Oboe'.. ow Os' Finance Committee Meeting October 8, 2001 I Committee Members Mr. Herbert S. Winokur, Jr., Chairman Mr. Robert A. BeIftr Mr. Norman P. Blake, Jr. Mr. Ronnie C. Chan Mr. Paulo V. Penax Pereira Mr. Frank Savage EC4U4Mom71 I CONFIDENTIAL I :xH064-00002 EndIin pmsibIIWe.'~ EXHIBIT 4614 CmnNo If 04.0025 I: 6 C 4 EC4049A0638186 EXHOG4-00003 Herbert S. Winokur, Jr., Chairman Robert A. Belfer Norman P. Blake, Jr. Ronnie C. Chan Paulo V. Ferraz Pereira Frank Savage AGENDA Meeting of the Finance Committee of the Board of Directors of Enron Corp. 4:00 p.m. (CDT), October 8, 2001 50k" Floor Boardroom, Enron Building Houston, Texas I Approval of August 13, 2001 Finance Committee Minutes Chief Financial Officer Report / rreasurer Report 4. Chief Risk Officer Report Quarterly Risk Update - Audit & Compliance and Finance Committee Roles - Trade Credit Update - Market Risk Update - Post Transaction Reviews 5. Projects and Amendments A) Revision to the Risk Management Policy - Approve for Recommendation to the Board B) Pi~oject Southwood - Approve for Recommendation to the Board Mr. Winokur Mr. Fastow Mr. Glisan Mr. Buy Mr. Buy 6. Other Business 7. Adjourn 9,. 0#b See Addendum for Deal Approval Sheets approved between Board meetings ECASGM0lU FYHfl~A-flflflOA Page 1-1 2-1 3-1 4-1 4-2 4-4 4-15 4-26 5-1 5A-1 Mr McMahon 58-1 6-1 7-1 E 4- U 1' a a 4 EC46ug~~ EXHOS4-00005 1 1 -. 1 Enron Corp. Finance Committee Minutes from August 13, 2001 meeting EC4g4g~~~ EXHOO4-OOOOG DRAFT EXHOS4-00007 MINUTES MEETING OF THE FINANCE COMMITTEE OF THE BOARD OF DIRECTORS ENRON CORP. AUGUST 13, 2001 Minutes of a meeting of the Finance Committee ("Committee") of the Board of Directors of Enron Corp. ("Company"), noticed to begin at 5:00 p.m. C.D.T., but actually begun at 5:50 p.m., C.D.T., at the Enron Building in Houston, Texas. All of the Committee members were present as follows: Mr. Herbert S. Winokur, Jr., Chairman Mr. Robert A. Belfer Mr. Norman P. Blake, Jr. Mr. Ronnie C. Chan Mr. Paulo V. Ferraz Pereira Mr. Frank Savage Directors John H. Duncan and Kenneth L. Lay, Messrs. William S. Bradford, Richard B. Buy, Richard A. Causey, Timothy A. DeSpain, Andrew S. Fastow, Ben F. Glisan, Jr., David G. Gorte, Mark E. Koenig, and Theodore R. Murphy, and Ms. Rebecca C. Carter, all of the Company or affiliates thereof, also attended the meeting. Director Jeffrey K. Skilling and Mr. Richard N. Foster, of McKinsey & Company, mc, joined the meeting in progress as noted below. The Chairman, Mr. Winokur, presided at the meeting, and the Secretary, Ms. Ceder, recorded the proceedings. Mr. Winokur called the meeting to order, noted that a draft of the minutes of the meeting of the Committee held on April 30, 2001 had been distributed to the Committee members, and called for any corrections or additions. There being none, upon motion duly made by Mr. Savage, seconded by Mr. Chan, and carried, the minutes of the meeting of the Committee held on April 30, 2001 were approved as distributed. Mr. Winokur called upon Mr. Fastow to present the Chief Financial Officer's report, a copy of which is filed with the records of the meeting. EC4894W0W1' Mr. Fastow discussed total return swaps that had been completed in June and July and noted that the ending balance shown in the presentation materials did not reflect recent activity, which had led to an ending balance of zero. He also reviewed recent treasury stock purchase activity. He then presented a chart depicting the Company's interest rate exposure in different areas and noted the dollar amounts at fixed and at floating interest rates. He stated that the chart now reflected all elements of the balance sheet, and while the overall amount had increased, the fixed- floating ratio remained fairly constant. He then discussed other asset monetizations. Mr. Fastow then noted that the Company was diversifying its funding sources and compared the percentage of funding the Company had received from banks, U.S. capital markets, and non-U.S. capital markets over the last three and one-half years. He then commented on the Company's liquidity and net margin activity. Messrs. Foster and Skilling joined the meeting. Mr. Fastow then presented a summary of the status of asset dispositions. He stated that the new accounting rules relating to goodwill could impact the Company's debt to total capital ratio and commented that the Company would be closely monitoring the sale of assets and the impact on the ratio. Mr. Winokur called upon Mr. Glisan to present the Treasurer Report, a copy of which is filed with the records of the meeting. Mr. Glisan reviewed the Company's active letters of credit and discussed the changes since year end. He presented the Company's guarantee portfolio as of June 30, 2001 ahd noted that guarantees continued to increase due to the significant increase in activity by the Wholesale group. He then presented the liquidity forecast and commented on the sources and uses of funds. He reviewed the Company's key financial ratios and noted that the Company was on target to meet the year end goals. He then discussed the Company's ratings by the rating agencies and provided comments on the views of each of the agencies. Mr. Winokur called upon Mr. Buy to present the Chief Risk Officer's report, a copy of which is filed with the records of the meeting. Mr. Buy stated that he would only be reviewing the overall portfolio summary and that he would be avaijable to answer any questions on the other material provided in the report. He stated that the Risk Assessment and Control group had expanded the portfolio summary to include additional EC45949M930791 EXHO64-OOOO8 international assets. He then reviewed the assets in each of the four performance categories, comprised of exceeding expectations, meeting expectations, below expectations, and troubled. Mr. Skilling joined him in answering questions from the Board regarding the assets in the troubled category. Mr. Winokur called upon Mr. Glisan to discuss a proposed resolution relating to brokerage account authorizations. Mr. Glisan discussed the proposed resolution and following a discussion, upon motion duly made by Mr. Savage, seconded by Mr. Ferraz Pereira, and carried, the proposed resolution relating to brokerage account authorizations, as presented at the meeting, was approved for recommendation to the Board. There being no further business to come before the Committee, the meeting was adjourned at 6:20 p.m. C.D.T. Secretary APPROVED: Chairman K:',s Minutes',2001 Minutes\OBI$O1F.doc EC46949A9030192 EXHOG4-OOOO9 N I '1 "S £ C 4 *15 EC4694uJ7u EXH0S4-0001 0 Enron Corp. Chief Financial Officer Report October 8, 2001 EC4680M038794 EXHOO4-COO1 1 2-1 Finance Issues * Enron Stock Activity * Interest Rate Exposure * Liquidity - Margin Activity * Finance Related Asset Sales * Outstanding Financings and Debt * Summary Asset Dispositions * Restructurings 2-2 EC4a49MLW?n EXHO64-00012 Enron Stock Activity Stock Trading Activity - MTM Description Opening Balance Total Return Swaps Ending Balance Stock Purchase Activity (Treasury) Description Opening Balance Repurchases Other Activity Ending Balance 400 $37.95 ($5,154) 400 Shares (000) 577 7,079 (3,646) Avg Price Amount (000) $78.21 $553,662 4010 Autt,orizatn, Sttject to ~n DerrOs ap~rovaI Activiy 7078,501 includes Stock Option Exercises Stock Option Swaps (Non-Oualified}, and oIhe~ miscellaneous EC4U49A803O796 Shares (000) Avg Price Qtr P&L (000) ~uky Fbstion Lit VOR ttbnal open Livii ($Ws~ $1000 Orent posion (SIvM ~.38 .%shtc ~1Is exehide mA poadion which S 'sitbeted .i ~A okpot~ontepo4 -t,aides 60% of JO) K an open posilon $30000 $11.32 EXHOO4-00013 2-3 Interest Rate Exposure 45, 000 , 000 40.000000 35,000,000 30.000,000 25.000.000 20,000,000 15.000,000 10.000,000 5,000,000 0 Notes: 1. Current OP Balance of $1987 MM represents 23% of floating rote debt. 2. FO$Z goal of 80/20 IWfit composition. 2-4 2,443.605 601,202 9.563,546 $39,827,S89 8,01,54 DFIoaUng-22% L EFo~ed - 78% Projects- P~epays 140's LTD-Off OP Projects- LTD-B/S Leases ENE Hedges Total Oft B/S B/S On B/S Liabilities EXH0O4-00014 EC46S4wg~g7 Liquidity - Margin Activity as of September 26, 2001 Current Liquidity ($MM~ Normal Disaster Market Market (P50) (P99) 1,524 Cash & ST Lines Inventory PRM Asset Net ARIAP Debt Shelf Equity Shelf Operational OF Whitewing Vehicle Capacity 7,665 1,634 260 29.6 3.0 Board ADDroved LiquidIty Factor Margin 10 day MeUc Actual Coverage Factor Required Coverage Factor LiquidIty Factor wI largest Historical Monthly Maroin Out Max Monthly Margin Out Actual Coverage Facto! 996 7.7 636 2.0 1.5 996 1.6 2-5 EC4U4gA.g93708 1,524 1,134 300 3,242 1,000 375 (50) 160 (50) 160 Total EXHO64-OOO1 5 Finance Related Asset Sales Prepays and 140 Sales ($MM) 12/31/98 &'3W99 12/31/99 &'30/00 12/31/00 $ 1,258 $ 2,239 $ 2,489 $ 2,962 $ 4,016 $ 6/30/01 9/30/OlE 5,031 $ 5,665 $ 573 $ 683 $ 1,316 $ 772 $ 1,521 $ 1,533 S 1,687 $ 1,831 $ 2,922 $ 3,805 $ 3,734 $ 5,537 $ 6564 5 7,252 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 12/31/98 6/30/99 12/31/99 6130100 12/31/00 6/30/01 9130/OlE z~t / y~o«= ~'f2~~Y~9fr1 -b FA«= /4'9% (~«=s) 3tC55/A! 2'~ k7ChPV aowt yk~Jt(t - EC4IY48MOM1e9 Prepays Pasb 140 E E 0 'S a S .5 2-6 Outstanding Financings and Debt ($MM) o Capital Nkts - Non-Usi * Capital lvkts - US I. - -r m 2000 Bank Cap Mkt-US Cap Mkt - Non US Total 1998 Year End % of Outstanding Total 11,330 61% 7,229 39% - 0% $ 18,559 100% 1999 2000 3Q '01 E Year End % of Year End % of Quarter End % of Outstanding Total Outstanding Total Outstanding Total 14,453 56% 17,933 52% 19,961 50% 10,224 40% 12,897 38% 16,390 41% 1 037 4% 3,550 10% 3,477 9% $ 25,714 100% $ 34,380 100% $ 39,828 100% 2-7 E046949A00wrn I, Bank 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 C- K. t~t 1998 1999 r 3QOIE ($ in millions) Summary Asset Disposition Status Disposition Status Said Sale Pending 2001 Active Negotiation 2001 High Priority 2002 Active Negotiation - PGE - Carnhusker 2002 High Priority Number of Assets 30 7 9 19 I 1 21 Book Value On BIS $1,878 626 1,132 158 1,589 0 1,176 Book Value Off 815 $124 585 99 306 0 2~ 0.0 252 Total 88 $6,669 $1,666 -8 c-s. 4 4 .12 .1 1< EC46949M030601 Restructurings ,~ tlod&o'«=u a. Oabhou&cky1~, tM ~ ~&Ld I tnoP * Raptoy car- r~ .~ cda~t A, Whitewi,,g .7 ~ (/fl ~9%( 4 a .7, a witA oAr <.~ + 2-0 EC4eg4 PAoo3o~g2 Summary of Major Non-Plan Divestitures ($ millions) Timing Assetjsusiness Probability Book Value EGEP India Ecoelectrica CEG/CEG-Rio Azurix North America Enron Wind (preferred) Medium High Medium High Low $ 378 146 247 197 200 $ 390 $ 266 247 150 200 2002 PGE Europe (Turkey/Poland) SK Enron GAS PART Trans redes EOTT Units COPEL GAIL Other Azurtx** High Low Low Low Low Low Low Low Low $ 1,368 266 294 213 138 127 108 70 295 $ 1,878 $ 240 220 205 146 127 90 51 136 $ 4.047 $ 4.346 $ 3.599 * Includes Canoun and IASA Mexico, Madera Ranch, Geoplan and Mendoza. ~AYV ,bot gr - (Lt&A9. 'k/k! /4 '~~4 I 'ii ~--19 - L4~ V 07(1:; (h A ci 11 4/ ,J{y /7 Si) 2 4'6 ~t»=' 23 tIE- )BoJt 94t («=cfl EC4 09 49 AG 0 30 003 <"-"A <720011Q4 6 Price tEst. VaIue~ Net Cash Proceeds 307 254 247 200 Total 1,517 240 220 205 141 127 90 51 C iv ½ C, o2~2j 2~J t #7 ~~ff- ft' / (/ nA&J 46.6 ii 41 - A> ~ 1<) 2' A'~k- 4'?! ~zhow Lt/4?-. .54j, 6 ~kAc~4V C, ~§/( fry/n) Sv~J YtA&S.', EC46949A9030804 C-- A- 0' l9kntJAv 6 ~ '2 96O&~ OAZ2t#) ~/dti Aki5W~ by - /01 &~/ c-c (6%/tat /0 zA goc Aaenda Item 3 EXHO64-00022 Enron Corp. Treasurer Report October 8, 2001 8C4949AU38U8 EXHOG4-00023 3-1 Enron Corp. Active Letters of Credit by Category ($000) 09/21101 12131100 I 2131/99 Bids Debt EOTT Lea sos Other Other Third-Party Performance1 Trade' $ 7,766 65,932 139,055 12,871 18,833 25 980,403 863,585 $ 6,321 24,241 102,089 12,750 280,179 6,605 425,210 634,300 $ 5,968 52,946 150,310 15,604 80,071 24,078 522,006 76,269 Grand Total $ 2,088,470 $ 1,491,695 $ 927,252 'irs or 58 15,622 posted as Margin are included in the Trade and Performance ealegonies 3-2 EC4694u.go7 EXHO6A.00024 Enron Corp. Guarantee Portfolio (000's) 08131101 Trade (Payment & Performance) EOTT Trade Swap Agreements (Master & Individual)1 Projects (Non-Debt)2 Debt $23,009,811 544,7" 13,222,421 6,627,145 3,338,969 $21,197,904 544,744 10,878,431 4,632,739 3,422,444 $17,316,817 440,375 7,148,443 4,756,470 2,493,049 Grand Total $46,743,090 1 Increased counterparty activity. 2 Increase primarily due to6 NEPCO projects $1.B18MM $40,676,262 $32,155,154 EC4694eA~~ggjg 12131100 12/31199 EXHO64-00025 3-3 Enron Corp Liquidity Forecast & Sensitivities As of September 26, 2001 ($000) Sources Available: Overnight 2-IC Days lI-SO days Total Commercial Paper (Backed by committed Bank Revolver) 1233,000 1233000 Uncommitted Bank Lines & Loan Sales Lines 2 255,000 255000 teller of Credit Facilities 36,530 36530 Inventory 1,134,000 1,134,000 Net Accounts Receivable/Accounts Payable 3,242,000 3,242,000 Net PRMA 300,000 300,000 Operational Cashflows (50,000) (50,000) Shell Registration for Public Debt Issuance 1,000,000 1,000,000 Shelf Registration for Public Equity Issuance 375000 375,000 Whitewing Vehicle Capacity 160,000 160,000 Merchant Portfolio Available for Monetization 490,883 490,883 Scheduled Asset Monetizations 120,000 120,000 Total Sources Available $1,524,530 $6,161,000 $610,883 $8,296,413 CP Program Capacty is $3,350 maior 2 Lear, Sales capacity is $550 million [IC Lines Capacty total$2,125 miller A/R Sale Proceeds comprise less than 10% of Trade Receivables Available ($tI.IB) IS mikion shares at 125 per share 3-4 EXHOG4-00026 Enron Corp Liquidity Forecast & Sensitivities As of September 26, 2001 ($000) Forecasted Outflows: 0/WiG Days 11-90 days Total General & Administraliw Expenses 50000 405,000 455,000 Debt Maturities 1312,000 1,400.000 2,712,000 Total Forecasted Outflows $1,362,000 $1,805,000 $3,167,000 Contingencies: O/N-10 Days 11-90 days Total Margin Acti~4ty (Postings & Deposits Returned) 1 836,000 836 000 Total Contingencies $836,000 $836,000 Forecasted Inflows; 0/N-jO Days 11-90 days Total 10 Year Benchmark 1,000,000 1,000,000 Recei'able Monetization 250,000 500,000 150.000 Contract Monetization 1,400,000 1,400,000 Prepaid Contracts 350,000 400,000 750,000 Eon Monetization 185,000 185,000 Total Forecasted Inflows $785,000 $3,300,000 $4,085,000 Represenls 99% confidence interval on 10 day V@R based on h~toricaI trsrgin. ECAIO4eAJPJB1O 3-5 EXHOG4-00027 Crisis Funding Breakdown ($MM) Normal Process CP Dealer CP Direct Date Placement Placement Week I 11-Sep 12-Sep 13-Sep 14-Sep Week 2 17-Sep 18-Sep 19-Sep 20-Sep 21-Sep 305 865 435 507 403 220 216 Rank Loans 74 125 103 190 70 67 85 2 80 28 91 Crisis Bank Lines Total Funding Comments 50 671 721 NoOP Market bnplemented Bilateral Loans with Cifi, Chase, and BofA 512 512 Marketopenbutverylight Covered $354MM of crisis borrowings from 9/11 379 Treasuries resume trading Covered additional $266 of crisis borrowings 1,093 Begantooverfund Repaid $15OMM of WestLE BL 695 Stock reopen, Fed cuts 50 bps Repaid final $1 00MM on WestLB BL 659 403 302 335 Slow paid large receivables. Stepped up Direct CP placement efforts. Over funded when possible. Sept 11-14: Longest term available 6 weeks at 100 bp wider than before. Sept 17-21: Longest term available 6 weeks at 50 bp narrower than prior week. 3-6 EXHO64-00020 B Financings Completed Since September 11 Amount Transaction ($MM) Market Prepay Receivables Mon etization 250 Conduit EOTT 140 Master Lease Program Prepay Extension Inventory Sale ServiceCo. 140 Sale $1,375 EC46949A0030612 /~ VI 'I 34-~ 0 IE&V £~0W &e.A 2' ~ 2 ~ ~ ~h ~ ~ O~ *(f*tt~ _ Sale 350 Bank 185 Bank 150 150 150 Bank Bank Bank 140 Bank t A N Enron Financings in 2001 Completed to Date: Amount Type # Deals ($ billion) Bank 24 6.29 Capital Markets 5 4.75 Total 29 $11.04 6 Syndications (Closed in 2000) 2.1 To be Completed - AFt t) AKL' At -/P'3*) S C' I i~~1, t Cl Amo~ud't~~ # Deals f$-biilion) Type Bank Capital Markets 1.80> (2> - -1.50- Relinancings Total 10 <(5.05 Projected Total 2001: $15.09 %,<' DC-i v K-It .oY~; 0, 0.2 9 EG4694gAooao8la 3-8 mci Cr e ~ - t <-5-, ft - ,-, <~~1 0~ CV' 1-' t a 'C>t co-ic NJ ci. 4- r&~ t«=QD ii,-' A s- u-'~ '-~ Key Financial Ratios Focus - K! ~ ct1wLj - or- £u~-. ~4-7 V $ 4.07 4.16 4.02 3.52 3.69 ½ 7 K> &t -4 (flmr IC! -c>.w F'' - - ;~ F> 9 - (01w; ,J 9~ ~nc Remaining 2001 Transactions to AIR Sale Contract Monetization Prepaid Contracts C 2 / O~ P~rC Si-i'> Meet Plan $500 $1,400 $400 -~ 3.36 3.08 2.62 2.54 EC46949A0030814 Other 2001 Finance Activity Ten Year Benchmark $1,000 -4-- Funds flow Interest Coverage ---- Into rest Coverage Kit' C A 4~* ~/b~IJ. L~ ¾ /61/2 ,fx Dt-~ $&j-* o ~Q4~ -1 & ~(4¼/< 3-9 I / / ~4J? ~ > <-/ -/ I.- .11 ~,7 46/> J(\7r'. 'Vt) y 5 4 2.18 I 1998 1999 2000 2Q '01 2001 P '4- 2' 1v~ C AAJ-'r ~ Rating Summary Rating Agency Long Term Commercial Paper Standard & Poors Mood Fitch IBCA R and I (Japan) BBB+ Baa 1 BBB+ A-. A2 P2 P.2 n/a Stable Stable Stable Stable 3-10 EC45949M030615 EXHO64-00032 Outlook Net Investment Activity ($MM) Pro form a 2001 Operating Results Q3&Q4 Iden tilled Transactions Funds Flow from Operations 1804 374 2526 2,900 Change in Working Capital (3,142) (3,797) (1) 1,426 (2) (2,371) Proceeds from Asset Sales 1,423 1535 738 2,273 (3) Investing Activities (2,583) (4) (3,379) (350) (3,729) (I) Includes $426 MM in margin deposit refunds. (2) Includes $1 B in Accounts Receivable Sales, $500 MM posted and $2SOMM ofinventorymonetizations. (3) Primarilyproceeds from sale of Peaking Power Plants. (4) June YTD includes $347 MM related to Sithe intangibles, $487 restructuring, $326 MM for Azurix privatization. {~ (~( of LICs replacing cash margin MM forsithe >,c $0~~A~2 v/c 5tOu~ \J £r>v~ ) EC46y4gMoao8i6 3-11 Actual June VTD Pro form a 2001 Cost of Capital 5 year annualized return Equity Analyst Forecasted Stock Prices ENE WACC 35.0% 30.0% - 25.0% 20.0% 15.0% - 10.0% - 5fl% - 0.0% Itr-98 Sep-98 IMr-99 Sep-99 I~r-00 Sep-00 Iv~r-01 After Tax Debt Equity % of Capital Cost Structure WACC 3.8% 10.2% C' C' C~ V 45% 55% Sep-01 1.7% 5.6% 7,3% ry .