitted Exemption Request to US DOT r Radiological Dose Pathways Analysis Submitted to Wash Dept of Health Y WDOH Technical Evaluation Report Written, Executive Approval Expected October 1998 Activities All Major Contracts (Heavy Haul, Packaging, Large Pipe Cutting, Heavy Lift) Awarded Containment Opening Enlarged Interior Concrete Cutting Completed °o CRDM Removed Barge Constructed and Launched 2 T Grouting Procedures Finalized EXH 011-01069 ============= Page 82 of 123 ============= REACTOR VESSEL AND INTERNALS REMOVAL PROJECT RISK MITIGATION Engineering Analysis Will Also Support One Piece Reactor Vessel Shipment Without Internals Grouting of Reactor Vessel Will Only Be Conducted After Receiving Regulatory Approvals Option of Cutting Up the Reactor Vessel Always Maintained All Major Contracts Allow PGE Termination Without Penalty rn c., 0 0 cl .1 EXH 011-01070 ============= Page 83 of 123 ============= v Reactor Vessel Height: Diameter: = Wall Thickness: Penetrations: Weight: 42'6" 17'1" at Head Flange 21'10" at Nozzles 5 318" 10 1/2" 148 633.6 Tons Reactor Vessel Package Welded Closures Filled with Low Density Cellular Concrete (LDCC) I - 5" Shielding < 200 MR Contact, < 10 MR at 2 Meter rr C3 0 0 0 =a w C" = 950 Tons (w/o Impact Limiters) r 8000 FT3 Plastic Foam Impact Limiters 1020 Tons Fully Loaded EXH 011-01071 ============= Page 84 of 123 ============= CRDM PENETRATIONS r st W OUTL NOZZ FLANGE MONITORING TUBES 2" THICK SHIELD INLET `~ NOZZLES 5" THICK SHIELD INCORE PENETRATIONS 'RATION EXH 011-01072 ============= Page 85 of 123 ============= v 1998 October Washington Dept of Health Approval of Burial 10104 = Oregon Energy Facility Siting Council Approval of DSAR 10116 Y Oregon EFSC Approval of Transportation Safety Plan 10116 = NRC Staff Recommendation of Transportation 10114 = NRC Issue Approval in Federal Register 10128 = PGE Review and Approval of Transportation Procedures 10122 November r 0 d En } Install and Tension RV Head Studs 11102 = Drain Water from Reactor Vessel 11109 Y US DOT Approval of Exemption Request 11116 = Complete Erection of LDCC Grout Plant and Grout Chiller 11123 = Mobilize RV Nozzle Cutting Contractor 11130 December = Complete Grouting of RV 12110 = Complete Cutting RV Nozzles 12121 EXH 011-01073 ============= Page 86 of 123 ============= REACTOR VESSEL AND INTERNALS REMOVAL PROJECT SCHEDULE (Contd) 1999 January Mobilize RV Package Prep Contractor 01103 r Start Welding of Reactor Vessel Closure Plates 01104 Mobilize Heavy Lift Contractor 01111 f Commence Barge Slip Dredging 01115 February m C110 a A .tea C? W Commence Fabrication of Cradle Assembly 02/01 Complete Barge Slip Preparations 02128 March ~- Install Down Ender, Rails and Tall Tower Lift Device 03111 Begin Reactor Vessel Lift 03129 Commence Installation of Reactor Vessel Shielding 03129 April Complete Down Ending of Reactor Vessel 04128 May Commence US Ecology Burial Trench Excavation 05110 EXH 011-01074 ============= Page 87 of 123 ============= v 9( 1999 June Complete Closures and Shielding of RV 06103 Transporter and Haul Route Load Test 06103 Decontaminate and Coat Reactor Vessel 06107 RV Lowered on Transporter 06/17 Complete US Ecology Burial Trench Construction 06121 July } Complete Installation of Reactor Vessel Tie-Downs 07112 > Washington DOH Approval of Burial Site 07128 Transport RV to Barge Slip, Load on Barge 07129 > Transport RPV to US Ecology 07131 August > Place RV in Burial Trench 08105 m C) C:~ 0 0 0 En 0 Q EXH 011-01075 ============= Page 88 of 123 ============= INDEPENDENT SPENT FUEL INSTALLATION (ISFSI) PROJECT BACKGROUND AND OBJECTIVES Dry Fuel Storage System Y Dual-Purpose (Storage and Transportation) System Chosen for Trojan Allows for Ultimate Removal of Spent Nuclear Fuel from Trojan Without the Need to Return to Spent Fuel Pool and with no Further Handling of Fuel Objectives - Safely Store Trojan Spent Fuel > Facilitate Decommissioning > Align with DOE Fuel Strategy (MPG) y Minimize Trojan O&M Prepare Trojan Spent Fuel for DOE Acceptance m c-, 0 0 4 cst a EXH 011-01076 ============= Page 89 of 123 ============= INDEPENDENT SPENT FUEL STORAGE INSTALLATION (ISFSI) STRATEGY Provide Lowest Fuel Management Costs Until USDOE Accepts Spent Fuel for Repository "Dual Purpose System"-Licensed for Storage and Transportation (Unique). Fuel is Packaged and Licensed for Shipment Capital Investment Offset by Lower Dry Storage O&M (Approximate Differential $6 Million Per Year) Protect PGE