~cr Finn Recommendation 12 Month Target Price AG. Fdwards Accumulate 55 CIBO Oppenheimer Buy 80 CSFB Strong Buy 84 Goldman Sachs Buy 68 Howard Well Accumulate 76 Menill Lynch Buy 75 Morgan Stanley Outperform 85 Pwdential Buy 55 Simmons Buy 55 Average 70.3 Closing Implied Current Stock Price Date Price Equity Return 9/26/2001 25.150 179.7% V. of Capital Cost of Capital Cost Structure After Tax Debt 3.8% 45% 1.7% Equity 179.7% 55% 98.8% WACC 100.5% Closing Implied $35 Target Price Date Price Equity Return 9/26/2001 25.150 39.2% ¶4 of Capital Cost of Capital Cost Structure After Tax Debt 3.8% 45% 1.7% Equity 39.2% 55% 21.5% WACC 23.3% iv' rr Ri OK ocu-t> p ½-~ EC46g494o9~081y 3-12 Cost of Capital Pr U -WI '.ffi v-J L~j L.J uU U-i L4 12-2 ~-~-j ~-~-J k____ II] w Estimated New Issue Cost As of September 26, 2001 Enron Estimated New Issue Cost USD lv 3y 5y jOy Capital Markets 3.88% 5.93% 6.35% 7.33% BankMarket L+125 L+150 USD Equivalent libor Funding Spreads USD Sterling Euro 1.76% 1.12% 1.08% 1.76% 1.12% 1.08% 1.55% 1.31% 1.24% 1.80% 1.50% 1.47% Qo~.04 pt; S I e V 24 3-13 EC45949M089318 k-~ Lit LA Lw Lw &S Ut 4W LJ.~J L-2 L~~9 ~ t-J c-~----i LW W Comparison of Funding Spreads Marketers and Producers 375 325 275 225 175 126 01/02101 ytjw ~M o &YLor 5~4A o ~oYZ eA5i4 S 3)") - cc~t~+ fUfc'O~-1 o&fEtI & pssdt rh~ Uj tAt -NIR8.300% due 05/01/11 -Calpine 8.500% due 02/15111 -FSR3 R~wer 7.750% due 04/01/11 - Enron 6.75% due 08/0 1/09 NRG 8.250% due 09/15/10 Allegheny Energy 7.600% due 03/15/11 -6 Paso 7.000% due 05/15/11 -'~%iB 7.125% due 09/01/11 3-14 EC46o4guoaooi9 0. .0 V a I a. &0 02/11/01 03/23/01 05/02/01 06/11/01 07/21/01 08/30/01 L~. '---- C> ~ &---i L-L cJ4 Q2 W LI) L~ Market Structure Sector Spreads As of September 21, 2001 9 8 7 5 4 S HISTORICAL 5-YEAR YIELD HISTORICAL 3-YEAR YIELD 9 -Treasury 8 - Enron 7 Duke -Dy negy S El Paso 5 -Mirant Reliant 4 -Williams 3 g~~g~gSgggggg goOO 000 ='o~n~nfeo~.o-.nenr-o~ Historical 3-Year Treasury Spread (bps) ENE (BBB+/BaaI) OUK (A/fl) DYN (S88+IBaa2) EPO (BBS/Baa2) PAIR (BBB-/Baa2) REt (B88~/Baa2) WMB (RBS-/Raa2) Treasury Rate 912112001 190 135 185 210 275 215 205 3.37% 9/1/2001 156 106 191 163 251 241 174 3.89% 612912001 148 143 198 168 248 263 180 4,60% 3/30/2001 139 143 205 180 290 240 4,39% ~ikt&r6)r c~ -Treasury -Enron Duke -Dynegy El Paso --Mirant Reliant -Williams K) LjiiCcc~ ~ Lov~i \;ru 4}' - I U t&J dr.Am-~ S Wv 64 3-15 N -k4,rt EC4949~0306~ dear aYt&A w~Qt q,\fl ~ - flfA -. r~-~-,A ~4~L I----- ---I %r) V it A- N 44~> ~ HISTORICAL 10-YEAR YIELD 9 - Treasury -Echos Duke - . -Dynegy - ElPaso -Mired -Retant ---Williams 3 _____ ogg2gsgQgog Sn 0000000000 0000000000 Historical 5-Year Treasury Spread (bps) Historical 10-Year Treasury Spread (bps) 9/21/2001 9/7/2001 6/29/2001 313012001 9/21/2001 9/7/2001 6/29/2001 3/30/2001 ENE (2884-/Ba ) ~ ~ 225 168 159 161 ENE (BOB+/Oaal) 220 183 15$ 173 DUK (A/AS) - 122 109 114 104 DUI< (A/A31 146 135 133 188 DYN (BDB+/Baa2) ,' 195 155 163 186 0Th (BBB+/Baa2) 210 IRS 183 208 EPS (B6B/Eaa2) / 226 195 183 172 EPO IABR/8aa21 238 232 218 188 PAIR (BBB./Ba ) 270 218 238 N/A PAIR (RBB4Baa2) 290 265 276 N/A REI (8 */Baa2) 225 205 219 221 REI (BBB+/Baa2) 235 230 263 268 WMB (BEB-/Baa2) 220 178 184 176 WMB (BBE-/Baa2) 228 207 198 198 Treasury Rate 3.83% 430% 4.95% 456% treasury Rate 4.70% 4,79% 5.41% 4.92% __ &w WA ~t tic w kit wi Market Indicators As of September 26, 2001 YTD Max Interest Rates YTD Mm YTD Change 1213112000 30 Day A21P2 CP 3 Yr Treasury 5 Yr Treasury 10 Yr Treasury Libor (3M) Equities Dow Industrials S&P Index NASDAQ Commodities Natural Gas (Henry Hub) Crude (NYMEX) 3 Year Sovereign Spreads YTD Max 'flD Mm YTD Change 1213112000 Argentina (B-ICaal /B-) Brazil (BB-IB1/BB-) o LQ\erky a>> EC4eg49Mo~B21 912612001 6.45% 5.14% 5.05% 5.52% 6.40% 11,338 1,374 2,859 10.50 32.19 2.83% 3.29% 3.77% 4.55% 2.59% 8,236 966 1,423 1.89 21.81 -3.37% -1.84% -1.2 1% -0.48% -3.81% (2,247) (317) (1,005) (8.61) (4.75) 6.40% 5.13% 4.98% 5.11% 6.40% 10,787 1,320 2,471 10.50 26.80 3.03% 3.29% 3.77% 4.63% 2.59% 8,540 1,003 1,466 1.89 22.05 26.10% 9.40% 4.96% 4.4 1% 15.68% 4.3 1% 9126)2001 7.00% 5.02% 22.68% 9.33% I(ot~2. 3-16 I S S 3 b Enron Corp. Chief Risk Officer Report October 8,2001 4-I EC4694eAoo3gn'jj EXI1064-OOQ4O Audit & Compliance and Finance Committee Roles EC449M030824 A EXHOGA-00041 4-2 Roles For Monitoring The Risk Management Policy Audit and Complianc9 Committee ~ Review internal controls as it relates to the operation of the Risk Management Policy > Review limit violations and determine that actions taken by management are consistent with the Policy Finance Committee r Approve risk management framework and review policy issues r Determine appropriateness of limits, correlations, profitability and liquidity based on the Company's risk appetite as ratified by the Board ~- Review corporate liquidity and funding plans r Review investment returns achieved relative to expectations 4-3 2 EXHOB4-00042 EC4uqjs,no~ Trade Credit Update 4-4 EXHOB4-00043 Trade Credit Update Table of Contents * Trade Credit Portfolio * Net Credit Exposure by E-Rating * Major Trading Relationships * Top 25 Net Credit Exposures for August 31, 2001 * Collateral * Change in Cash Collateral * Top 5 Country Net Credit Exposures * California Update * Bankruptcy Update 4-5 EC4UWN2? EXHO64-00044 Trade Credit Portfolio 66% 34% $1092 311.47 $5.67 54 84 m Gross Exposure $16.69 $1621 75% 25% as of August 31, 2001 In $Bns ($1.16) ($1.15) ($0.50) ($0.59) 68% 32% ($0.38) ($0. 25) * Investment Grade * Non-Investment Grade ($0.23) ($0.18) 65% 35% Cash Collateral ($1.54) ($1.40) Other Collateral (including monetizations) ($0.73) ($0.75) $9.26 $9.73 $5.06 $4.43 Net Exposure $14.32 $14.18 Numbers in italics represent comparable amounts at June 30, 2001. 4-c EC4U4IANNSZI EXHOS4-00045 Net Credit Exposure by E-Rating Investment Grade Non- Investment Grade 70% - 60% 50% - 40% - 30% - 20% - 10% - 0% - 1 2 3 4 5 7 8 9 10 11 0813112001 $14.32 Bn 4-7 EC46s4eAa0 EXHOO4-00046 100% 90% 00% 0 0 a- 0 1 2 3 4 5 S 7 8 9 10 0613012001 $14.16 Rn Major Trading Relationships as of August31. 2001 Total Net Exposure $14.32 Bn Parent E*Rating Major Relationship~ 40% / / / RelationshIp 4 tXJtorp. 5 Sierra Pacific Resources rnPG&E Corporation 4 Dynegy Inc. 4 El Paso Corporation 2 Bonneville Power Administration 3 Coral Energy Holding, L.P. I Government Of The United States 1 Koch Industries, Inc. 1 BP p.l.c~ 11 Edison International 4 TransAlta Corporation [F] calpine Corporation [flEOTT Energy Partners LP 2 FPL Group Inc. 3 Westcoast Energy Inc. 4 Petro-Canada 3 T~af15Ca~da Pipelines Limited 5 Canadian Natural Resources Ltd. I American International Group. Inc. S Avists Corporation 3 Sempra Energy 2 Duke Energy Corporation ~CMS Energy Corporation 4 Dominion Resources Inc. 5 Williams Companies, Inc., The 4 Reliant Energy Inc. Major Relationships Total Gross Exposure In SUM'. 1,615 542 505 268 340 229 222 216 197 274 196 162 258 133 131 118 90 84 81 75 70 154 175 90 82 33 161 Net Collateral Exposure In 5MM. In SUM's (101) 1,514 - 542 - 505 - 288 (100) 240 - 229 - 222 - 216 - 197 (88) 186 (34) 162 - 162 (100) 158 - 133 - 131 - 116 - 90 - 84 - 81 - 75 - 70 (86) 66 (118) 57 (34) 56 (29) 53 - 33 (141) 20 6,521 (833) 5,688 Count.rp.flJ.s now to 'Major R.Iatlonships list Non-Investment Gmd. Credit Exposures 4-S EC4349A330m EXHOO4-00047 Top 25 Net Credit Exposures for August 31, 2001 In $MM's E-Rating Counterparty Name (Legal ~ntlty) June 30, 2001 August 31, 2001 4 TXU Europe Energy Trading Ltd. 1554 1,476 12 Pacific Gas & Electric Company 474 505 5 Nevada Power Company 422 373 2 Bonneville Power Administration 105 229 1 United States Department of Energy 188 205 3 Coral Energy Holding, L.P. 193 191 2 Koch Petroleum Group, [P. 393 180 4 Dynegy Power Marketing, Inc. 196 177 rSouthern California Edison Company 145 156 ~~~jCalpine Energy Services, L.P. 160 154 5 Sierra Pacific Power Company 149 145 rEOTT Energy Liquids, LP. 132 4 TransAlta Utilities Corporation 172 131 3 El Paso Merchant Energy, LP. 214 131 3 IBM Corporation 102 120 2 Florida Power & Light Company 134 120 3 Public Utility District No. 1 of Snohomish County 98 116 4 Engage Energy Canada LP. 71 98 1 BP Energy Company 163 93 4 Coastal States Trading Inc 154 93 3 SBC Services Inc. 89 3 City of Santa Clara California, Silicon Valley Power 45 88 4 Petro-Canada Oil and Gas 79 83 4 Canadian Natural Resources 82 72 rOwest Communications Corp. 70 70 Top 28 Total 5,227 Other Net CredIt Exposures 9,092 Total Net CredIt Exposure 14,319 Coant.qmflMs flew to Top 28' list j22J Non-investment Grade Cr.dlt Exposures EXHO64-00048 Collateral In $MM's 813112001 913012001 Counterparty 0&3112001 09/3012001 CASH POSITIONS The Chase Manhattan Bank (1) Duke Energy Trading and Marketing, L LC Sempra Energy Trading Corp. Reliant Energy Services, Inc BP Corporation North America Inc. The New Power Company El Paso Merchant Energy, IP. Morgan Stanley Capital Group Inc. PSEG Energy Resource. & Trade LLC Goldman Sacha Capital Markets, L.P. Calpine Energy Services, UP. UtiliCOtp United Inc. Other Cash - Incoming Other Cash - Outgoing Aquta RiSk Management Corporation Mirant Americas Ene*gy Marketing. L.P. Bank of America, National Association Enlergy-Koth Trading, LP Credit Suisse First Boston International Merrill Lynch Capilal Services, Inc. I-less Energy Trading Company LLC Pllibro Inc Reliant Energy Services. Inc. El Peso Merchant Energy, IP. Matron,. Ltd Morgan Stanley Capital Group Inc. Williams Energy Marketing & Trading Company J. Aron & Company Duke Energy Trading and Marketing, L.L C. Net Outgoing Cash Tot.I Incoming Cash Total OutgoIng C~.h Bank oI&tontra.l OUTGOING SECURITIES INCOMING LETTERS OF CREDIT 377 255 Abegheny Energy Supply Company. LLC 118 190 C$,ine Energy Services, L.P. 67 168 TXU Energy Trading Company 169 160 Constelation Power Source, Inc. 88 130 EPCOR Energy Services (Albetta) Inc. 109 tog The Prerneor Refining Group. Inc. 100 100 Select Energy, Inc. 100 96 SempraEnergyTradingCorp. 49 53 Southern California Edison Company 33 52 Entergy-Koct Trading, LP 50 50 Other 48 48 Total Incoming Letters of Credit 233 267 156) (122) 64) 0 (200) 0 (26) (48) 120) (50) 1t7) (59) 145) (60) (43) (681 (72) (781 1135) (921 (100) (100) (145) 11231 1119) 11361 (296) (186) t61) (210) (521) (330) (579) 16 1,541 1,678 (2,120) (1.5621 Counterpertv OUTGOING LETTERS OF CREDIT Duke Energy Trading and Marketing, LL.C. California Power Exchange Corporation Pack Gas & Electric Company Wilierns Energy Marketing & Trading Company Mirant flnericas Energy Marketing, L.P. Aquila Risk Management Corporation The Caitfomia Independent System Operslor Conporabon Arjufa Enes~y Marketing Corporation Oman Liquefied Natural Gas. LLC. Sate R Finanoal Products Corporation Powerex Cow. Duke Energy Marketing LiMed Partnership Other Total Outgoing Letters of Credit Mahonia Ltd ISO Now England Inc. Total Outgoing Surety Bonds (93) (125) OUTGOING SURETY BONDS 127 122 50 III 101 110 76 76 40 40 11 35 50 32 21 31 23 23 44 0 328 364 671 944 08/3112001 (200) (200) 1107) 1107) 1100) (tOO) 0 (tOO) o (55) o ISO) (36) (36) 0 (30) (231 (19) (181 (18) (27) 0 (181 0 IA) (5) (533) 1720) (981) (9811 (40) (45) (1,021) 11,028) (1) Includes amount related to prepay structure with Mahonia Ltd. 4-10 EC45049AN30832 EXHO64-00049 Cournti.rparty Change in Cash Collateral In $MM's Major Cash Positions - Incoming Cou,flarp.rty IncomIng Cat, Outgoing C.t -4-- Mat CaSt The Chase Manhattan Bask Duke Energy Trating and Marketu,g. LI. C Senpra Energy TradIng Cap Reliant Energy Senices, Itt OP Cowaba NOV91 M,e~ce itt The Nee Power Can pany El Paso M.rchan( Energy. L.R I) Morgan Stanley Capita) Group Inc P560 Energy Resowces & Trade ITO Goldman SC,. Capita Maskats. LP. Capine Energy SONICOS, IP. Utilcap Uneled Inc 1,544 El 06/30/2001 08/31/2001 09/30/2001 03 Change 566 3?? 255 (331) 66 118 190 124 42 67 188 126 135 189 160 25 92 88 130 36 70 109 109 39 0 100 100 100 120 IOU 96 24) 32 49 53 21 10 33 52 42 o 50 50 50 0 48 48 48 246 233 257 22 Tobsi incoirikig ~ 1 541 lATh 260 Major Cash Position. - Outgoing Coijntagma,ty Diii. Energy Traifrg and Merketing. L L C. I ken & Coin peny WIlsa Erergi Marketing & ?TS6IIQ Cci eny Moegan Statey Capital Group no Mahonw LW S Paso Merchant Energy. L P. (3) Reliant Energy Serhicos, Itt Phbo Inc Hess Energy Trading Ccinpany LIC Fkrri) Lynch Capital Senices no CvOI Sue.. First Boston Irterriabo-isl Fntingy-tcoch Trackg, IP Bank of Ainedca, Nebasi Assodabon M'rantAsnesicas Energy Mai*etng. L P A~.als Risk Maragasnert Carpasboc 06/30/2001 08/31/2001 09/30/2001 03 Change (35)) (521) 330) 21 (63) (161) (210) (1471 (10) (296) (186) 1170) 442) 11191 (1361 6 14421 11451 (1231 319 0 (lCD) 11001 (lOU) 124) (135) (92) 32 (54) 721 78) 24) (I) 43) 68) 67) 491 45) (601 Ill) (SI (171 (591 (50) o (201 (501 50) o 126) (48) (48) (101) 12001 0 lOt (112) (64) 0 112 (184) 1156) (122) 82 (lii Total Outgoing 1.548) (2,120) ff~i~f Nat Cab 1250) 579) II 258 (1) I'I008* and outgoing coQateml posted in the same rount for a - cesh POSlIOO equal to zero EC45949A9fl0533 4,760 3,~? ~~lt 2 633 4,000 3.- taco I,- 0 1.000) (2,000) (3.-) (4.000) 1)10/2000 1213112003 343111001 UlXl2901 8/31)2001 EXHO64-00050 4-11 Top 5 Country Net Credit Exposures In $MM's Other Net Credit Exposures Czech Republic E-Rating Country June 30, 2001 1 USA 1 United Kingdom 1 Canada 1 Germany flMexico Top S Total Other Not Credit Exposures Total Net Credit Exposure Calculated based on country of incorporation. August 31, 2001 10,399 1,874 1,270 98 % of Total 73% 13% 9% 1% 54 13,895 824 14,319 Sweden Switzerland France Netherlands Australia Slovakia Norway Spain China Trinidad & Tobago Italy Bermuda Croatia Belgium South Korea Panama Cayman Islands Brazil Japan Slovenia Hong Kong Liberia Colombia Finland Austria Ireland Philippines Argentina Other Total 48 43 40 39 36 36 29 27 26 23 23 21 19 19 18 17 16 12 10 10 9 9 a 8 7 6 6 5 5 49 624 EC4SB4IAMW EXHO64-00051 % of Total 10,246 1.833 1,356 127 72% 13% 10% 1% N/A Counterpadles new to Top rust m Non-Investment Grade Credit Exposures 4-12 California Update as of August 31, 2001 In $MM's Utility Exposure Enron PGE Net Exposure Pacific Gas & Electric Company ("PG&E") 505 72 577 Southern California Edison Company ("Edison") 156 40 196 Total Utility Exposure 773 * The Edison "bailout" bill stalled in the California Senate and support is weak. * PG&E filed its Plan of Reorganization ("POW') on September 2gth, which would pay accepted claims in full, plus interest. * PG&E's unsecured creditors would be paid 60% cash and given 40% in restructured debt. * PG&E's POR faces numerous legal challenges from the State of California and if successful, will take from 1.5 years to 3 years to achieve consummation. * Of $577MM in Enron exposure to PG&E (includes $7'2MM at PGE), $403MM is related to negative CTC claims that PG&E is disputing. 4-13 ECAUGMOSOW EXHOO4-00052 Total Exposure $71 7(1) 107 counterpartles (I) Amount represents exposure before any recovery. Bankruptcy Update as of August 31, 2001 In $MM's * As a result of Enrons migration into the retail sector and declining credit markets, current bankruptcy rates represent a significant increase from historical Enron experience. * Total bankruptcies from 1994 to 1999 were fewer than twenty counterparties and $3OMM. Bankrupt Counterparty Exposures over $IOMM Counterparty Name Business Unit Exposure Pacific Gas & Electric Company EES, ENA, PGE 36onetworks, inc Sub-Totat Exposures over $IOMM EAS % of Total Exposure 577 81% 87 664 Other Exposure 12% 7% 53 717 Total Exposure 414 ECS4IAN EXHO64-00053 Market Risk Update EC4U4Mc37 EXHOO4-OOO54 4-IS Market Risk Update Table of Contents * Risk Profile * Risk Profile by Market Concentration * Risk Profile by Business Unit * Backtesting of Enron Corp. Aggregate VaR * Utilization of VaR Limits * Market Risk Limit Violations * Scenario Analysis * Liquidity Risk Ratio Analysis * Brazilian Foreign Exchange Exposure Update 4-16 EC4U4SMOUUO EXHOO4-00055 Risk Profile Eight Months Ended August 31, 2001 and 2000 Trading PM. ($MA4) it, fl807 677 ~flj 826 LULL r Antedc.. America. Ga. Pow. L YTD 8131101 P&L = $2.2 B YTD 8131100 PAIL = $1.8 B 28 ~ 58 ~g ____ rn European Products Financial. Emerging Ga. & Business.. Power Business Unit Comparison YTD Trading P&L = $2.2 B Trading P&L ($MM) 1,658 "4 NI 2~ Americas 107 I 13 42 Euro~ Global Industrial Markets Markets Average VaR fl YTD 8131/01 Avg VaR = 879 MM Average VaR {TO Average VaR = 879MM ($A4M) YTD 6131200 Avg VaR = $38 MM ($MM) II -~ A (2) (6) (3) (3) (4) (7) (II) 20) fIG) (18) 141) (4I( ISA) (Sal (60) ia~ Arn.vica. Avn.rlcas European Products Financial. Emerging Americas Europe Globl Industrial Power Get & Susinem. Power Markets Markets Return on VaR - Eight Month. Endad August 31 2001 128% 140% 141% 21% 2000 210% 189% 092% 72% Enron 168% 210% ~4% 157% 49% 352% J Return on VaR - Eight Month. Endd August 31 2001 191% 188% 78% 2000 281% 116% 139% (1) Comn,odltles aggre2St.d par ConcentratIon Limit Categories Market Concentrationci EXHO64-00056 4-17 Enron 201% 214% 114% 352% EC4SSUADOSD83I Risk Profile by Market Concentration Eight Months Ended August 31, 2001 and 2000 Americas Americas Gas Power European Gas & Power Products Financials Emerging Businesses Trading P&L S YTD 8/31/01 PAL=$2.2B Y1D 8131100 PAL = $1.8 B 48 (9) (22) 4 ___ ~ NA Gas Am$css NA Power Am.flcas UK Power Emso~nn Co,tlrwq,tsI Noidic GM Pow., GM Power Power Odier Ott., SI' 24 2 Co.' GIobM Credit Flnmnlars Sti Products Tr.dIn~ 0th" Selsis W.a.' Em.JWng .4-" at- Rsurn on VaR - Eight Month. End.d AogusI 31 2001 121% 65% 141% 32% 115% 99% 107% (7s%~ 175% (14%) 98% 127% 244% 82% 135% 85% 2000 207% 295% 110% iUA~ 167% (22%) 111% 30% 53% 63% 11% 185% NA 43% 53% 105% EC4349A130840 EXHOO4-00057 (5MM) 975 725 415 225 (25) (5MM) a (18) (32) (48) (64) Average VaR YTO 8/31/01 Avg VaR = $79 MM~ YTD 8131/00 Avg VaR = $38 MMJ Risk Profile by Business Unit Eight Months Ended August 31, 2001 and 2000 Global Markets Industrial Markets Average VaR YTD 8131101 Avg VaR = $79 MM YTD 8/31/00 Avg V.A = 538MM fttum on VaR - Eight Mont. En~d August31 2001 104% 157% 12% 115% 99% 82% 107% 05% 2000 207% 400% 227% 487% (22%~ 43% 161% 11% Total Enron RoVaR YTD 8131101 = 214% t 135% (75%) 188% 122% 135% 3% 244% 59% 30% 63% 164% 63% 23% WA Total Enron RoVaR YTD 8/31/00 = 352% 4-ID EC4U4flpI EXH004-OOO58 Americas Europe 269 (SMM) 875 660 425 200 (16) (32) (4B) (64) [Trading P&L YTD 8/31/01 P&L = $2.2 I. ________ YWSflhIOOP&L$1.8B (251 NA Ga ISA Power Am.&a. A~ power Ewopeen Metal. OcetnantS Creelt A,wfraNa~ Nordit Coal Global water Global ~ (SUM) Power Ott", barber 0 34% 114% Backtesting of Enron Corp. Aggregate VaR 12 Months Ended August 31, 2001 - Curve Shift PIL - VaR - VaR Limit - Expected Tail Lou (ETL ETL Advisory Limit 12 Month Corn. UmitEvolutiogi: 06/01/00 10/07/00 12/07/00 12/28100 02/13/01 08/14/01 (MM) $75 $100 5140 $100 $125 5150 4-20 (1150 MM) ......(5820MM) EC4U49A30342 (SAW) 600 200 100 0 (100) (200) (300) (400) 12/4/00 - 1485MM 2/00. (1551 MM) Kupieclest sets out sccwtable TSflQS 01 instances ( where cuiveahifi profit a rid loss exceeds VaR. Al 95% I confidence and for the 251 trading days shown, the acceptable rang. is between 6 and 2ltirnes. Adual occurrences are 17, indicating that the VaR model is acceable. EXHO64-00059 Utilization of VaR Limits Quarterly Comparison ~v;age VaR 21 2L2L21 24 QLQLUI 24 2L9L22 24 QL2LSI 21 2L2L21 21 2L2L21 21 SISLSA 2000 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 2001 Americas Americas European Products Financials Emerging TOTAL ENRON Gas Power Gas & Power Businesses TRADING Not. I: QJ 2001 r.p,.s.nMd by July 1-August31. Not. 2: Utltlzstton calculatIons we,. band on Commodity Group Limits, not Concentration Limits. ConcentratIon Limits we,. not established until 8114101. 4-21 EC441Mfl EXI406A-00060 Percentage of VaR Limit 100% 78% - 60% 26% - 0% - Market Risk Limit Violations July Ito September 26, 2001 o No Violations of Board Approved Portfolio Limits o No Violations of Board Approved Concentration Limits o No Violations of Business Unit Limits La Commodity Group Limits are established conservatively to act not as traditional "limits", but as triggers for management decision making, thereby ensuring compliance with Concentration Limits. Commodity Group Limits may be adjusted frequently in response to business needs and maricet dynamics. Commodity Group Limit Violations INVSR U Maturity/Gap uNet Open Position 50- 40 - 30- Number of Violations 20 - 10- 0- Globat R.gulat.d UK Powar Product. Portfolio (PGEI I M*talsttt European Gas Sr ax (1) Steal tAiniber I) Violations were the resub of booking errors. EOL. Crud. North Arn.rlcan Gas EXHOO4-OOOG I 4-22 EC4UBANIOW Scenario Analysis as of September 2001 What if... War in the Middle East Breaks Out * Most militant Middle Eastern countries declare an oil embargo; crude prices rise to $42 for the next four months * A majority of the Middle Eastern countries declare an oil embargo; price of crude spikes to $75 for the next four months * Terrorists destroy a gas pIpeline in the Gulf; gas prices Increase an average of $1 per month for the next 12 months Recession * Recession and war foam cause a credit crunch, reduction In volumes and foregone profits * In addition to above, Enron realizes losses from an Increase In bankruptcies Prolonged and Unexpected Winter Freeze in the U.S. * Gas and power prices rise due to an increased demand as a result of colder weather ($MM) Potential Lasses (100) (200) (300) - ($82)* ($274) ($200) ($250p* ($1BO)k ($160) ($70) ($230) * Worst Case, assumes Instantaneous impact on current positions. Losses incurred or income foregone over a 3 month period. 4-23 K Crude Natural Gas Loss In Potential Profits Credit Losses Power 1 EC4U4IAOOIO4I (400) EXHO64-00052 Liquidity Ratio = Liquidity Risk Ratio Analysis Ten Day Forward Time Horizon Future Available Cash + Borrowing Capacity Trading Portfolio's Potential Future Cash Requirements .1 05/20/01 05/27/01 00/03/01 00/1 0/01 00/1 7/01 0S/24/O1~2 Liquidity Ratio - P50(1) Potential Margin Exposure 45.0 45.0 - - - - - - - - 42.0 35.0 fl.o 33 .0 30.0 27.0 24.0 2 1 .0 15.0 15.0 12.0 * .0 * .0 3.0 0.0 05/13/01 05/20/01 08/27/01 05/03/01 'I inciuen f4.t Account. R.c.lveb/. and Debt and Equity Sh.ifR.glstratlon. - P50 Advisory Limit = 3.0 - - - Lk~uidity Ratio ........... 05/1 0/01 05/17/01 05/24/01 .2 4-24 EC4s4g~a~6 EXHO64-OOO63 Liquidity Ratio - P99 Potential Margin Exposure P99 Advisory Limit = 1.5 - - - Liquidity Ratio I 5.0 1 3.5 1 2.0 1 0 .5 * .0 7.5 5.0 4.5 * .0 1 .5 0.0 00/Is/ol Brazilian Foreign Exchange Exposure Update Brazilian Reals ("BRL") Cumulative Translation Adjustment (CTA) Current and Forecasted Balances * Historical OTA Balance * Forecasted CTA Balance - BRL Historical Rate 1,600 *~ - BRL Forward Rate 1,488 1,547 A.60 1,420 1,400 -L 1,224 - 4.00 1,200-- 1,004 350 '4' t2 C a ci, 800 - 3.00 600 - - 2.50 400 - 2004 -+- -+-- -p--- - -i--- -+--- - Mar-01 Jun-01 Sep-Cl Dec41 Dec-02 Dec-03 Dec44 4-25 EC44018647 - tOO 1,164 EXHO64-00064 Post Transaction Reviews 4-25 ECUI4SMCSOI4S EXHO64-DOOG5 Procedure: Post Transaction Reviews * Post transaction reviews for transactions over $200 Million will be performed at a minimum of 18- and 36-month intervals after closing. Additional transaction reviews will occur as directed by the Chief Risk Officer or in response to Board questions. * "Merchant" investments will continue to be monitored by RAC and quarterly portfolio performance reported to the Finance Committee at regularly scheduled meetings. * Compliance related issues resulting from transaction reviews will be evaluated and discussed with the Audit and Compliance Committee. All other issues resulting from transaction reviews will be discussed with the Finance Committee. * Major strategic implications resulting from transaction reviews will be presented to the full Board. 4-27 2 EC4U4egjnJp~ EXHOO4-OOO66 An~.n.¾. lion, ~ EXHO64-00087 I {~sr '.1 8W5/EEIAA&ALS EW&IOWOSO& 1(51,111 EWS'EOM&MO (ES (ES '. However, the quality of the creditworthiness assessment is often contingent upon the availability of financial or public information. Qualitative data shall be obtained from external sources such as reference materials, interviews with counterparty management, analyst commentary and other sources providing tangible insight. The strength and vision of the counterpart/s management are critical subjective factors in assessing the viability of the counterparty's business. This information compliments RAG's knowledge of the counterparty gained through quantitative analysis. 4.2.1.2 Credit Limits In assessing counterparty creditworthiness, RAG shall establish one global Credit Limit for each active counterparty. These limits provide a framework for monitoring exposure against limits and managing the Company's concentration of exposure to a particular counterparty or group of counterparties. Credit limits are approved and governed by the Credit Risk Procedures reflected in Appendix C and are subject to review and adjustment at the discretion of the vice-president in charge of the credit risk management function in RAG. Both quantitative and qualitative information can provide input to RAG's decision on limits. The Company's risk appetite for a particular counterpart>' is impacted by counterparty's credit profile, the volume of business 0 CN the Company expects to transact with the counterparty and the counterparty's relative size in relationship to other participants in the applicable industry. Various other Credit Limits may be established for a '0 counterparty based on the level and type of trading activities conducted by the Company and that counterparty. These limits may be reflected as contractual thresholds or established for internal guidance purposes. Guidance Credit Limits are used so that RAG can accurately monitor and manage the overall credit risk for a counterpart>', while contractual limits are used to manage risk within specific contract or transactions. Counterparty Credit Limits shall be captured and maintained by RAG to facilitate effective monitoring and reporting and shall be filed in a counterparty's credit file. 4.2.1.3 Tenor Limits In addition to establishing a global Credit Limit for each counterpart>', RAG shall set one global Tenor Limit (i.e., maximum term to maturity) for active counterparties. Tenor limits provide acceptable risk for long-term transactions in which credit risk increases with maturity due to: (a) greater probability of a counterparty default, (b) higher volatility or change in market prices that leads to increased credit exposure, and (c) larger volumes on average for longer-term deals. RAG also retains the flexibility to restrict the tenor of specific products as appropriate. RAG approval authority is outlined in the table set forth in Appendix C, and is subject to review and adjustment at the discretion of the vice-president in charge of the credit risk management function in RAG. 4.2.2 Administration and Reporting for Credit Risks A number of resources and monitoring tools are utilized to assist RAC in the credit management process, including the Credit Aggregation System ("CAS") and counterpart>' credit files. Other internal or external analytical tools are also available to assist with counterparty credit assessment. To the extent a counterparty's exposure exceeds its pre-assigned limit, the excess should be reported to the Chief Risk Officer or his designee. RAC shall prepare various reports to quantify and report significant credit risks created by the Company's trading activities and to summarize critical credit risk indicators. These reports shall be provided to the Chief EC46949A0030880 -I Enron Corp. Page 17 Risk Management Policy Proprietary and Confidential Risk Officer upon request so that he can determine the form and manner in which such reports will be made available to senior management and the Board. These reports may include, but are not limited to, credit reserves, top twenty-five counterparty exposures, E-Rating exposures, industry exposures, counterparty concentrations and non-per-forming or distressed assets. In addition to counterparty credit exposures, RAG is responsible for periodically reporting exceptions to contractual requirements to the Chief Risk Officer. The Chief Risk Officer shall review and approve the level of the Company's credit reserves monthly. 4.2.2.1 Documentation Approval Various forms of agreements such as master contracts or confirmations support counterparty relationships and specific transactions. In order to limit the Company's credit risk exposure, RAG shall approve the credit provisions included in such documents and actively participate in the negotiation of the documents. Agreements such as master firm purchase/sale agreements, International Swap Dealers Association (ISDA) master agreements and other master contracts shall contain credit provisions authorized by RAG. Some of the major provisions impacting credit risk include: (a) netting provisions, (b) provisions relating to the perfection of collateral and security interests, (c) Material Adverse Change (UMAC) clauses, (d) cross default provisions, (e) set-off clauses, (f) provisions relating to the right to access and receive data, (g) provisions relating to the right to audit, and (h) provisions relating to exposure threshold(s). 4.2.2.2 Credit Aggregation System ('GAS") GAS enables RAG to record Credit Limits and monitor end-of-day credit exposure. GAS aggregates counterparty exposure globally and displays active transactions from business unit source and back office accounting systems. GAS also allows RAG to maintain information on credit enhancements, contractual agreements, netting rights and any other relevant counterparty information, as well as enabling RAG to prepare reports on exposures by size, exposures by Enron entity, exposures by product, collateral requirements and credit watch list participants. Exception reports can also be generated. Approved E- Ratings, Credit Limits and Tenor Limits are captured and maintained in GAS. Gounterparty collateral and guarantees are also captured and maintained in GAS to ensure monitoring and compliance. 4.2.2.3 Counterparty Credit Files Credit files shall be created and maintained, as necessary, for each counter-party with a trading relationship governed by this Policy. Credit files provide the primary support for credit approval and credit risk decisions. To this end, files shall support the assessment of counterparties' creditworthiness, including assessed 2- Ratings, Credit Limits, and Tenor Limits, and shall contain sufficient information to explain the current status of a counterpar-ties' credit relationship with the Company. Credit files also may include applicable financial statements, correspondence, rating agency reports, research, executed agreements and guarantees, corporate resolutions and any other information as deemed appropriate. These files are confidential in nature and are controlled by RAG. 4.2.2.4 Credit Reserve Monitoring As described in Section 3.5.2 of this Policy, the credit risk management function in RAG shall apply a probabilistic model that simulates defaults based on counterparty ratings and calculating expected losses over the term to maturity for transactions. Credit reserves will be assessed across the Portfolios and tested for adequacy on a quarterly basis. If the credit reserve that the Accounting department records for the quarter is over 10% more or less than the credit reserve per the model simulated by RAG, the CEO shall be notified by the Chief Risk Officer to ensure he is aware of any subjective issues considered in the Company's credit reserve analysis. EC48949A0030881 EXHOG4-oOO9S Enron Corp. Page 18 Risk Management Policy Proprietary and Confidential 4.3 Capital Associated with Operational Risk Operational risk losses may include the costs to fix an operational problem, payments to third parties, write downs, latent losses and contingent losses. The Company shall maintain a rigorous control environment to manage and limit exposure to operational risk. This protects the Company from additional market, credit and liquidity exposures arising from operational failures. 4.3.1 Guidelines far Operational Risk Operational risk is not subject to limits under this Policy. RAC, Enron Assurance Services, and Information Technology Compliance departments shall provide an independent focus on the operational risk management and shall work closely with each Enron Business Unit and GRMO to identify, assess, categorize, quantify and mitigate exposure to operational risk. The collection of internal loss data will allow a transition, over time, to more sophisticated measurement methodologies. Until internal loss information is available, the assessment of operating risk will be based on a qualitative judgment of the adequacy of the control environment and limited quantitative analysis. This assessment of operational risk shall be considered in the Risk Capital allocation process when the Risk Management Committee establishes Enron Business Unit Limits and when RAG establishes Credit Reserves. A list of the primary operational risk considerations is included in Appendix G of this Policy. 4.3.1.1 Segregation of Duties. Enron Business Units shall keep segregated from the business groups or individuals entering into transactions each of the following activities: recording and aggregation of transactions; preparation, issuance and verification of the Company or third-party documentation; reporting of positions and Commodity Group information; review of the reasonableness of prices and models, periodic validation of prices from to independent market sources; monitoring of limits; physical and/or financial settlement of transactions; reconciliation of accounts; and preparation of financial statements. 4.3.1.2 Fundamental Operating Standards The organizational structure for the origination, administration, review and approval of risk exposures is designed to provide a clear segregation of responsibility and accountability among risk-taking and middle- office risk management personnel. Enron Business Units shall comply with the Company's Fundamental Operating Standards contained in Appendix F, as such standards may be updated from time to time. GRMO is responsible for effective implementation of the risk management framework and adherence to this Policy. The independent risk management function, RAG, is responsible for oversight of the risk management activities throughout the Company to ensure compliance with the Policy. 4.3.1.3 Code of Ethics All employees of the Company shall transact business with the highest integrity and in accordance with the ethical values set forth by the Company. In particular, each employee shall comply with the Company's Code of Ethics that includes the Company's policies on the following matters: i. Principles of Human Rights ii. Securities Trades by Company Personnel iii. Business Ethics iv. Confidential Information and Trade Secrets v. Safety vi. Use of Communication Services and Equipment vii. Internet Security EC46949AO03G882 EXHO64-O0O99 Enron Corp. Risk Management Policy Proprietary and Confidential Page 19 viii. Governmental Affairs and Political Contributions ix. Consulting Fees, Commissions, and Other Payments x. Compliance with the Foreign Corrupt Practices Act xi. Compliance with Antitrust Laws xii. Compliance with Environmental Laws xiii. Conflicts of Interests, Investments, and Outside Business Interests of Officers and Employees xiv. Responsibility for Reporting xv. Compliance; Administration These policies may be amended, altered or terminated by the Company at any time. 4.3.1.4 Information Systems Support and Business Continuity Planning The Company shall have adequate information systems in place to support risk management activities. The Company shall review thoroughly all material risks associated with business disruption in each Enron Business Unit's field of endeavor arid establish prudent guidelines to ensure business continuity in ease of operational failure of critical systems. 