Against Further Delays in USDOE Geologic Repository Development Allows Full-Scale Dismantlement and Decontamination System Has No Moving Parts M C) CD 0 0 0 csi o .a, N EXH 011-01077 ============= Page 90 of 123 ============= INDEPENDENT SPENT FUEL STORAGE INSTALLATION (ISFSI) STATUS Licensing Submitted Safety Analysis Report and License Application to NRC Responded to Is' & 2nd Requests for Additional Information (RAls) Submitted Revised Safety Analysis Report (SAR) to NRC NRC Technical Review Concluded Safety Evaluation Report Expected Approval by April 7999 Activities > Steam Reforming and Fuel Debris Capsule Loading Completed Spent Fuel Pool Fuel Inspections Completed > Concrete Storage Pad & Access Road Constructed m C11 0 C= cm 0 C) Transfer Stations Constructed Security Fences and Systems Installed Procedure Drafts Completed Vacuum Drying Equipment On-Site Robotic Weld Equipment On-Site Selected ISFSI Staff Specialists Impact Limiters Constructed and On-Site Basket Prototype Constructed EXH 011-01078 ============= Page 91 of 123 ============= cam-' INDEPENDENT SPENT FUEL STORAGE INSTALLATION (ISFSI) PROJECT RISK MITIGATION BNFL Fuel Solutions Contract Design Engineering Fixed Price y BNFL Assumes Full Cost of Transportation License Fixes the Price of the Metal Baskets Equally Shares Costs Associated With Design Changes Occurring During Fabrication Allows PGE Cancellation Without Penalty Allows Takeback of Workscope Without Penalty Allows Lease Not Purchase of Transportation System Has Long Term (50Years) Warranty ~- Allows PGE to Have All Design Documents to Complete Project if BNFL is Unable to Perform Requires BNFL to Maintain Part 71 License Phased Authorization of Project Activities m C-, C* 0 0 0 0 EXH 011-01079 ============= Page 92 of 123 ============= v Transfer Cask Loaded (wet wlfuel) 105 tons Height 16 feet Width 9.5 feet Basket Loaded (wet w/fuel) 43 tons Height 15 feet T Width 5.5 feet n 0 0 a 0 cs+ Concrete Cask t Loaded (wet w/fuel) 145 tons Height 17.5 feet Width 11 feet Storage Pad 170 feet x 105 feet EXH011-01080 ============= Page 93 of 123 ============= INDEPENDENT SPENT FUEL STORAGE INSTALLATION (ISFSI) CONCRETE CASKS rtacr I Ir. m n O co CJ C= cm INNER CAST LSNEE ArR PAD CHARNEL AIR OUTLET BASKET AIR INLET EXH011-01081 ============= Page 94 of 123 ============= a F .10/ v 1998 October - OOE Issues Staff Report and Public Notice 10104 = Award Initial Basket Fabrication Purchase Order 10105 > Commence Fabrication of Overpack 10105 r Failed Fuel Cans Released for Fabrication 10109 > Basket Prototype Shipped from Hi Tech 10115 = OOE Conducts Public Workshop 10128 = Commence Construction of 1111 Concrete Cask 10/29 = Installation of Impact Limiters Completed 10/29 November rn C) a 0 a C" 0 = Transfer Cask and Yoke On-Site 11105 NRC Design Review Complete, Start Safety Evaluation Report 11112 All Auxiliary Equipment On-Site 11/12 > Commence Pre-Op Component Testing 11/15 Complete Cure of 151 Concrete Cask 11128 December OOE Hearing on ISFSI Rule 12114 EXH 011-01082 ============= Page 95 of 123 ============= a (Z v 1999 January Y Weld Procedures and Equipment Available 01102 Complete ISFS1 Readiness Audit 01104 Commence tat Basket Fabrication 01120 EFSC Vote on Rulemaking 01125 Complete Pre-Op Test Runs 01125 February 10- BNFL Complete and Submit Drop Test Report to NRC 02109 March Y NRC Part 72 License Issues 03103 State Rulemaking Complete 03104 ~- Commence NRC Pre-Op Test Program 03129 rn C? Q CM Pb CO April First Basket On-Site 04101 Implement ISFSI Security System, Start 24 Hour Coverage 04107 >- Commence Fuel Loading 04/12 EXH011-01083 ============= Page 96 of 123 ============= OVERVIEW OF THE STATUS OF THE DECOMMISSIONING OF THE TROJAN NUCLEAR PLANT Strictly Private and Confidential Attached is an Executive Summary (Summary) overviewing a meeting held on July 8, 1998 among representatives of Enron and Portland General Electric Company during which the decommissioning of the Trojan Nuclear Plant was critically reviewed and discussed. The Summary and the documents referenced therein were prepared at the request and under the direction of counsel, arc confidential and proprietary in nature, and are afforded protections tinder the attorney-client privilege. In order to maintain the confidential and privileged nature of the Summary and referenced documents, please do not copy, disseminate or discuss the Summary with any other person. Please review the Summary prior