4.3.2 Administration and Reporting far Operational Risks As discussed in Section 3.3, a framework to better evaluate the Company's exposure to operational risk will be developed. This framework will include reporting requirements that address exposures to and actual losses from operational risk. All Enron Business Units are required to perform serf-assessments of operational risk quarteriy or as otherwise required by RAC. Enron Assurance Services, Information Technology Compliance and RAG shall review the scope of each self-assessment. The Risk Management Committee shall consider this self- assessment and other indicators of operational risk when allocating capital to the Enron Business Unit Limits. EC46949A0030883 EXHO64-OO1 00 --I m Page 20 Enron Corp Risk Management Policy Propoetary and Confidential 4.4 Capital Associated with Liquidity/Funding Risk Liquidity/funding risk arises from the potential that funding requirements will exceed funding availability for a given time period. Funding requirements may vary over time as a result of: (a) exchange margin requirements, collateral obligations and coJlateral receivables primarily related to Trading Portfolio activities, (b) new investments, (c) the payment of interest and dividends, and (d) the maturing of debt and other obligations. Funding availability may vary over time as a result of: (a) available cash, (b) access to capital markets, (c) available collateral and (d) the time required to convert positions to cash or liquid assets. The Company shall use the Liquidity Ratio, liquidity stress testing and other methods as specified by the Chief Risk Officer to measure liquidity/funding risk. 4.4.1 Limit Structure for Liquidity/Funding Risk The CEO shall approve an advisory limit for liquidity/funding risk ('Liquidity Ratio Advisory Limit') to be implemented under a transition period approved by the Risk Management Committee. This shall be based on the Liquidity Ratio discussed in Section 3.4 of this Policy. The Liquidity Ratio shall be calculated using two different assumptions to derive the Trading Portfolio's Potential Future Cash Requirements, the denominator of the calculation: (a) a 50% confidence level, and (b) a 99% confidence level. 4.4.2 Administration/Reporting for Liquidity/Funding Risk The Liquidity Ratio shall be calculated on a daily basis and reported by RAC to the CEO, the Chief Risk Officer, and the Treasury department designee. If the Liquidity Ratio is (a) less than 3.0 using a 50% confidence level to calculate Potential Future Cash Requirements or (b) less than 1.5 using a 99% confidence level to calculate Potential Future Cash Requirements, the Chief Risk Officer shall provide a Liquidity Ratio Advisory to the CEO and others at his discretion. The CEO shall direct senior management to take certain actions to mitigate the Company's liquidity/funding risk. E045949A0030884 EXHOS4-001 01 a' C'4 'C IC Enron Corp. Page 21 Risk Management Policy Proprietary and Con fidentiad 5 Requests for Allocation of Risk Capital All Company transactions shall be characterized as either standard or non-standard transactions. Standard transactions are: (a) routine transactions executed in the ordinary course of business that can be easily valued on a daily basis, (b) authorized under the market risk Portfolio Limits, and (c) executed in accordance with the credit risk procedures contained in this Policy. Non-standard transactions include those that are unusual or require a capital investment at the outset of the transaction or during its term. Non-standard transactions may be complex and require ad hoc consideration and specific approval as specified by the Transaction Approval Process attached hereto in Appendix 0. RAG employs different procedures and guidelines for the analysis of deals classified as standard transactions than are applied for deals classified as non-standard transactions. Any issues regarding the characterization of a transaction as standard or non-standard should be directed to RAC and addressed prior to or upon commencement of negotiations. RAG determines whether a transaction is standard or non- standard, and this assessment is qualitative. Prior to execution, each transaction shall be analyzed sufficiently to enable the different types of risk to be identified and measured. 5.1 Portfolio Risk Capital Market risk limits assigned to each level of the Company's limit structure represent allocations of Risk Capital. As such, the Enron Business Unit that proposes the addition of a new Commodity Group or new product shall perform a cost/benefit analysis. This analysis shall be reviewed by RAG and by each of the relevant risk management functions. This analysis shall include not only the business strategy and summary of specific risks inherent in this business activity, but also an assessment of the incremental costs and stresses upon the risk management infrastructure necessary to adequately control risk in compliance with C this Policy, with recognition given to additional strain placed on the existing risk management environment by the new activity and the impact of a new activity on operational risk. RAG shall present its recommendations to the Risk Management Committee for final approval. A similar analysis of the returns on Risk Capital for individual Commodity Groups and Portfolios shall be prepared on an ongoing basis to support the continued evaluation of the Risk Capital allocation process, as described in Section 3.5 of this Policy. Approval of credit risk exposure and operational risk exposure also represents allocation of Risk Capital. However, credit risk limits are not assigned on a portfolio basis; instead individual transactions are subject to credit review as specified in Sections 4.2 and 5.2 of this Policy. 5.2 Transaction Specific Risk Capital 5.2.1 Approval Process for Standard Transactions Standard transactions generally include those documented on approved confirmations, valued in core systems and established in business units within the Company. RAG approves the execution of standard transactions either directly with commercial personnel or through the Company's global Internet-based transaction systems. All counterparties must be pre-approved by RAC for online trading. Online trading shall incorporate controls within the system to review Credit Limits and Tenor Limits as well as product approvals prior to allowing counterparties to execute transactions. For deals executed other than online, commercial personnel are responsible for (a) obtaining approval from RAG prior to executing transactions that expose the Company to credit risk and (b) understanding the current credit terms for executing transactions with a counterparty. RAG shall provide verification of credit trading terms or specific transaction approval upon request. The transaction approval process may vary by Enron Business Unit depending on the quality of counterparties as well as the liquidity and volatility of products. In some circumstances, RAG may maintain watch lists to highlight counterparties that require approval prior to trade execution as well as to specify counterparties with which deals may not be executed. RAG will make these reports available on a company- wide basis on RAGs intranet web site and in hardcopy format. If a counterparty is referenced on a watch list EC46949A8030m EXHOS4-0O1 02 Enron Corp. Page 22 Risk Management Policy Proprietary and Confidential or has not transacted with the Company for six months, then commercial personnel must contact RAG for specific transaction approval prior to trade execution. Generally, counterparties are listed on these reports for one or more of the following reasons: (a) the counterparty's credit is near or in excess of its global Credit Limits; (b) the counterparty is subject to credit enhancement requirements; and/or (c) the counterparty is not creditworthy to transact without RAC's direct involvement and evaluation. Upon receiving a request to approve a standard transaction, RAG should evaluate the incremental credit exposure of the proposed deal with the counterparties' credit exposure to determine if the risk will be within the established global Credit Limits. If the aggregated exposure is within Credit Limits, the transaction may be approved. RAG will also consider offsetting positions when determining the credit risk involved with the proposed transaction. When a transaction requires credit enhancement, commercial personnel or RAG should disclose the requirements to the counterparty prior to executing the transaction. 5.2.2 Approval Process for Non-Standard Transactions in certain circumstances, the Company enters into non-standard transactions. Criteria for identifying these types of deals include: i. Capital expenditures required at the inception or during the term of the proposed transactions ii. Embedded funding in the deal structure using current price curves iii. Drafted or non-standard documentation iv. Customized valuation (i.e., not valued by core systems) v. Outside credit and market risk limits vi. Expenditures in a business that is not pre-approved vii. Expenditures that are outside a pm-approved capital budget U, Non-standard transactions have an approval process similar to non-budgeted capital expenditures. In order to determine the proper approval level of senior management, non-standard structured transactions must comply with the Transaction Approval Process attached hereto as Appendix 0. RAG will determine the risk- adjusted capital amount for the transaction by evaluating the credit and market risks as well as the upfront and implied capital requirements for the transaction. Enron Corp. is requested from time to time to issue credit support instruments on behalf of its subsidiaries, affiliates and unaffiliated third parties in the furtherance of the foregoing parties conducting business in the marketplace. These credit support instruments include, but are not limited to, guarantees, letters of credit, letters of indemnity and comfort letters. The Guarantee Approval Process described in Appendix E sets forth the approval requirements for the issuance of Enron Corp. credit support. Procedures for compliance with, and daily administration of, the Guarantee Approval Process periodically shall be reviewed and revised, as appropriate, by the Global Finance department and RAG, and approved by the Office of the Chairman of Enrort Corp., the Chief Financial Officer or the Treasurer, For the purposes of this policy, a certification by the Office of the Chairman, the Chief Financial Officer, the Treasurer or any Deputy Treasurer, to the effect that this policy has been complied with in connection with the issuance of any Financial Guarantee or Performance Guarantee shad be conclusive evidence of such compliance and may be relied upon by all persons interested in such Financial Guarantee or Performance Guarantee. EC46949A0030886 EXHOS4-0O 103 Enron Corp. Page 23 Risk Management Policy Proprietary and Confidential 6 Roles and Responsibilities Corporate governance is a primary consideration of this Policy, as without established reporting relationships and defined responsibilities, established systems, methods and rules are of little value. The primary governing bodies that participate in the Company's risk management process are described in this Section. 6.1 Board of Directors of Enron Corp. (the "Board") The Board is accountable to the shareholders of the Company and assumes overall responsibility for the management of the Company. By establishing the risk management guidelines used by the Company, including the Transaction Approval Process and this Policy, the Board ensures the Company's risk-taking activities are consistent with its strategies and that Risk Capital is properly allocated and preserved. The Board delegates the day-to-day execution of its risk management responsibilities to the Company's senior management. The Board's risk management responsibilities include, among others things: i. The establishment of an overall framework for the evaluation, management and control of risk in capital allocation and capital preservation decisions through the approval of risk management policies and processes, including this Policy and the Transaction Approval Process ii. The establishment of specific Portfolio Limits and Concentration Limits, as deemed necessary, to ensure that the Company's risk-taking activities are consistent with the risk appetite of the Board iii. The evaluation and approval of specific transactions in accordance with the Transaction Approval Process iv. The review and approval of recommendations of its working committees C,, The Board holds regularly scheduled meetings throughout the calendar year. The Board may also hold Ic special meetings to address and resolve issues requiring consideration and/or approval that cannot be deferred until the next scheduled meeting. The Board has delegated much of its responsibility for risk management, including the implementation of this Policy, to the CEO. 6.1.1 Finance Committee of the Board of Directors ("Finance Cammittee") The Finance Committee is responsible for monitoring the Company's finance activities. The Finance Committee's risk management responsibilities include, among other things: i. The review, monitoring and development of recommendations to the Board concerning the Company's risk management policies and processes, including this Policy and the Transaction Approval Process ii. The evaluation of risks incurred by the Company to ensure these risks are appropriate and consistent with the Company's overall business strategies and the risk appetite of the Board The Finance Committee may, at its discretion, make recommendations relating to risk management activities to the Board. The Chief Risk Officer is responsible for presenting a summary of the Company's market and credit risks to the Finance Committee at each of its regularly scheduled meetings. This ensures that the Finance Committee and the Board understand the risks inherent in the Company's activities. The summary presented by the Chief Risk Officer shall include a review of any significant changes to this Policy, as well as a summary of senior management's recommendations regarding specific Risk Capital allocation issues. The Chief Risk Officer also reports periodically to the Finance Committee on the returns achieved by the Company relative to expectations. Certain reports on Loss Notifications and Limit Violations will be sent to the Chairman of the Finance Committee between regularly scheduled meetings as required by Section 4.1,2.3 of this Policy. EC46949A8038887 EXHO64-0O1 04 EXHO64-0O 105 Enron Corp. Page 24 Risk Management Policy Proprietary and Confidential 6.1.2 Audit and Compliance Committee of the Board of Directors ("Audit Committee") The Audit Committee operates under a written charter adopted by the Board and is responsible for overseeing the Company's financial reporting, internal controls and compliance processes. Risk management responsibilities of the Audit Committee include reviewing the Company's administration of and compliance with the parameters established by this Policy. The Chief Risk Officer shall present summaries of market risk limit notification and limit violation activities of the Company and any significant changes to this Policy at each regularly scheduled meeting of the Audit Committee. 6.2 Chief Executive Officer of Enron Corp. (the "CEO") The CEO is responsible for the overall management of the Company, including the execution and implementation of and compliance with the Board's policies and directives. The CEO's risk management responsibilities include, among other things: i. The establishment of an overall framework for the Company's implementation of the risk management policies and processes established by the Board, including compliance with the Board approved Portfolio Limits and Concentration Limits ii.Tho cctablichmznt. togzthor with tho Risk Manogomont Committco, of spocific Enron Bucinocc Unit Limitc and Commodity Group Limits to oncurs that tho Cornr"t rick takh potivitioc a-- concictznt with ~k ..:,I, ~ ..~f *k,. O.~A I. The review and approval of transactions as prescribed by the Transaction Approval Process The CEO has delegated much of his risk management responsibilities to a variety of corporate and Enron Business Unit functions, as described in this Policy. 6.3 Chief Risk Officer of Enron Corp. (the "Chief Risk Officer") The Chief Risk Officer reports to the CEO, has dotted line reporting responsibility to the Board and is a member of the Risk Management Committee. The Chief Risk Officer's management responsibilities include, among other things: i. The implementation and oversight of the Company's risk management policies and processes ii. The establishment, in consultation with the Risk Management Committee, of specific Bran Business Unit Limits and Commodity Group Limits to ensure that the Company's risk-taking activities are consistent with the risk appetite of the Board iii. The determination of whether a new product is a standard product that can be combined with an existing Commodity Group or whether a new Commodity Group must be established iv. Approval of products that are authorized for trading within a specific Commodity Group wThe reporting to the Board and its working committees on the Company's compliance with this Policy and other relevant information related to the company's risk management function Some of the Chief Risk Officer's responsibilities are prudently delegated to RAC as described in Section 6.8 of this Policy. 6.4 Risk Management Committee The Risk Management Committee reports to the CEO, and its membership includes the Chief Risk Officer and such other individuals as determined by the CEO. The Risk Management Committee's risk management responsibilities include, among other things: ECASI4SMWS Enron Corp. Page 25 Risk Management Policy Pro prietan/ and Con fidentia/ i. The otdnblishmont and review of systems and controls to measure risk and monitor compliance as required by this Policy ii. Tha cztsblichmcnt, togothor Consultation with the CEOChief Risk Officer reaardinp-e* specific Enron Business Unit Limits and Commodity Group Limitc, '.vhizh in oggrzgatz do not cenflict with the 603rd approvod Portfolio Lir''- '"' '""'' I iii. The approval of individual Commodity Groups that may be traded within each Enron Business-as xcll oc tha prcductr that arc authorized for tradir" within a spocific Cornr~.~M~~ r.~, iv. The designation and management of Head Traders (see Section 6.5.2 below) for each Commodity Group in the Trading Portfolio v. The approval, together with the CEO, of new Commodity Groups vi. The periodic review of Company positions that need management attention to ensure that reorganizations, transfers, and employee turnover do not interfere with the active management of all of the Company's positions, contracts, investments, assets and liabilities. The Risk Management Committee meets on an ad-hoc basis, as appropriate, to ensure its involvement in the Company's dynamic business activities. Representatives from RAG, GRMO and the various Enron Business Units may be periodically called upon to make reports to the Risk Management Committee regarding specific risk management issues. The Risk Management Committee fulfills its risk management responsibilities through direct oversight and prudent delegation of its responsibilities to both corporate and business unit personnel. Authority for the approval of Credit Limits is delegated to RAC, 6.5 Enron Business Units Each Enron Business Unit is responsible for compliance with the Policy as described herein. IC 6.5.1 Office of the Chairman clan Enran Business Unit Either the Chief Executive Officer or the Chief Operating Officer of each Enron Business Unit is responsible for the implementation of and compliance with this Policy within their respective business unit. Each Enron Business Unit's Office of the Chairman's risk management responsibilities include, among others things: i. The establishment of a framework within the business unit for the implementation of the risk management policies and procedures established by the Board and any additional requirements established by the CEO, Risk Management Committee, the Chief Risk Officer or RAC ii. The management of business unit positions to ensure that all required Limits are observed and any required Limit Violation and Loss Notifications, together with any required documentation, are provided to the appropriate parties as required under this Policy iii. The designation of key commercial managers for each asset, liability, and active contract to ensure the Company's Risk Capital is optimized in compliance with this Policy iv, The management and review of the activities and responsibilities of traders and commercial personnel, including verification that this Policy is reviewed and implemented by their business unit v. The provision of guidance to traders regarding position management upon notification of a Limit Violation or a Loss Notification vi. The review of their respective Enron Business Unit to ensure compliance with this Policy 6.5.2 Authorized Traders and Commercial Personnel Only those employees specifically approved by the Office of the Chairman of an Enron Business Unit or its designee, as reported to RAC, will be authorized to enter into Transactions on behalf of the Company. RAG EC46949A0030889 EXHOS4-OO 106 Enron Corp. Page 26 Risk Management Policy Proprietary and Confidential shall maintain a record of these Authorized Traders. The Office of the Chairman of each Enron Business Unit or its designee is responsible for immediately reporting any change in its Authorized Traders to RAC, even if such changes are due to the termination or reassignment of an existing trader or the hiring of a new trader. Head Traders are those traders who are responsible for a specific Commodity Group e Conzzntrztion Limit under this Policy. Traders and commercial personnel who have direct contact with potential counterparties represent the Company's first line of defense against transactions with unauthorized market risk exposure and unacceptable credit exposure. Commercial personnel include originators, marketers and business development personnel. Authorized Traders' and/or commercial personnels' risk management responsibilities include, among other things: i. The review and compliance with this Policy, including the management of their activities in a manner that is consistent with the Company's overall business strategies and the risk appetite applicable to positions they manage ii. The identification of material risks inherent in their activities and the timely communication of information regarding market developments, trends and counterparty credit events to RAC iii. The submission of required counterparty information to RAC for credit analysis and review purposes iv. The verification that all required approvals are obtained from RAG and Legal, as well as any approvals required under the Transaction Approval Process, if applicable, prior to entering into a transaction v. The proactive reduction of risk exposures as limits are being approached or in anticipation of planned transactions that would increase risk exposures beyond established risk tolerances C,, vi. The determination, together with the Company's Accounting Department, of the appropriate q accounting impact of trading, risk management and hedging strategies involving the use of ~C instruments as defined in SFAS 133 vii. The development of procedures, together with the Company's Accounting Department, for testing the ongoing effectiveness of derivative hedges to ensure compliance with SFAS 133 requirements viii. The accurate recording and valuation of positions in the Company's risk books and financial and accounting systems ix. The reporting, as required under this Policy, of any Limit Violation or Loss Notification or other exceptions to the limit structure 6.6 Global Risk Management Operations ("GRMO") Global Risk Management Operations ('GRMO) plays a key role in the implementation of each Enron Business Unit's risk management processes. Accordingly, GRMO has a dual reporting role at the executive level to both the Chief Accounting Officer of Enron Corp. and to commercial management. For certain businesses or activities, a middle office function other than GRMO may perform a similar role and have equivalent responsibilities to those described for GRMO in this Section. For purposes of this Policy, any discussion of GRMO's roles and responsibilities is intended to apply to the middle office functions of those businesses or activities that do not employ GRMO, GRMO's risk management responsibilities include, among others things: i. The coordination of logistics and settlements ii. The execution and confirmation of contracts with counter-parties ii. The capture and reporting of the Company's risk positions as required by RAC with sufficient detail to allow accurate analysis and reporting of market and credit risks EC4684YAjOao3 EXHO64-00107 Enron Corp. Page 27 Risk Management Policy Proprietary and Con tidendal iv. The preparation of various valuation and risk analyses, with the distribution of results arid conclusions to the appropriate personnel in RAC v. The participation in new product development and approval to ensure that operational risks are addressed and infrastructure needs are met prior to the commencement of any new business activity vi. The preparation and distribution of market risk limit exception reports on a timely basis, including explanations for exceptions provided by the appropriate traders vii. The support of investigations into any trading anomalies viii. The support of operational risk assessments of trading offices 6.7 Accounting The Company's Accounting department performs a back office function responsible for the management of certain financial and accounting functions and for certain statutory and compliance reporting. The Back Office's risk management responsibilities include, among others things: i. The reconciliation of the monthly general ledger to the risk reports such as the Enron Business Units Daily Position Report ii. The analysis of budget to actual iii. The preparation of weekly and monthly management reports iv. The preparation of cash flow and income forecasts v. The evaluation of the adequacy of credit reserves based on simulations by RAC and other considerations 6.8 Legal The Companys Legal function is responsible for ensuring that the documentation supporting the transactions executed by Authorized Traders and other employees considers and protects the Company from risk exposure. All documents that contain a commitment binding the Company must be reviewed and initialed by a member of the Company's Legal department prior to execution. The Legal function's risk management responsibilities include, among others things: i. The management and resolution of all legal issues related to the business of the Company ii. The drafting, review and approval of all master agreements, confirmations, guarantees and other documents that Enron Business Units must sign to execute transactions iii. The monitoring of the Company and each Enron Business Unit to ensure each conforms to all laws, regulations and Company policy iv. The administration of the Company's Code of Ethics that is incorporated by reference into this Policy 6.9 Risk Assessment and Control ("RAC") RAC reports directly to the Chief Risk Officer, and includes the market risk management function, the credit Risk management function, the operational risk assessment function, and the various strategic risk management initiatives of the Company's enterprise-wide risk management policy. RAC also includes management of the Transaction Approval Process designed to provide special review of market and credit risks as well as operational exposures for specified transactions in accordance with this Policy, and management of the Guarantee Approval Proces& The credit risk management function has dual responsibilities to (a) support the commercial personnel on daily basis in relation to credit risk issues, and (b) EC46949A0030891 EXHO64-OO1 OS EXHO64-0O1 09 Page 28 Enron Corp. Risk Management Policy Proprietary and Confidential to act independently in identifying, reporting and monitoring credit risk exposures and ensuring that senior management is kept informed of these exposures References to RAC shall be interpreted as the appropriate individual and/or group within RAG depending on the issue being addressed. The Chief Risk Officer's risk management responsibilities delegated to RAG include, among others things: i. The oversight of the overall risks and risk management practices to ensure that they are consistent with Company policy and strategy; engaging management in discussions regarding events or developments in macroeconomic, legal, regulatory and technological structural shifts that could expose the Company to potential losses ii. The oversight of the development, approval and administration of policies, methodologies, and practices for measuring, monitoring and managing the risk exposures of the Company; the review of proposed modifications to existing risk measurement methodologies, and the development of new risk measurement tools for market risk, credit risk, liquidity risk and operational risk, in coordination with the Company's research function iii. The central management of the Company's market and credit exposure governed by this Policy, the aggregation of risks across the Company and the review of the risk profile of the overall portfolio iv. The establishment of credit reserves against potential credit losses, as appropriate v. The review and recommendation for approval of market risk limits to the Chief Risk Officer, following analysis of market risks vi. The establishment and approval of counterparty credit limits vii. The recommendation, implementation and approval of credit risk mitigation and hedging strategies for positions that fall outside the direct responsibility of an Enron Business Unit viii. The review and approval of Benchmark Position methodology, the review of curve validation results, stress test results, and any other significant analyses prepared by GRMO; the evaluation of the effectiveness of the VaR process via Back Testing, and the refinement of VaR model requirements ix. The oversight of a model veiling process to ensure market and credit risks are accurately quantified x. The provision of operational risk assessment guidelines, addressing whether Enron Business Unit employees are appropriately trained to understand and comply with the Company's established risk management processes xi. The assessment of whether the Company's infrastructure supports the credit, market, operational and liquidity risk management needs of the Company to support, measure, monitor and manage exposures xii. The assessment of returns achieved by Enron Business Units in the various Portfolios relative to expectations and to the level of risk incurred xiii. The reporting to the Finance Committee and Audit Committee at regularly scheduled Board meetings, as well as providing special analyses and reports to the CEO and to the Chairman of the Finance Committee xiv. The performance of due diligence for the Merchant Portfolio to determine it a potential investment counterparty has appropriate accounting systems, controls and infrastructure for appropriated stewardship of Enron's capital xv. The monitoring of deal milestones, compliance requirements and performance for Merchant Portfolio investments to determine if the investment is performing according to the approved Deal Approval Sheet ("DASH") and appropriate legal documentation ECA69A9M§3O~2 Enron Corp. Page 29 Risk Management Policy Proprietary and Confidential xvi. The assessment of special valuation issues or specifying limitations on the use of certain derivatives; the performance or review of special analyses on the Company's overall risks, using specialized stress tests and scenario tests xvii. The review and approval of counterparties and trading positions transactions prior to execution in order to identify, measure and price the associated credit risk, and for significant changes in credit quality and risk issues, such as exceptional gains and losses xviii. The review of requests for new Commodity Groups and new products within existing Commodity Groups, the identification of issues and the recommendation of limit structures xix. The performance of due diligence on issuers of counterparties' letters of credit and guarantees to ensure they meet minimum credit standards xx. The coordination of review and execution of all counterparty documents with the Company's Legal function, including negotiating directly with counterparties to ensure credit risk is mitigated through contractual arrangements xxi. The maintenance of current and complete credit files, and actively monitoring counterparty credit events and industry/market trends for potentially adverse effects on the counterpar~s credit profile, using internal and external information sources 6.10 Treasury/Global Finance Treasury/Global Finance supports this Policy by managing funding/liquidity risk as addressed in Sections 3.4 and 4.4 of this Policy, these responsibilities include obtaining or coordinating the preparation of cash flow projections, considering both business-as-usual scenarios and planning for liquidity constraints. The Treasurer shall report at each meeting of the Finance Committee the aggregate amount of the Company's (a) payment obligations and (b) estimated contingent liability of performance obligations not involving the payment of money under all the Company's guarantees, letters of credit, letters of indemnity, and other support arrangements effective at the time of the meeting. 6.11 Internal Audit 6.11.1 Enron Assurance Services Enron Assurance Services operates under a written charter adopted by the Audit Committee and maintains its independent and objective stature by its functional reporting responsibilities to the Audit Committee, The objective of Enron Assurance Services is to improve the Company's operations by bringing an independent, systematic and disciplined approach to evaluate and enhance the effectiveness of risk management, control and governance processes. Working in concert with the Company's independent auditors and other various control and monitoring functions across the Company, (i.e., RAC, information technology compliance, security, legal, ethics, environmental, and quality management), Enron Assurance Services directs a broad, comprehensive program of assurance and consulting activities within the Company. This includes establishing scopes, selecting subjects, selling frequencies, allocating resources and utilizing a variety of techniques required to accomplish internal control/risk management objectives. 6.11.2 Information Technology Compliance The objective of Information Technology Compliance is to monitor and improve information technology risks and controls across the Company. Information Technology compliance serves as the primary auditor of the Company's information technology systems and works in concert with the Company's independent auditors, Information Technology Compliance serves as a complimentary organization to Enron Assurance Services with a specific focus on information technology. EC46g4gMo~aga EXH064-O01 10 Enron Corp. Page 30 Risk Management Policy Proprietary and Con ficientiai 7 Miscellaneous 7.1 Brokerage Accounts Administration Certain Enron Business Units shall be authorized periodically to open trading accounts with clearing brokers to facilitate the conduct of their business. All requests to open or renew a trading account with a broker shall be reviewed and approved by the Chief Risk Officer or his designee(s). The Company shall also notify brokers of the names of Company personnel authorized to irade futures, options or other contracts. The Company shall update these authorizations periodically. Brokerage account agreements must be reviewed by the Legal department of the Company prior to execution, and at least one officer of an Enron Business Unit and one officer of RAC are required to open an account as required by corporate resolution. Brokers must be in compliance with all rules and regulations of the Securities and Exchange Commission requirements. The Company shall maintain a comprehensive file of all open brokerage accounts that lists the purpose for which each account was opened and the names of Authorized Traders. Changes in Authorized Trader lists shall be communicated to the appropriate brokers as necessary. All brokerage accounts shall be reviewed periodically to determine whether they are still active, and shall be closed if no longer needed. 7.2 Employee Trading No employee of the Company may engage in the trading of any position for the benefit of any party other than the Company, whether for their own account or for the account of any third party, where such position relates to any security, commodity, contract or derivative thereof within any Commodity Group listed in Appendix A. The only exception to this restriction is that employees who are not involved with the Commodity Groups listed under the heading 'Financials" in Appendix A, may trade for their own account those items with which they are not involved. Periodically, certain employees, their family members and anybody that is financially dependent on those employees, may also be restricted from trading specific securities and derivatives thereof. In addition to these trading restrictions, if any employee should at any time possess non-public information about any public company, that employee, the employee's family members and anybody that is financially dependent on that employee, shall be restricted from trading in that issue, and that employee may not disclose the non- public material information to anyone that does not have a business need to know. Employees must seek dispensation from the Risk Management Committee for any exception to these requirements. In no case should employees' personal trading conflict with the Company's trading initiatives. Employee with questions regarding employee trading and investing should contact the Company's Compliance department. 