to the meeting of the Audit Committee. An overview of the Summary and other current aspects of the decommissioning will be presented during the meeting. EC 000051049 EXH 011-01084 ============= Page 97 of 123 ============= Personal & Confiidential Subject to the Attorney-Client Privilege TROJAN NUCLEAR PLANT ACTION PLAN AND UPDATE TO FINAL HGP, INC. REPORT EXECUTIVE SUMMARY (July 8, 1998) erv'ew On July 8, 1998, representatives of Enron Corp. ("Enron") and its subsidiary, Portland General Electric Company (PGE"), met in Portland, Oregon to discuss the Final Report issued on March 17, 1998 by HOP, Inc. ("HGP Report"), covering HGP's engagement by Enron to critically review the status of the decommissioning of the Trojan Nuclear Plant ("TNP") from the period July 19, 1996 through October 22, 1997. Enron had initially engaged HGP to conduct a thorough due diligence review of TNP in conjunction with the merger between Enron and Portland General Corporation which was consummated effective July 1, 1997, As a result of that engagement, HGP issued a "Preliminary Due Diligence Report" on July 19, 1996. The HGP Report serves as an update and supplement to HGP's preliminary report. The following persons attended the meeting in Portland: Al Alexanderson Peggy Fowler Walt Pollock Jim Derrick Ken Harrison Steve Quennoz Robert Eickenroht Doug Nichols Jack Urquhart Presentation of the Reports Walt Pollock and Steve Quennoz presented a detailed review of the status of the decommissioning of TNP, including an update of the events which had occurred since HGP completed its review on October 22, 1997 and issued the HGP Report. Their presentation • included providing copies to each attendee of (I) a report prepared under their direction entitled "HGP's Final Report - Enron/PGE Monitoring Project." dated July 7,1998 (the "Enron/PGE Report"), and (ii) a report prepared by Arthur Anderson entitled "Project Management Review - Trojan Nuclear Plant," dated May 1998 (the "AA Report"). Mr. Pollock and Mr. Quennoz presented in detail the Enron/PGE Report, compared its findings to the HGP Report, and briefly summarized the findings of Arthur Andersen in the AA Report. Following presentation of each matter in the Enron/PGE Report, the attendees discussed the findings of the Reports and the alternatives available to address the matters noted in such Reports. The AA Report had been commissioned by PGE to review the information, accounting, financial and cost control procedures utilized by PGE in the decommissioning on an independent basis to confirm or deny certain matters disclosed in the HGP Report. Page 1 of 4 EC 000051050 EXH011-01085 ============= Page 98 of 123 ============= Personal & Contrdentrol Subject to the Attorney-Client privilege Summary of the Reports While reference is made to the Reports for a complete description of the matters covered during the meeting, in summary the Enron/PGE Report and the AA Report reflected favorably on the status of the decommissioning and covered five general areas: • Facts or circumstances which had changed since the date of completion of HGP's review of TNP, including the status of the Reactor Vessel and internals Removal ("RVAIR"), the Independent Spent Fuel Storage Installation ("1SFSI") and Sierra Nuclear Corporation ("SNC"). • Differences in strategy surrounding choices which EnronIPGE had made with respect to taking or omitting to take certain actions suggested by the HGP Report. • The adoption of critical review, monitoring and oversight procedures for on-going decommissioning activities. • Procedures for enhanced communication to regulatory authorities, intervenors, co-owners of TNP and the public, and documentation of same. • Procedures for enhanced communication to senior Enron management, including the Chairman, President, Enron Board of Directors and/or Audit Committee- In particular, Mr. Pollock and Mr. Quennoz confirmed the following matters during their presentation: The establishment of a single dedicated nuclear decommissioning executive (Steve Quennoz, Site Executive) and the designation of senior Enron management to oversee the decommissioning process. 2. With TNP management assistance, BNFL completed the acquisition of SNC in April 1998, alleviating the questionable financial and quality control issues surrounding SNC. 3. That the cask design for Trojan has been accepted by BNFL as the premier storage design far spent nuclear fuel. BNFL is currently undertaking to correct deficiencies previously encountered by SNC in the manufacture of casks of an earlier design. 4. The development of an area-by-area cost estimate and scheduling system (including tracking, forecasting, scheduling, analysis and reporting) and specific analysis of the effect of any delays in the decommissioning schedule on the decommissioning budget. Integration of the cost and scheduling systems is expected to be complete in August, 1998. 5. The curtailment of any efforts to utilize TNP personnel to market decommissioning expertise to other Enron projects which would jeopardize the resources available for decommissioning at TNP. Page 2 of 4 EC 000051051 EXH 011-01086 ============= Page 99 of 123 ============= Personal & Confidential Subject to the Attomey-Client Privilege 6. The decision to utilize Enron/PGE personnel for decommissioning in lieu of subcontracting the decommissioning on a turnkey basis. Enron/PGE believes that it currently has the expertise, resources and ultimate responsibility to conduct the decommissioning of TNP. Subcontractors will continue to be utilized for selected decommissioning activities. 7. The documentation of major risks and mitigation plans, including from a prudency and third party exposure perspective. Extensive documentation (including both decision making and technical/engineering) is available to support Enron/PGE decommissioning activities from both a prudency and third party exposure perspective, including its on-going activities and judgments made with respect to RVAIR, ISFSI and SNC. The documentation process will be revised to develop action plans on significant risk issues identified during monthly project status meetings, with monitoring of their implementation. The Electric Power Research Institute, an independent industry group with nuclear experience, also will conduct a review of TNP during late 1998. 8. The conduct of on-going high level quarterly and annual reviews by Enron management and the establishment of a process for inviting continuing criticism at TNP aimed at improving the efficiency and safety of the decommissioning process. These procedures will be employed In lieu of the Trojan Oversight Committee, which had provided oversight of PGE decommissioning activities to Enron during the pending Enron/PGC merger. 9, The extensive nature of communications to industry experts, government officials, intervenors, co-owners of TNP and the public with respect to RVAIR, ISFSI, SNC and the final closure plan, and the decision to pursue same on a multi-level (rather than heavy-handed NRC) approach. W. A detailed review of the Trust Fund established for the decommissioning has been undertaken, including (i) an analysis being performed by Arthur Andersen to review on an annual basis decommissioning cost estimates against Trust Fund deposits and (Ii) an evaluation by Enron/PGE of the earned value of decommissioning expenditures against the adequacy of funds in the Trust Fund. The Trust Fund is also reviewed quarterly by Enron/PGE and audited annually by Arthur Andersen. ifronal Recommendations In addition to those matters noted in the Enron/PGE Report, the following additional recommendations were made and discussed at the meeting, At least three times each year, senior Enron management and other Enron representatives will meet with representatives of PGE on the status of the decommissioning. • On a semi-annual basis, Enron senior management from Portland will meet with the Chairman and President of Enron to brief them on the status of TNP. Page 3 of 4 EC 000051052 EXH 011-01087 ============= Page 100 of 123 ============= Personal & Confidential Subject to the Attorney-Client Privilege On an annual basis, Enron senior management from Portland will brief the Enron Board of Directors and/or the Audit Committee on the status of TNP, with presentation materials. All presentation materials will have legal review prior to distribution of same- • Enron/PGE will further define a set of measurable targets for the decommissioning, including individual responsibility and timelines for implementation/performance. Written contingency plans wilt be established for directing changes irti implementation of certain major decommissioning activities (e.g., RVAIR and ISFSI), and benchmarks wilt be established to define and measure the triggering events for Implementation of such plans. • Outside nuclear counsel for Enron will be updated on the status of