7.3 Employee Review and Compliance with Policy As determined by the Chief Risk Officer or his designee(s), Company employees participating in any activity or transaction within the coverage of this Policy shall sign a statement approved by the Chief Risk Officer (see Appendix hi for sample employee compliance statement) that such employee (a) has read this Policy, (b) understands this Policy, and (c) has complied and will comply with this Policy, with specific acknowledgement of employee trading restrictions. The Company's employees should comply with this Policy. Willful or deliberate non-compliance or falsification of risk metrics or profits and losses referred to by this Policy will be regarded as gross misconduct. EC46949MU~894 EXHOG4-OO1 11 EXHO64-00 112 Page 31 Enron Corp. Risk Management Policy Proprietary and Confidential 7.4 Transition Plan for Policy Compliance The Board delegates to the Risk Management Committee the authority to approve exceptions to Policy requirements during a transition period. RAC shall work with the Enron Business Units to develop a transition plan to implement the Policy guidance and requirements described herein. 7.5 Supersedes Prior Policies This Policy supersedes and replaces all previous policies of Enron Corp. approved by the Board concerning risk management or trading or transaction approval. This Risk Management Policy was approved by the Board on August 14, 2001, and shall be amended by the Board as necessary, the dates of such amendments to be reflected on the first page hereof. Enron Business Units may execute their own risk management policies and procedures that are subordinate or in addition to the requirements in this Policy. EC46I49M8~~5 Enron Corp. Page 32 Risk Management Policy Proprietary and Confidential 8 Glossary Affiliate shall mean any entity in which the Enron Corp. has an ownership interest less than 80%. Audit Committee shall mean the Audit and Compliance Committee of the Board of Directors of Enron Corp. Authorized Traders shall mean those traders approved by the Office of the Chairman of an Enron Business Unit or its designee to enter into Transactions on behalf of the Company. Back Testing refers to the process of systematically comparing outputs from a model to actual observed outcomes the model is designed to forecast. In the context of VaR, this means that actual daily trading profits and losses should be compared to the calculated VaR. Since the standard approved VaR methodology assumes a 95% confidence interval, it follows that, on average, a loss would occur that exceeds VaR, once in every twenty trading days. The occurrence of such observations at a greater or lower frequency than that implied by the 95% confidence interval may indicate that the results of the model understate or overstate risk. Benchmark Position shall mean the position within a Commodity Group into which all other positions within the same Commodity Group can be converted using price volatility and correlation-based conversion factors. Such conversion factors shall be established and authorized by RAC, and any significant changes in the factors or methodology shall be reviewed and approved by RAG. Board shall mean the Board of Directors of Enron Corp. Borrowing Capacity shall mean, as used in calculating the Liquidity Ratio, the sum of the Company's: (a) commercial paper, (b) uncommitted bank lines and loan sales lines, (c) letter of credit facilities, (d) net accounts receivable and accounts payable, fe) net Drice risk management assets. (fl inventory. (eg) shelf registrations for public debt issues, and (fit) shelf registrations for public equity issues, as determined by the Company's Treasury/Global Finance department. Capital Portfolio is designed to manage exposures in the Company's capital structure as described in Section 2. CEO shall mean the Chief Executive Officer of Enron Corp. Chief Risk Officer shall mean the Chief Risk Officer of Enron Corp. Commodity Group shall mean a collection of positions having sufficient relationship and correlation as approved by Risk Management Committee that allow for aggregation into a Benchmark Position. Commodity Grouc Limits shall mean those market risk limits assigned as described in Section 4.1.1.4 of this Policy. Company shall mean Enron Corp. and its subsidiaries. Concentration Limits shall mean the maximum risk appetite for specific markets or activities approved by the Board and aggregated into specified Commodity Groups of categories of positions, as described in Section 4.1.1.2 of this Policy. These Concentration Limits are listed in Appendix A. Conforming shall mean a transaction that is routine, non-budgeted and within the general business lines of the Company: in an industry where the Company has established expertise; and in a country where the Company has established a local presence and is currently conducting business. To be designated Conforming, the RAC recommendation must be "Proceed with Transaction". Credit Aggregation System ("CAS"j provides Credit Risk Management with the capability to record limits and monitor end of day credit exposures. The credit risk aggregation system aggregates counterparty exposure globally and displays active transactions from business unit source and back office accounting systems. Credit Limits shall mean limits governed by the credit risk management function of RAC as described in Section 4.2.1.2 and Appendix C. Credit Risk Procedures shall mean the credit risk management function personnels' authority as described in Appendix C. EC46949A0030596 EXHO64-OO1 13 Enron Corp. Page 33 Risk Management Policy Proprietary and Confidential Cumulative 5-day Loss shall mean when the Cumulative 5-day Profit and Loss results in a loss in excess of 225% of the corresponding VaR limit. Upon a Cumulative 5-day Loss, Loss Notifications are triggered in accordance with Section 4.1.2.3. ~olIowing the occurrence of a Daily Loss or a Cumulative 5-Day Loss, the Cumulative 5-day Loss calculation is reset. Cumulative 5-Day Profit and Loss shall mean the net sum total of Daily Profit and Loss for each Commodity Group for five consecutive business days, without giving effect to the impact of change in valuation adjustments. Upon a specified Cumulative 5-Day Loss, Loss Notifications are triggered in accordance with Section 4.1.2.3 of this Policy, Daily Profit and Loss shall mean a single day of the profit or loss without giving effect to the impact of change in valuation adjustments. Upon a specified Daily Loss, Loss Notifications are triggered in accordance with Section 4.1.2.3 of this Policy. The Daily Profit and Loss will be calculated using the mark-to-market method on a net present value basis, exclusive of valuation adjustments. This measurement shall be calculated from (a) the profit or loss reported on the Company's daily position reports, and (b) the valuation adjustment activity reported in a separate schedule. No other adjustments to the calculation shall be considered in determining the Daily Profit or Loss, regardless of whether or not the profit and loss results include catch-up or other type of unusual entries, Deal Approval Sheet (DASI-B is the document used in the official approval of the deal. It encompasses a summary of RAC's final analysis of the risks and mitigants in the deal as well as the expected value and range of values Other documents employed in this process include Guarantee Approval Sheet (GASH), Modeling Assumption Sheet (MASH) and Revaluation Approval Sheet (RASH). Delta shall mean the change in value due to a unit change in the price of the underlying. Discretionary VaR as referred to in Appendix A shall mean an amount of VaR included in the Trading Portfolio Limit and reflected in the Trading Portfolio's Concentration Limits that the CEO and Risk Management Committee can allocate to Enron Business Units and Commodity Groups at their discretion. Divestiture shall mean the disposal of an asset (including securities). Earnings-at-Risk is a risk metric to be applied as described in Section 3.1.5 of this Policy. Enron Business Unit(s) shall mean Enron Corp. and any entity controlled, directly or indirectly, by Enron Corp., (including internal groups created for the purposes of trading, or aligned according to the commodities set out in the Appendices), or any entity directly or indirectly under common control of Enron Corn. For this purpose, the criteria for establishing "control" of any entity include but are not limited to, ownership of more than fifty percent (50%) of the voting power of such entity. Enron Business Unit Limit shall mean the overall VaR limit for each Enron Business Unit as determined by the Risk Management Committee and the CEO. Enron Business Units Daily Position Report shall mean the report comparing Portfolio Limits, Enron Business Unit Limits, and Commodity Group Limits for each respective Enron Business Unit to corresponding actual results, as described in Section 4.1.2.2.1. Enron Concentration Limit Daily Position Report shall mean the report that monitors each Concentration Limit and aggregates the Company's consolidated results of the Trading Portfolio on a Commodity Group basis. The Capital Portfolios Concentration Limit shall also be included in this report as described in Section 4.1.2.2.2. Enron Rating (E-Rating) shall mean the Enron Credit Rating as referenced in Appendix B of this Policy. E-Ratino shall mean a RAC assigned counterparty credit risk rating on a scale of 1 to 12 as described in Appendix B. Eta shall mean the change in the price of an option as correlations change. Exoected Tail Loss (~ETL") shall represent the expected daily loss beyond Extreme VaR. Expected Tail Loss Advisory Limit (FTL Limit") shall mean the Board approved advisory limit that applies to the Company's Trading Portfolio used to trigger certain notifications. EC46849A0030897 EXHO64-OO1 14 Enron Corp. Page 34 Risk Management Policy Proprietary and Con fidential ETL Notification shall mean the occurrence of an ETL measurement in excess of the ETL limit requiring notifications as described in Section 4.1.2.3.1. Extreme Value-at-Risk ("EVaR") shall mean the potential exposure measurement based on historical profits and losses and current positions given a specified confidence level and a tat-tailed distribution (as opposed to a normal distribution used for the Company's VaR calculations). Extreme Value Theory ("EVT") examines the characteristics of extreme events, whose impact on the portfolio cannot be determined using the standard VaR metric, and is described in Section 3.1.2 of this Policy. Finance Committee shall mean the Finance Committee of the Board of Directors of Enron Corn. Financial Guarantee shall mean a guarantee issued by the Company that (a) guarantees obligations (i) for the repayment of money borrowed which are or should be shown on a balance sheet as debt in accordance with Generally Accepted Accounting Principles ("GAAP"), or (ii) as lessee under leases which, in accordance with GAAP, are capital leases, and (b) constitutes "Debt" under the definition of "Debt" in the principal credit agreement of the Company; provided, that a Financial Guarantee shall not include any letter of indemnity or other support arrangement (including, without limitation, a sponsor or parent support or performance agreement). For purposes of this policy, any letter of credit issued for the account of the Company and obligations related thereto, including, but not limited to, obligations arising under any master letter of credit agreement for any such letter of credit, shall be treated as debt. Fundamental Operating Standards shall mean the standards as referenced in Appendix F of this policy. Future Available Cash shall mean, as used in calculating the Liquidity Ratio, the Company's current cash- flow forecast as determined by the Treasury/Global Finance department, considering operating and investing activities, Gamma shall mean the change in Delta of an option given a change in the price of the underlying. Global Risk Management Operations shall mean the middle office function of the Enron 8usiness Units, whose responsibilities are described in Section 6.6. GRMO shall mean the Global Risk Management Operations of Enron Corn. U, Guarantee Anproval Process provides for a process of review and approval of guarantees (see Appendix E). Guidance Credit Limits shall mean the credit limits used by RAC to accurately monitor and manage the overall credit risk for a counterparty. Head Trader is the person on the trading desk designated to allocate capital to traders, approve trading strategies and monitor trading activity, positions and profit and loss. Letter of Credit shall mean any letter of credit issued for the account of the Company and obligations related thereto, including but not limited to obligations arising under any master letter of credit agreement for any such letter of credit. Limit Violation shall mean an occurrence where a Net Open Position, Maturity/Gap Position, or VaR measurement exceeds the corresponding limit, consequently triggering certain reporting as described in Section 4.1.2,3 of this Policy. Liquidity Exoosure Ratio (tiauiditv Ratio") shall be calculated as the sum of the Company's Future Available Cash and Borrowing Capacity divided by the Company's Potential Future Cash Requirements where: Liquidity Ratio Advisory Limit shall mean the specified level of the Liquidity Ratio that will require the Chief Risk Officer to notify the CEO in accordance with Section 4.4.2. Liquidity Ratio shall be calculated daily over a specified time period by dividing (a) the sum of the Company's (i) Future Available Cash and (ii) Borrowing Capacity, by (b) the Company's Potential Future Cash Requirements. Loss Notification shall mean an occurrence where a Daily Loss or Cumulative 5-Day Loss measurement exceeds a specified percentage of the corresponding VaR limit, consequently triggering certain reporting as described in Section 4.12.3 of this Policy. EC46949A0030898 EXHO64-OO1 15 Enron Corp. Page 35 Risk Management Policy Pro pr,etary and Confident dad Material Adverse Chance ("MAC") shall mean a change in the business conditions, financial conditions, or operations of a party that prohibits the party from performing its obligations under a contract. Maturity/Gap Position shall mean the largest rolling net open position within a specified reference period. It is a measure designed to capture time spreads in the portfolio. Merchant Portfolio is designed to manage exposure related to merchant investments as described in Section 2. Monte Carlo Simulation is an analytical technique that uses a computer to generate random outcomes assuming a distribution. Net Ocen Position shall mean the discounted aggregate of the open positions in a Commodity Group on a Benchmark Position equivalent basis. Net Open Position for interest rate exposure is measured and limited by sensitivity analysis measured through a partial duration hedge metric. Selected points are identified on the yield curve, and position exposures are allocated to time buckets for each of these points along the yield curve. Sensitivity is calculated by increasing the yield associated with one time bucket by one basis point while holding all other points along the curve constant. This process is applied to each time bucket separately across the entire term structure. Net Open Position for foreign currency positions in the Trading Portfolio is translated into an equivalent U.S. Dollar position using the closing spot rate. The equivalent U.S. Dollar position is summed to provide the net foreign currency open position. Non-Conforming shall mean a transaction that is outside the general business lines of the Company or in an industry where the Company has little or no expertise; made in a country where the Company has no local expertise or where the overall exposure to the country is excessive; or made to an entity or within an industry that would result in excessive exposure to that entity or industry. Non-conforming transactions include all with RAC recommendation of "Returns Below Capital Price" or "Do Not Proceed". Other Assets and Contracts Portfolio is designed to manage exposures embedded in the Compan/s assets (investments, contractual arrangements, etc.) that are either accounted for on an accrual basis or are not otherwise captured in the Trading Portfolio, the Merchant Portfolio, the Capital Portfolio, or the Regulated Portfolio. Performance Guarantee shall mean any guarantee not constituting a Financial Guarantee, any letter of indemnity or any other support arrangement (including, without limitation, any sponsor or parent support or performance agreement). For example, a guarantee of a swap agreement, swap confirmation, or master swap agreement is a Performance Guarantee. Policy shall mean the Enron Corp. Risk Management Policy. Portfolio shall mean the specific aggregation of positions as defined in Section 2 of this Policy. Portfolio Limits shall mean the limits assigned to aggregate positions for the Portfolios identified in Section 2, as described in Section 4.1.1.1 of this Policy. Position Limit Violation shall mean the occurrence of a Net Open Position or Maturity/Gap Position measurement that exceeds the corresponding limit. Potential Future Cash Requirements shall mean the denominator of the Liquidity Ratio, representing the simulation of margin exposure and collateral requirements for the Trading Portfolio Preoaid or Embedded Debt Financing shall mean the maximum exposure to the Company as a result of a prepaid physical or derivative trading/risk management transaction, a tilted swap or other transaction where debt financing of a counterparty is embedded in a trading/risk management transaction. President shall mean the President of Enron Corp. Principal Credit Agreement of Enron Corp. shall be the U.S. $1,750,000,000 364-Day Revolving Credit Agreement dated as of May 14, 2001, as such Revolving Credit Agreement now exists or may be amended from time to time, among Enron Corp.. as Borrower, the Banks named therein, and The Chase Manhattan Bank, NA. and Citibank NA., as Co-Administrative Agents. EC4S949AoO3fug EXHO64-OO1 16 Enron Corp. Page 36 Risk Management Policy Prophetary and Confidential RAG shall mean the Risk Assessment & Control department of the Company. RAG Recommendation shall mean RAG's recommendation on a Transaction, which will be one of the following: (a) proceed, (b) returns below capital price, or (c) do not proceed, or any other categories determined by RAG. Regulated Portfolio shall mean the Transportation and Distribution Regulated Portfolio. Return on Capital-at-Risk (RoCAR") shall mean the aggregate of expected returns against aggregate Risk Capital. Return on Value-at-Risk ("RoVAR"~ shall mean the aggregate profit or loss, divided by the average daily VaR for the same period. Rho shall mean the change in the price of an option due to changes in interest rates, Risk-Adiusted Capital shall mean the aggregation of exposure in a transaction that results from: (a) capital expenditure; (b) commodity position; (c) credit; or (d) guarantees, with such exposures translated into an equivalent amount of capital as determined by RAG. Risk Assessment and Control ("RAG") shall mean the Company's Risk Assessment and Control department. Risk Capital represents the amount of capital at risk due to market factors, credit quality and operational events as more clearly described in Section 1.2 of this Policy. Risk Manacement Committee ("RMC") shall mean the Risk Management Committee of Enron Corp. Its membership includes the Chief Risk Officer and such other individuals as determined by the CEO. Subsidiary shall mean: (a) any subsidiary directly or indirectly 80%-owned to 100%-owned by Enron Corp., (b) any direct or indirect subsidiary of Enron Corp. if the other owners of such subsidiary hold stock in such subsidiary for the purpose of meeting legal requirements of the jurisdiction in which such subsidiary is incorporated, and (c) Enron Equity Corp., Enron Capital & Trade Resources International Corp. or any of its '1 direct or indirect subsidiaries or any other direct or indirect subsidiary of Enron Equity Corp. or Enron Capital & Trade Resources International Corp. not 1 00%-owned by Enron Equity Corp. or Enron Capital & Trade '0 Resources International Corp. if the other owners of such subsidiary collectively hold a minority ownership interest in such subsidiary that entitles them primarily only to a return of capital contributions or to share in the profits, losses, distributions, or dividends of such subsidiary and does not entitle them to participate in the operation, management or control of its business. For purposes of this Policy, the right to vote by itself shall not be deemed to entitle an owner to such participation. Tenor Limits shall mean limits governed by the credit risk management function of RAG as described in Section 4.2.1.3 and Appendix C. Theta shall mean the change in the value of an option for a one-day decay holding all other parameters constant. Trade Guarantee shall mean guarantees issued in the normal course of business by Enron Corp. to support the obligations of Enron Corp. Subsidiaries or Affiliates with respect the purchase and/or sale of physical commodities or financial transactions related to trade activities. Trading Portfolio is designed to manage exposures to commodity transactions as described in Section 2. Transaction shall mean shall mean risk-adjusted capital, divestiture or embedded debt financing with the exposure reflected net to Enron, including funding vehicle exposure. Transaction AoDroval Process provides for (a) a process of review and approval of Capital Expenditures, and (b) a process for prior transactions involving Capital Expenditures to be reviewed for performance and results (see Appendix 0). Transportation and Distribution Regulated Portfolio ("Regulated" Portfolio) shall mean the Portfolio described in Section 2 that manages the regulated activities in the Company's natural gas pipelines and domestic utility subsidiaries. Unaffiliated Third Party shall mean any entity in which Enron Corp. has no ownership interest. EC46949A0030990 EXHO64-OO1 17 Page 37 Enron Corp. Risk Management Policy Proprietary and Confidential Value-at-Risk (WaR) shall mean the potential exposure related to a Commodity Group or Position representing the potential change in value resulting from changes including: market prices, interest rates, currency rates, counterparty credit condition, liquidity, funding and settlement risk, among others. VaR shall be calculated using the RAG approved VaR methodology at the 95% confidence interval using a 1-day time horizon. Any recalibration or modification of the VaR methodology or parameters that take into account observed or anticipated changes in market factors or developments in VaR technologies must be approved by RAG. VaR Limit Violation shall mean the occurrence of a VaR measurement that exceeds the corresponding limit. yeas shall mean the change in the price of an option due to a change in volatility. Volumetric Risk shall mean the risk of loss due to a change in expected volumes. 40 q IC EC46949A0030901 EXHO64-0O1 18 Page 38 Enron Corp. Risk Management Policy Proprietary and Confidential 9 Appendices A - Market Risk Limits B - Description of Enron Credit Risk Ratings (2-Ratings) C - Credit Risk Procedures D - Transaction Approval Process E - Guarantee Approval Process F - Fundamental Operating Standards * G - Operational Risk Considerations * H - Sample Documentation of Employee Acknowledgement of Policy 'I, IC to EC45949A00369O2 EXHO64-OO1 19 Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Page A-i Enron Corp. Risk Management Policy Proprietary and Confidential Changes are denoted in red Appendix A - Market Risk Limits Tradino Portfolio VaR Expected Tail Limits Loss Advisory ($000) 1$QQQI Aggregate Portfolio Limit (1) AMERICAS NATURAL GAS 'North American Natural Gas * Southern Cone Natural Gas * LNG AMERICAS ELECTRICITY * North American Electricity 'Southern Cone Electricity * Global Risk Markets 150,000 520,000 100,000 100,000 EUROPEAN NATURAL GAS & * European Natural Gas * UK Electricity * Continental Electricity * Nordic Electricity ELECTRICITY PRODUCTS * Global Products 'Coal FINANCIALS * Credit Trading 'Financial instruments (Interest Rates, Foreign Currency) * Equity Trading 'Convertible Arbitrage EMERGING BUSINESSES 'Metals & Minerals 'Australian Electricity 'Japanese Electricity 'Weather Derivatives 'Freight Markets 'Emissions 'Pulp & Paper 'Lumber * Steel * Meats Trading * Grain Trading 'Soft Commodities * Bandwidth * Data Storage * Advertising 'DRAM * Voice Minutes * Financial Real Estate 45,000 20,000 15,000 20,000 CAPITAL PORTFOLIO N IA Enron Stock 10,000 REGULATED PORTFOLIO 10,000 .LEGENO: Portfolio Limit (Approved by Beard) Concentration Limits (Approved by Board) Commodity Groups' (1) $50 MM of Discretionary Var is included in the $150 MM Trading Portfolio Limit and Trading Portfolio Concentration Limits above: Discretionary VaR to be allocated to Enron Business Units and Commodity Groups by the CEOChief Risk Offic Commodity Groups listed for informational purposesi-CEQ-an4 may cliang at any time. EXHO64-00 120 Co 'It La Page 8-1 Enron Corp. Risk Management Policy Proprietary and Con fidentia/ Appendix B - Description of Enron Credit Risk Ratings (E-Ratings) ENRON MOODy'S RATING S & P RATING RATING INVESTMENT GRADE DESCRIPTION AAA/AAt- Aaa/Aa Exceptional degree of stability and substance * Significant balance sheet and cash flow demonstrated throughout business or industry cycle with positive trends and long-term outlook * Significant size and strength in industry * Very high quality assets * Capacity to pay interest and principal very strong * Low financial leverage with substantial debt capacity * Un uestioned access to lobal markets 2 AA/AA-/A+ Aa2/Aa3/A1 * High degree of stability and diversity * Balance sheet and operations slightly more susceptible to adversity with the business or industry cycle * High quality assets * History of strong earnings and cash flow with excess interest coverage levels * Modest financial leverage with ample debt capacity * Ready access to capital markets under normal market conditions S NA- A2IA3 * Strong market and financial position with a history of successful performance, but more susceptible to economic changes * Assets are good quality with little reliance on intangibles. CAPEX is reasonable * Strong cash flow and interest coverage levels with trends generally consistent * Financial leverage is satisfactory with sufficient debt capacity * Access to capital markets under normal market conditions 4 BEB+/BBB Baal/Baa2 * Satisfactory earnings, cash flow and interest coverage, although trends are occasionally inconsistent * More concentration of business risk, by product or market, may be present. Susceptible to cyclical changes * Assets are of average quality, which may require significant CAPEX; intangibles may be material in nature * Highly experienced/qualified management * Access to capital markets will generally be available under normal market conditions 5 B8B- Baa3 * Higher degrees of susceptibility to cyclical trends due to industry position, less diversification, etc. * Assets and cash flows are reasonably sound with adequate coverage levels * Financial leverage is slightly above average and assets may require significant CAPEX * Access to capital markets may be available under normal conditions 6 BB~ Bal * Higher degree of volatility of earnings, cash flow, interest and overall performance * More long-temi uncertainty, but with less near-tern, vulnerability than other speculative grades * Financial leverage is high with some debt capacity remaining * Adequate coverage * May have above average' risk elements relative to industry * Less access to public markets, reliant on bank financing EC46949A0030904 EXHOS4-0O1 21 Page 8-2 Enron Corp. Risk Management Policy Propnetary and Confidential Appendix B - Description of Enron Credit Risk Ratings (E-Ratings) ENRON MOODY'S RATING S & P RATING RATING INVESTMENT GRADE DESCRIPTION 7 88 Ba2 Earnings, cash flow and interest coverage may be volatile with trends subject to erratic swings * Outlook contains factors which may lead to unstable conditions * Assets are below average quality but are expected to maintain value * CAPEX requirements could be significant due to asset quality/possible material reliance on intangibles * Financial leverage is high with some debt capacity remaining * Adequate financial controls * Experienced management, but depth of management is less certain * Access to financing primarily available from banks or other private sources; less access to public markets 8 88- Ba3 * Pronounced risk elements with uncertainty of future performance * Earnings and cash flows are volatile * Assets are below average quality; CAPEX spending requirements could be significant * Marginal interest coverage levels * Less access to public markets 9 6+/B 81/82 * Earnings and cash flow will generally be strained * Trends are unfavorable and the outlook is difficult * Adverse economic market or other event may affect the company's financial performance in the future * Assets are significant value to provide a "second way our; significant intangibles exist * Financially over-leveraged, with minimal sources of financing available * Management turnover or lack of experience or stability may result in deterioration of financial performance 10 B- 83 * Adverse business, financial or economic conditions will likely impair capacity to repay interest and principal * Assets are insufficient value to provide a "second way our; warrants additional levels of supervision * Financially over leveraged * Weak interest coverage levels; management turnover or lack of experience or stability may result in deterioration of financial performance 11 CCC Caaa/Ca * Poor quality in most respects * Interest likely to be in arrears with principal payments in danger * This rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments continue 12 0 * Payment default, interest and/or principal payments have not been made on due date, even if applicable grace period has not expired * This category is also used when the Company has filed a bankruptcy petition and debt service payments are jeopardized * Repayment in full is highly questionable EC46949A0O30805 EXHO64-OO1 22 Page C-i Enron Corp. Risk Management Policy Proprietary and Confidential Appendix C - Credit Risk Procedures If the assigned E-Rating is consistent with the public credit rating, any level of credit risk management personnel has the authority to approve the internal E-Rating. A manager or above in credit risk management in RAC must approve E-Ratings for counterparties whose public ratings are not consistent with the assigned E-Rating and for non-publicly rated counterparties. Credit risk management RAG personnel approval authority is described in tables below. Credit Limit Authority ($MillionsJ Credit Risk Management E 1-2 E 3-5 E 6-8 E 9-12 Personnel Authority Analyst Level I $10 $5 $2 $0.25 Analyst Level II $20 $15 $10 $2 Manager $50 $35 $20 $5 Director $100 $100 $50 $25 V.P. $200 $200 $100 $50 Chief Risk Officer or Office of the Over $200 Over $200 Over $100 Over $50 Chairman of Enron Corp. Tenor Limits Credit Risk Management E 1-2 E 3-5 E 6-8 E 9-12 Personnel Authority Analyst Level I 2 years 1 year 1 year 3 months Analyst Level II 5 years 5 years 3 years 6 months Manager 7 years 7 years 5 years 1 year Director 10 years 10 years 7 years 3 years V.p. 15 years 15 years 10 years 5 years Chief Risk Officer or Office of the Over 15 years Over 15 years Over 10 years Over 5 years Chairman of Enron Corn. EC4694WO~9O6 EXHO64-OO 123 It, I' It, Enron Corp. Risk Management Policy Propnelary and Conlidontial Appendix D - Transaction Approval Process Changes are denoled in red TRANSACTION size (4i £JrIIOJPJA(]PIU Ei4rrr( Request For: RISK ADJUSTED CAPITAL or PREPAIDOR EMBEDDED DEBT FINANCING ~) or DIVESTITURE (>$2,500,OOO) (I) transaction a~pgg~t I, RISK ASSESSMENT & CONTROL (RAC) * Transaction Review and Valuation * Credit and Market Risk Assessment * Pricing * RAG RECOMMEN- DATION [ BUSINESS GROUP HEAD ~ RETAIL ____ CHAIRMAN & CEO 7 h WHOLESALE OOC. -fr -4 ongoing portfolio review and revaluation (Ii Except NON-CONFORMING transacheos and venture capital transactions not auThorized by the Conipanys charter, for both of which The lin'~t is $5OO~O. (21 OeM A~provaI Sheets approved by the RETAIL CHAIRMAN & CEO. WHOLESALE GOC and ENE-OOCwlI be disbibuted to the ENE-BOD (Finance Conv-rittee) alter approval. (3tTmn~tj~s deemed NON-CONFORMING only due to RAC RECOMMENDATION being "Returns Below Capital Price" will NOT require Ft/F-ROD approval ii' 575MM. 41 Merchant asset DIVES TI TURFS exceeding 5500MM and strategic asset DIVESTIWRFS excooding 5200MM require ENE-BOD approval. '~i Transactions meeting certain criteria ney be approved under the F-DASH process of The Transaction Approvd Process. See page 0-3. DEFINED TERMS IN ITALICS at pages D-T & 0-8 64-52 EC4694BAfh3bsr Page D-1 Approving Unit FUNCTIONAL GROUP HEAD CONFORMING I -4 $MM a 2 05 <= 10 (21 c 20 (2) <=75(21 75+ I" ENE-QOC I" ENE-ROD NON CONFORMING ENE-GOC Lni.fr -fr EXHO64-00I 24 Enrori Corp. Risk Management Policy Propriela,y and Confidential Appendix 0 - Transaction Approval Process Approval Process for Originated Contractual Transactions *~rriJCrJFtltlcJ tRrJUP~I ORIGINATED TRANSACTION Non-standard documentation OR Deal results in violation of existing limits RISK ASSESSMENT & CONTROL (BAC) r C ( I Commodity ] Position Risk VaR Capital $ Expenditure (if any) Reserve Credit Risk PVB Savings Guarantee (or equivalent) ADJUSTED I RISK) CAPITAL RAC APPROVAL TRANSACTION 3 PROCESS I EC4684sAflg08 LA-Si EXI-1064-OO 125 Page D-2 Enron Corp. Risk Management Policy Prnpnetary and Confidential Appendix 0 - Transaction Approval Process E-DASH Process (II Approval Amount and Maturity Rating Minimum 21 510MM <= 520MM 575MM > $25 MM EXHO64-0O 126 EC4584gMoavgog Enron Corp. Risk Management Policy P'opriatary and Confidential Appendix 0 - Transaction Approval Process Approval Authority CONFORMING NON-CONFORMING LIMIT (1MM) LIMIT (5MM) rIdE-BOO----------775. 25+ EN F. 00 C <= 75 VI/HOLESALEOOC <20 RETAIL CHAIRMAN & CEO BUSINESS GROUP HEADS (WHOLESALE) BUSINESS GROUP flEA OS (OTHER) FUNCTIONAL GROUP flEA OS 12.5MM with Funded Capital I >s 12.5MM and do not require IENE.OOC or ENS-BOO approval Andy Fastow, CFO Ben Glisan, Managing Director & Treasurer Tim Despain, Vice President, Finance & Deputy Treasurer Barry Schnapper, Vice President, Finance & Deputy Treacurer EC46849A0030912 Page 0-6 ENRON GLOBAL FINANCE EXHO64-00129 5.4-57 Enron Corp Risk Management Policy P'npherary and Confidential Appendix D - Transaction Approval Process Definitions CONFORMING DIVES TITURES NO fl-CONFORMING PREPAID OR EMS EnDED DEBT FINANCING RA C RA C RECOMMEN- DATION * Routine, nontudgeted and within the general business lines of Enron * Made in an industry where Enron has established expertise * Made in a country where Enron has established a local presence and is currently conducting business * RAG RECOMMENDATION must be ?roceed with Transaction" * RAG will determine if CONFORMING * Disposal of assets (including securities) * Outside the general business lines of Enron or in an industry where Enron has little or no expertise * Made in a country where Enron has no local expertise or where the overall exposure to the country is excessive - Made to an entity or within an industry that would result in excessive exposure to that entity or industry * Includes all transactions with RAG RECOMMENDA TIONs of ~Retums Below Capital Pric&' or "Do Not Proceecf' - RAG will determine if NON-CONFORMING * Maximum exposure to Enron or any affiliate as a result of a prepaid physical or derivative trading / risk management transaction, a tilted swap or other transaction where debt financing of a counterparty is embedded in a trading / risk management transaction * Risk Assessment and Control group at Enron * Chief Risk Officer, responsible for RAG activities - RAG's overall recommendation on a TRANSACTION, summarized in one of the following: - Proceed with Transaction - Returns Below Capital Price - Do Not Proceed EC46949A0030913 Page D-7 EXHOO4-O0l 30 LA-SB Enroii Corp. Risk Management Policy Proprietary and Confidenhial Appendix D - Transaction Approval Process Definitions RISK ADJUSTED CAPITAL TRANSACTION * The aggregation of exposure in a transaction that results from: - Capital Expenditure cash outflow or commitment to make a cash outflow (examples include any form of debt or equity financing and prepaid physical or derivative trading / risk management transactions) * providing, directly or indirectly, a guarantee of obligations of unalliliated third parties or of NON-CONFORMING obtigations * the maximum exposure to Enron or any affiliates as a result of a tilted swap or other transaction where debt financing of a counterparty is embedded in a trading / risk management transaction * a commodity or financial position that results in an exposure outside of Board approved limits - Commodity positions Credit - Guaranties Such exposure translated to an equivalent amount of capital * RAt wiN determine the components and total amount of RISK ADJUSTED CAPITAL RISK ADJUSTED CAPITAL IDIVESTITURE I PREPAID OR EMBEDDED DEBT FINANCING * Exposure reflected net to Enron, including funding vehicle exposure * RAC will dete,mine exposure 5A .