the decommissioning (including RVAIR, (SFSI and SNC) and he and/or Enron management will orally inform HGP of the intended course of action with respect to matters noted in the HGP Report and discussed at the meeting. The meeting adjourned following reiteration of the preceding recommendations. relcken m&alpge-nuke\rojan1 b. doe EC 000051053 Page 4 of 4 EXH011-01088 ============= Page 101 of 123 ============= Agenda Items ` lw li9 0 T !!7 O O O O W EXH011-01089 ============= Page 102 of 123 ============= Capital Risk Management T" C7 C* C= C= O !i7 r 0 en 0 EXH011-01090 ============= Page 103 of 123 ============= F', CID Q O CCs' j cn Agenda Objectives and Priorities • Fair Value Merchant Portfolio Composition Fair Value Merchant Portfolio Position Report • Merchant Portfolio Process Risk Book Architecture Proposed Limit Structures ENE Buy and Sell Bands EOG Buy and Sell Bands g9o EXH011-01091 ============= Page 104 of 123 ============= Objectives and Priorities Objectives: - Transform Enron investments into a portfolio of liquid positions which can be more actively managed and financed Implications: -- Merchant asset "risk books" with manageable exposures - Daily mark-to-market of merchant assets - Limit structures and risk management policy for merchant assets Priorities: - Current fair value assets by October Board meeting • ECT Merchant Assets • Selected International Assets • Enron Stock Books --- "Non strategic" assets by year end • International Assets • Tranches (carve outs) from regulated businesses ru 0 0 C= 0 O Cn y9 O EXH 011-01092 ============= Page 105 of 123 ============= Fair Value Merchant Portfolio Composition As of 09/30/98: Gross Fair Value Merchant Portfolio Syndications Net Fair Value Merchant Portfolio Net Portfolio: By Asset Class (millions) $2.22 Billion = <$0.55 Billion = $1.67 Billion Net Portfolio: By Industry (millions) Cash from Fledges: $$40 aM v- C* 0 O EXH011-01093 Enron Stock Books: $52 Cash: $40 ============= Page 106 of 123 ============= Fair Value Merchant Portfolio Position Report C) O 0 -& ca ea Fair Value Merchant Portfolio Public-US S 139,433,266 $ 9,174,878 $ (26,486,745) $ 122,121,399 Privates - US S 726,417,237 $ 26,541,982 $ (5,195,097) $ 747,764,122 Public-Canada $ 17,199,496 $ 97,082 $ (2,961,168) $ 14,335.411 Public-UK $ 1,756,772 $ - $ (1,141,227) $ 615,545 Privates-UK $ 14,035,000 $ 13,700,674 $ 688,000 $ 28,423,674 Privates-Thailand $ 12,028,710 $ - $ - $ 12,028,710 Public - Andean Pact/Southern Cone $ 140,700,000 $ - $ (12,440,000) $ 128,260,000 Private-Andean PactSouthem Cone $ 3,945,000 $ - $ (1,136,000) $ 2,809,000 Total Equity $1,055,515,481 S 49,514,616 $ (48,672,236) $ 1,056,357,861 Hedges US E&P $ 34,749,294 $ 34,749,294 S&P $ 2,694,117 $ 2,694,117 Canadian E&P $ 526,653 $ 526,653 UK $ 280,001 $ 280,001 Andean Pact/Southern Cone $ 285,832 S 285,832 Currency $ 942,000 $ 942,000 Total Hedges $ 39,477,897 S 39,477,897 Equity Portfolio Net of Fledges $ (9,194,339) $ 1,095,835,758 Structured Credit $ 516,539,027 $ 516,539,027 Enron Stock Books $ 52,760.647 $ 52.760,647 Total Fair Value Merchant Portfolio $1,572,054,508 $ 49,514,61fi $ 43,566,308 $ 1,665,135,43 J 0 EXH 011-01094 ============= Page 107 of 123 ============= Enron Corp. Merchant Portfolio Process m C, a 0 0 0 cs, 0 C= 0 Z ran C MCiTB~D Business Unfts Bank Markets Deal Approval tJo Liquidity Capital I Markets Deal Price Request Cash wlw Business Units - Approved i RAC Deal Yes Merchant Merchant Syndication Funds Asset? Portfolio Desk Now Deal Assets Assets i Private Prlcln Cash Liquidity Placements t Request informa ion f 4 Insurance ! 10 Markets Treasury - - Books* Swaps ----- ° ---._. t _.._.~. Business Unit RAC Merchant Portfolio • Constructs the • Investment Review and • Strategic Deal Structuring Assistance Direction on of Debt EguLty • Builds the Initial • Deal Anal cs l~ Investments -- Valuation Model • Prices Idiosyncratic a Buy/Sell/Hold • Negotiates and Risk Decision Closes the Deal • Obtain Prices From • Deal Capital Books Restructuring • Populate Capital Books • Business Unit • Transaction Approval Approval • Coordination of • Monitoring Management and Asset Board Approval Performance The Books will be responsible for the following: Execution, Curve Development and Maintenance, Risk Hook Management, Market Views y9o EXH011-01095 ============= Page 108 of 123 ============= Risk Book Architecture c-, 0 0 0 a cs' Q7 .1 Characteristics Merchant Portfolio Quarterly revaluation No market risk ' --- - ---" Asset specific valve changes Systematic Risk Transfer Characteristics Daily MTM i Commodity Interest Rate Currency Equity Net open positions Basis risk --- ' Necessary to No new authorities establish new authorities Credit To be integrated with the existing Trade Credit Portfolio; reserves established `9 O EXH 011-01096 ============= Page 109 of 123 ============= Proposed Limit Structures Merchant Portfolio: - Total Notional Dollar Limit (after syndication) • Current Exposure = $1.67 Billion • Proposed Limit = $2.0 Billion Equity Portfolio: - Net Open Position and VAR limits Current Open Proposed Net Open Benchmark Position Position Limit V@R Limit Enron Companies $ Notional $305 Million $300 Million $10 Million Other $ Notional $150 Million $200 Million $10 Million Trading Portfolios: - No changes Ca O C= C" C* 9y 0 EXH 011-01097 ============= Page 110 of 123 ============= ENE Buy and Sell Bands $70- $60- 4 503 $50 x $40 W W $30 0 Authorization Date 1210"1 S20- $10- Sell Target 541 NE Pric 401/4 Buy Target 1 1 1 1/, 1 1/ 1, 1/ 1 1 1 „ . I// 1 ./ 1 1 / 1 1 / 1 , / I I I I- 1 CO O 40 CO w 0) 0) ~ ~ ` ~ ° r ~ i a s o i rn r r rn O Q C,' os Cw) * Beginning Band Prices Escalated at A S&P 500 times 13 ENE y9 O EXH011-01098 ============= Page 111 of 123 ============= EOG Buy and Sell Bands m c7 0 0 0 0 csI 0 Q: .a. $35 130 $30 l $25 Sell Target 21'l s- $20 0. IA OG Price ~ $15 AuthorIzation Date 12108197 $10 s $5 $0 M rn rn rn Co OD OD CD CO 6c+~7 M Cdr} c3 (~*J C> 2 ~ ('} t j N r r * Beginning Band Prices Escalated at A E&P Basket times !3 EOG 'y9 0 EXH011-01099 ============= Page 112 of 123 ============= Market Risk Update October 12, 1998 r n 'y9 0 EXH011-01100 ============= Page 113 of 123 ============= r" C"$ a a Q! Q, Table of Contents C1 Objectives a Risk Profile a Limit Violations o Policy Changes 2 ti9 a EXH011-01101 ============= Page 114 of 123 ============= Objectives m C) 0 CM a a a, U Provide overview of risk in the trading portfolios o Inform the Board of any limit violations o Summarize and discuss policy changes o Provide opportunity to address policy issues 3 4-P& EXH 011-01102 ============= Page 115 of 123 ============= Risk Profile rYt C) 0 d 00 YTD P&L - As of 9/25/98 ($000y) 200,000 157,642 150,000 100,000 50,000 0 GAS RoV@R 142% [1=9169~4 TD $17,09 QTD = $60YTD = $502,202 127,895 10],790 73.830 POWER 92% Average V@R - September `98 ($000s) 0 (5,000) (10,000) (15,000) M M 33,408 7,637 EURO TRADING TREASURY (2) LIQUIDS EMG(1) 53% - 28% 64% Average V@R = $19,466,000 (14,160) GAS POWER EURO TRADING TREASURY (2) LIQUIDS (1) EMG includes Emission Credits, Coal Trading, Paper, and Weather. 4 (2) Treasury includes Financial Instruments (US Interest Rate, Foreign Currency. UK Interest Rate) and Securities Trading. EMC, (1) ~A-' ? 4*:~o EXH011-01103 ============= Page 116 of 123 ============= 690190000 33 CA 0 a 5/9/97 5/22/97 6/5/97 6/18/97 7/x/97 1/16/97 7/29/97 8/11/97 8/22{41 9/5/97 9)19/97 1x/2/97 10/15/9/ 10/18/97 11 /10/97 11,74/97 12/9/97 12/22/97 1/9/98 1123/98 7/x/98 2/25/98 3/12/98 4/Zr9fl 4/17/98 5/1/98 5/14/98 5/29/98 6/12/98 6/26/98 7/10/98 7/23/98 8/7/98 8/20/98 9/2/98 9/16/98 S rb` a z C W O 0~4 Cn ============= Page 117 of 123 ============= Limit Violations As of 9/34/98 m CIO 0 0 a V VIOLA71ONS MAX A LL VSOW1OI'6 NO111CA110ir Limas LailtMioant 1D 1D CR0 COO CEO YC GG-ENRON Position Maturity Gap VOR ($36,000,000) P&L Loss Daily (510,000000) 4 ($19,434,000) 4 4 2 5 DayRoling (${5,000.000) a ($18,126,000) 2 3 2 7 7 7 4 1VA GAS ('J Position 150 bcf Maturity Gap 180 bcf 1 (133) 1 I I V O R (S2Q000,000) Daily Lass Daily ($5,000,000) 4 ($14,647,000) 4 4 2 5 Day RoUmg ($10,000,000) 5 ($19,541,0W) 1 5 2 10 10 10 5 NA POWER Position 25 MM MW} Maturity Gap 15 MM M WH - V OR Dai1y Loss Daily ($5.000000) 5 ($10,909,000) 5 5 1 5 Day Rolling ($(0,000000) 5 ($14,136,000) 5 z 10 10 6 1 GLOBAL LIQUIDS ( Positiz 12.5 MM bbl Maturity Gap 15 MM bbl V @R ($8 000000) Daily Loss Daily ($5.000,000) 5 Day Ra1ing (310, X LlX ) (1) FC = "Finance Committee" (2) The maturity gap violation occurred prior to the position limit increase (8/10/98 from 120 bcf to 180 bcj) 6 y9 O EXH011-01105 ============= Page 118 of 123 ============= Limit Violations As of 9/30/98 VIOLATIONS Nil A LL VIOLATIONS NOU0CATION Yg Inndts UmltAnwwt 7D CRO GOD t~0 Ica) EUROPEAN GAS Position 45 bcf Mar-triy Cap W be f 2 51 bof 2 V@R ($7.500.000) Daily Loss Daily ($5,000,000) 5 Day Rolling (S 10,000,000) 2 2 EUROPEAN POWER Poskion 10 MM MWH Maturity Cap 10 MM M WH V@R Daily Loss Daily ($5,000,000) I ($7,405.000) 1 1 5 Day Rolling ($ L0 000,000) 1 1 1 EMERGING MARKETS (2 300,P30 audits 115 MM Tans 1 Posaion M 150,000 Metic Tons I S LOO M Maturity Cap V @R Daily Loss Daily t$5900,00 I) 5 Day Robng (510,000,000) TREASURY Posiion - Maturity Gap - V@R - Daily Loss Daily ($S,000.OODy 5 Day RtIIiig ($IQ000 X30) TOTAL 30 30 26 10 rn C, 0 c a 0 (1) FC = "Finance Committee" (2) Both maturity gap violations occurred prior to the maturity gap limit increase (8/10/98 from 30 bcf to 60 bcf) 7 y9 0 EXH 011-01106 ============= Page 119 of 123 ============= Policy Changes 0 Limit violations to Chairman of the Audit Committee * Updates to the Audit Committee at all regular Board meetings U New commodities approved under interim policy o Argentine Electricity o Australian Electricity CII C" 0 8 y'Po EXH 011-01107 ============= Page 120 of 123 ============= MINUTES MEETING OF THE AUDIT AND COMPLIANCE COMMITTEE OF THE BOARD OF DIRECTORS ENRON CORP. October 12,1998 Minutes of a meeting of the Audit and Compliance Committee ("Committee") of the Board of Directors of Enron Corp. ("Company"), noticed to begin at 4:00 p.m., but actually begun at 4:15 p.m., C.D.T., on October 12, 1998, at the Enron Building in Houston, Texas. The following Committee members were present, constituting a quorum: Dr. Robert K. Jaedicke, Chairman Mr. Ronnie C. Chan Mr. Joe H. Foy Lord John Wakeham Mr. Bruce G. Willison Committee member Dr. Wendy L. Gramm was absent from the meeting. Directors Norman P. Blake, Jr., Ken L. Harrison, Kenneth L. Lay, Jeffrey K. Skilling, and John A. Urquhart, Messrs. Brad Alford, Robert H. Butts. Richard B. Buy, Richard A. Causey, James V. Derrick, Jr., Robert D. Eickenroht, Andre LeGallo, Ted Murphy, Walter E. Pollock, and Stephen M. Quennoz, and Mesdames Peggy Y. Fowler and Peggy B. Menchaca, all of the Company or affiliates thereof, Messrs. Thomas H. Bauer, David Duncan, and D. Stephen Goddard, all of Arthur Andersen LLP ("Arthur Andersen"), also attended the meeting. Messrs. Blake, Harrison, LeGallo, Pollock. Skilling, and Quennoz and Ms. Fowler joined the meeting in progress as noted below. The Chairman, Dr. Jaedicke, presided at the meeting, and the Secretary. Ms. Menchaca, recorded the proceedings. Dr. Jaedicke called the meeting to order and noted that a draft of minutes of the meeting of the Committee held on May 4, 1998, had been distributed to the Committee members. He called for any corrections or additions. There being none, upon motion duly made by Mr. Foy, seconded by Mr. Chan. and carried. the minutes of the meeting of the Committee held on May 4, 1998. were approved as distributed. ECh015474433 EXH011-01108 ============= Page 121 of 123 ============= Mr. Duncan began the review of the 1998 financial and internal control audits. He distributed a copy of Arthur Andersen's letter to the Company confirming the arrangements for its services during 1998, a copy of which is filed with the records of the meeting. He updated the Committee on the status of the 1998 business risk audit plan and highlighted current activities. Mr. Causey joined in the report and discussed the extensive systems activities that were in process. Mr. Bauer discussed the enhancements developed for remote location risk assessment. Mr. Duncan reviewed significant current activities in the financial reporting area. He discussed the status of monetizations, and Mr. Causcy noted that Enron Capital Management expected a successful completion of its objective to have an estimated $700 million monetized prior to year-end. Mr. Duncan also reviewed start-up costs and related company activities, acquisition related activities, continued evolution of mark-to-market and fair value accounting methodologies, and recent Securities and Exchange Commission ("SEC") initiatives. He distributed a copy of the speech given by Arthur Levitt, chairman of the SEC, on September 28, 1998, a copy of which is filed with the records of the meeting. Mr. Causey commented on the five earnings management practices referred to by Mr. Levitt in his speech and how such comments related to the Company's reporting practices. Messrs. Causey and Duncan discussed matters relating to 1998 Financial Accounting, including a contract associated with the acquisition of Portland General Electric Company. Messrs. Duncan and Goddard discussed the issue in detail and Arthur Andersen representatives answered questions from the Committee. A copy of Mr. Duncan's report is filed with the records of the meeting. Messrs. Blake, Skilling. and LeGallo joined the meeting during the previous discussion. Mr. Causey presented a review of the Company's crisis management procedures. He noted the top ten countries in the world for kidnappings. the demands made, and results of negotiations from 1992 to date in each of the countries names. He discussed legal preparations, such as commissioning the Report of Kidnap Laws in high-risk countries, and also outlined the organizational and training preparations. He discussed the level of communication to country managers in an effort to disseminate the information necessary to promote awareness in each country where the Company had operating subsidiaries. He reviewed insurance coverage. Messrs. LeGallo and Derrick joined in the 2 EChO15474434 EXH011-01109 ============= Page 122 of 123 ============= discussion and answered questions from the Committee members. A copy of Mr. Causey's report is filed with the records of the meeting. Mr. LeGallo left the meeting following the crisis management report, and Messrs. Alford, Harrison, Pollock, and Quennoz and Ms. Fowler joined the meeting. Mr. Harrison presented an overview of the status of the decommissioning of the Trojan Nuclear Plant ("Trojan") by PGE. He introduced Messrs. Alford. Pollock, and Quennoz and Ms. Fowler and distributed two booklets related to the decommissioning effort, copies of which are filed with the records of the meeting. He called upon Mr. Pollock to begin the 1998 update. Mr. Pollock noted that Trojan was the first large nuclear plant to shut down early due to economics. He noted the state and federal regulations in effect at the time the plant was shut down. He reviewed the decommissioning strategy developed by PGE and called upon Mr. Quennoz to present the status of the decommissioning schedule. Mr. Quennoz reviewed the decommissioning schedule, which covered the period 1992 through 2020. He reviewed expenditures and the estimated balance of the Decommissioning Trust Fund at the end of the year. He discussed potential cost increases and decreases. He explained the reactor vessel removal project strategy and risks, and he discussed the independent spent fuel storage installation strategy and risks. A thorough discussion ensued, and the PGE team answered questions from the Committee members. Mr. Urquhart stated that he had examined the program and had visited the project site. He noted that he intended to return in November with Mr. Lawrence Izzo, president of Enron Engineering and Construction Company. In response to a question by Mr. Lay. Messrs. Harrison and Quennoz estimated a 70% chance of bringing the decommissioning project to close within the budget outlined. Dr. Jaedicke noted that the status of the project would be reported to the Committee on an annual basis. Following the report, Messrs. Alford, Harrison, Pollock, and Quennoz. and Ms. Fowler left the meeting. Mr. Buy began the update on the Company's risk management activities. He presented a risk profile analysis and valuation in each of the trading portfolios. He discussed limit violations as of September 30, 1998, and noted changes to be recommended to the Finance Committee of the Board with regard to the Company's Risk Management Policy. He stated that he would present updates on market risks and limit violations to the Committee at all of its regular meetings. A copy of Mr. Buy's report is filed with the records of the meeting. 3 EChO15474435 EXH011-01110 ============= Page 123 of 123 ============= Dr. Jaedicke called for an executive session with Arthur Andersen, and all non-Committee members were excused from the meeting with the exception of Ms. Menchaca. During the executive session, the Committee asked the representatives of Arthur Andersen if they had additional information to bring before the Committee, and the representatives responded that they did not. Mr. Goddard noted that Arthur Andersen's relationship with the management of the Company fostered involvement of Arthur Andersen at early stages of major projects and early diagnosis, which was beneficial to both parties. Secretary 3 mZ 4 ECh015474436 There being no further business to come before the Committee, the meeting was adjourned at 5:45 p.m.. C.D.T. APPROVED: A&~& QW&kc- Chairman pbm\minutos1101298A.doc EXH011-01111