~ EC46949A0030914 EXHOO4-0D131 Page D-8 ~~1 Enron Corp. Page E-1 Risk Management Policy Pro prietary and Confidential Appendix E - Guarantee Approval Process Procedures for Approval of Financial Guarantees and Performance Guarantees FINANCIAL GUARANTEE A. A Financial Guarantee shall be approved as follows: Any Subsidia,y: By the Office of the Chairman, Chief Financial Officer, the Treasurer or any Deputy Treasurer, regardless of principal amount, if the Financial Guarantee would guarantee unconditional, non- contingent payment obligations, provided that any Financial Guarantee that is a trade Letter of Credit shall be approved by any one of the foregoing officers or any Assistant Treasurer. Any Affiliate, where Support is Equal to, or Less than, the percentage of Enron Corp. 's direct or indirect ownership: 1. By the Office of the Chairman, Chief Financial Officer, Treasurer or any Deputy Treasurer regardless of principal amount, if the Financial Guarantee would guarantee unconditional, non- contingent payment obligations, provided that any Financial Guarantee that is a trade Letter of Credit shall be approved by any one of the foregoing officers or any Assistant Treasurer. Any Affiliate, where the amount of Support by Enron Corp. is Greater than, the percentage of Swan Corp.'s direct or indirect ownership whether expressly or ibmugh joint and several liability: 1. By the Office of the Chairman, Chief Financial Officer, Treasurer or any Deputy Treasurer and the Business Group Head (as defined in the Transaction Approval Process), if the Financial Guarantee would guarantee unconditional, non-contingent payment obligations (greater than Enron Corp.'s ownership interest) that are less than or equal to $2,500,000 in principal amount; 2. Upon evaluation and approval of the Financial Guarantee and the related transaction pursuant to the Transaction Approval Process, a Financial Guarantee that would guarantee unconditional, non- contingent payment obligations (greater than Enron Corp.'s ownership interest) exceeding $2,500,000 in principal amount. may be executed by the Office of the Chairman, the Chief Financial Officer, the Treasurer or any Deputy Treasurer. Any Unafflulated Third Party: 1. By the Office of the Chairman, Chief Financial Officer, Treasurer or Deputy Treasurer and the Business Group Head (as defined in the Transaction Approval Process), if the Financial Guarantee would guarantee unconditional, non-contingent payment obligations less than or equal to $2,500,000 in principal amount; 2. Upon the evaluation and approval of the Financial Guarantee and the related transaction pursuant to the Transaction Approval Process, a Financial Guarantee that would guarantee unconditional, non- contingent payment obligations exceeding $2,500,000 in principal amount, may be executed by the Office of the Chairman, the Chief Financial Officer, the Treasurer or any Deputy Treasurer. EC46949Afo30915 EXH064-OO 132 Enron Corp. Page E-2 Risk Management Policy Proor:etay and Confidential Appendix E - Guarantee Approval Process B. Amendment 1. An amendment to a Financial Guarantee that would (a) increase the obligations of Enron Corp. under the Financial Guarantee or (b) extend the duration of the Financial Guarantee shall be approved in accordance with the rules that would apply if the Financial Guarantee and its amendment together were an original F(nancial Guarantee. 2. Any other amendment to a Financial Guarantee which supports the obligations of a Subsidiary or an Affiliate shall be approved by the Office of the Chairman, the Chief Financial Officer, the Treasurer or any Deputy Treasurer, PERFORMANCE GUARANTEE A. A Performance Guarantee shall be approved as folLows: Any Subsidia,y By the Office of the Chairman, Chief Financial Officer, the Treasurer or any Deputy Treasurer, regardless of amount, provided, that any Performance Guarantee that is a Trade Guarantee may be approved by any one of the foregoing officers or any Assistant Treasurer. Any Affiliate, where Support is Equal to, or Less than, the percentage of Enron Corp.'s direct or indirect ownership: By the Office of the Chairman, Chief Financial Officer the Treasurer or any Deputy Treasurer, regardless of amount, provided, that any Performance Guarantee that is a Trade Guarantee may be approved by any one of the foregoing officers or any Assistant Treasurer. Any Affiliate, where the amount of Support by Enran Cop. is Greater than, the percentage of Enron Corn. 's direct or indirect ownership whether expressly or through joint and several liability: 1. By the Office of the Chairman, Chief Financial Officer, Treasurer or any Deputy Treasurer and the Business Group Head (as defined in the Transaction Approval Process), if the Performance Guarantee would support payment obligations (greater than Enron Corp.'s ownership interest) that are less than or equal to $2,500,000 in principal amount or performance obligations that would create an estimated contingent liability less than or equal to $2,500,000 in principal amount; 2. Upon evaluation and approval of the Performance Guarantee and the related transaction pursuant to the Transaction Approval Process, Performance Guarantees that support payment obligations (greater than Enron Corp.'s ownership interest) exceeding $2,500,000 in principal amount, or performance obligations that create an estimated contingent liability (greater than Enron Corp.'s ownership interest) exceeding $2,500,000 in principal amount, may be executed by the Office of the Chairman, the Chief Financial Officer, the Treasurer or any Deputy Treasurer, EC46949A0030916 EXHO64-OO 133 Enron Corp. Page E-3 Risk Management Policy Pro pri era ny and Con fidential Appendix E - Guarantee Approval Process Any Unaffihiated Third Pa fly: 1. By the Office of the Chairman, Chief Financial Officer, Treasurer or Deputy Treasurer and the Business Group Head (as defined in the Transaction Approval Process), where the Performance Guarantee would support payment obligations less than or equal to $2500000 in principal amount or performance obligations that would create an estimated contingent liability not exceeding $2,500,000 in principal amount; 2. Upon the evaluation and approval of the Financial Guarantee and the related transaction pursuant to the Transaction Approval Process, a Financial Guarantee to an Unaffiliated Third Party that would support payment obligations exceeding $2,500,000 in principal amount or performance obligations that would create an estimated contingent liability exceeding $2,600,000 in principal amount, may be executed by the Office of the Chairman, the Chief Financial Officer, the Treasurer or any Deputy Treasurer, For the purposes of this Section, in calculating the percentage of Enron Corp.'s ownership of an Affiliate, any shares of such Affiliate owned by employees, officers, directors or agents of Enron Corp. or any Subsidiary shall be deemed owned by Enron Corp. B. Amendment 1. An amendment to a Performance Guarantee to any Affiliate where support is greater than the percentage of Enron Corps ownership interest that (a) increases payment or performance (N (0 obligations under the Performance Guarantee or (b) extends the duration of the Performance Guarantee, shall be approved in accordance with the rules that would apply if the Performance IC Guarantee and its amendment together were an original Performance Guarantee. 2. Any other amendment to a Performance Guarantee which supports the obligations of a Subsidiary or an Affiliate shall be approved by the Office of the Chairman, the Chief Financial Officer, the Treasurer, any Deputy Treasurer; provided that any such amendment to a Trade Guarantee shari require the approval of any Assistant Treasurer, any Deputy Treasurer, the Treasurer, the Chief Financial Officer or the Office of the Chairman. PRICING A. Financial Guarantees and Performance Guarantees will be priced in accordance with established Risk Assessment and Control Group ('RAV) practices. B. Letters of Credit will be assigned a price in addition to any charges that may accrue from issuing institutions. MISCELLANEOUS A. All monetary threshold approval limits referred to herein, where applicable, shall incorporate by reference any changes to the Transaction Approval Process deal approval limits as it relates to Conforming Investments. 8. Performance Guarantees that are guarantees shall contain express monetary limits on guaranteed obligations unless otherwise approved by the Board of Directors of Enron Corp. or waived by the Chief Financial Officer or the Treasurer. EC46949ADO3O911 EXHOS4-OO1 34 Enron Corp. Page BA Risk Management Policy Propn~ta'y and Confidential Appendix 2 - Guarantee Approval Process DEFINF~IONS Affiliate shall mean any entity in which Enron Corp. has an ownership interest less than 80%. Financial Guarantee shall mean a guarantee issued by Enron Corp. that (a) guarantees obligations (i) for the repayment of money borrowed which are or should be shown on a balance sheet as debt in accordance with Generally Accepted Accounting Principles (MGPAP"), or (ii) as lessee under leases which, in accordance with GAAP, are capital leases, and (b) constitutes 'Debt" under the definition of "Debt" in the principal credit agreement of Enron Corp.; provided, that a Financial Guarantee shall not include any letter of indemnity or other support arrangement (including, without limitation, a sponsor or parent support or performance agreement). For purposes of this policy, any letter of credit issued for the account of Enron Corp. and obligations related thereto, including, but not limited to, obligations arising under any master letter of credit agreement for any such letter of credit, shall be treated as debt. Letter of Credit shall mean any letter of credit issued for the account of Enron Corp. and obligations related thereto, including but not limited to obligations arising under any master letter of credit agreement for any such letter of credit. Performance Guarantee shall mean any guarantee not constituting a Financial Guarantee, any letter of indemnity or any other support arrangement (including, without limitation, any sponsor or parent support or performance agreement). For example, a guarantee of a swap agreement, swap confirmation, or master swap agreement is a Performance Guarantee. Principal Credit Agreement of Enron Corp. shall be the U.S. 31 750,000,000 364-Day Revolving Credit Agreement dated as of May 14, 2001, as such Revolving Credit Agreement now exists or may be amended from time to time, among Enron Corp., as Borrower, the Banks named therein, and The Chase Manhattan Bank, NA. and Citibank NA., as Co-Administrative Agents. Subsidiary shall mean: (a) any subsidiary directly or indirectly 80%-owned to 100%-owned by Enron Corp., (b) any direct or indirect subsidiary of Enron Corp. if the other owners of such subsidiary hold stock in such subsidiary for the purpose of meeting legal requirements of the jurisdiction in which such subsidiary is incorporated, and (c) Enron Equity Corp., Enron Capital & Trade Resources International Corp. or any of its direct or indirect subsidiaries or any other direct or indirect subsidiary of Enron Equity Corp. or Enron Capital & Trade Resources International Corp. not 100%-owned by Enron Equity Corp. or Enron Capital & Trade Resources International Corp. if the other owners of such subsidiary collectively hold a minority ownership interest in such subsidiary that entitles them primarily only to a return of capital contributions or to share in the profits, losses, distributions, or dividends of such subsidiary and does not entitle them to participate in the operation, management or control of its business. For purposes of this policy, the right to vote by itself shall not be deemed to entitle an owner to such participation, Trade Guarantee shall mean guarantees issued in the normal course of business by Enron Corp. to support the obligations of Enron Corp. Subsidiaries or Affiliates with respect the purchase andlor sale of physical commodities or financial transactions related to trade activities. Transaction A~proval Process provides for (a) a process of review and approval of Capital Expenditures, and (b) a process for prior transactions involving Capital Expenditures to be reviewed for performance and results (see Appendix D). Unaffiliated Third Party shall mean any entity in which Enron Corp. has no ownership interest References herein to Chief Financial Officer, Treasurer, Deputy Treasurer or Assistant Treasurer shall mean the Chief Financial Officer of Enron Corp., the Treasurer of Enron Corp., the Deputy Treasure(s) of Enron Corp. or the Assistant Treasurer of Enron Corp. EC4G949MOaOg1O EXHOS4-OO1 35 Page E-5 Enron Corp. Risk Management Policy Pvop~iera~y and Confkienlial Appendix E - Guarantee Approval Process Guarantee Approval Flowchart origlnai to Count.rparty Copy to Legal *Input to D.tabn. Ye. erformance Guarantee No Financial Guarantee Fl? Guarantee Credit Risk Corp. Legal Approval Management Process SM Limits <=1500MM 9.. Exhibit IV * >5590MM approved by Treasurer DASH or GASH 4') (7~nte?'1 ii ii Corp Legal p oval ScE b V ('I Guarantees may be inciuded in the DASH for a transaction, However, It there is no DASH, or if the guarantee is not incorporated in the DASH, a GASH is used. GASH" is defined as Guarantee Approval Sheet. En ran Global Finance EC48949A0930919 5A-64 Business Unit Final Approved Document No Letter of Credit Yes EXHOO4-OO1 36 Enron Corp. Risk Management Policy Propbeta'y and Con4dentia! Appendix E - Guarantee Approval Process BUSINESS UNIT 2 Guarantee % a Ownership LIMIT $MM (1) r Other ] All Amounts r~ntee(1T~') I Approval Process Affiliate Guarantee % > Ownership % 4Tran.acIlon size based on Incremental Amountt21) 0, Unaffiliated 3rd Parties > 2.5 Business Group Head And ENE - OCCI CFO I Treasurer / Deputy Tr..surer TransactIon Approval Process See Exhibit IIn~ Limit Is lessor of notional amount or P99; notional amount will always be noted on DASH or GASH. ~I Incremental Amount equals amount that Support> Ownerehlp. (2l Authorized signatories alter review end approval through the Transaction Approval Process. 5A45 EXH064-OO 137 Page E-6 APPROVING UNIT L~~J EC46049uoM020 Enron Corp. Page F-i Risk Management Policy Pro prietary and Confidential Appendix F - Fundamental Operating Standards * Quantitative Transactions are recorded accurately and timely (completeness, accuracy) * Transactions are recorded with 100% accuracy and valued appropriately in an approved risk system for the applicable product * Transactions are input into appropriate risk system on date of trade * All trades executed on the telephone must be executed on t&ephones that are recorded electronically, and all trades executed over the Internet must be executed with appropriate recording back up Daily Profit and Loss position reporting is accurate and timely (completeness, accuracy) * Reports are 100% accurate at time of issuance (no revisions) * Daily positions and profit and loss have been approved and signed off by trading * Reports issued on next day of trading at a commercially pre-determined time * Trading limit violations noted and communicated to management on next day of trading Timely confirmation and execution of transactions (completeness, accuracy, existence) * Confirmation of all brokered trades with brokers by close of business trade date * Confirms sent to counterparties (non-exchange) within 24 hours of trade execution and agreed to risk system data * Confirms received from counterparties (non-exchange) within 48 hours of trade execution and agreed to risk system data * Confirms executed with counterparty within 7 days of trade date with exceptions noted and communicated to management with the associated level of risk for non-execution (i.e. master agreement in place, number of trades unexecuted) Settlements with counterparties occurs accurately and timely (non CACS, non Dash deals) * Invoices/payments agree with contractual terms * All invoices/payments sent to counterparties are resolved within 30 days of dispute date with material exceptions noted and communicated to management * Overdue cash collections followed up with counterparties within 48 hours of due date These are guidelines and may be updated periodically. EC46949MO~921 ExHOe4-oo1 38 Enron Corp. Page F-2 Risk Management Policy PropTietary and Confidential Appendix F - Fundamental Operating Standards * Operating system data matches risk systems and general ledger data * Flash to actual variances and prior month adjustments cleared within 30 days of identification * AU trading general ledger accounts are reconciled and outstanding items cleared within 7 workdays subsequent to month-end Qualitative Establish and implement business and controls infrastructure * Business unit head has ultimate responsibility to ensure operating standards are met (working in conjunction with GRMP and RAG)- * Full functionality and interfaces for market risk, credit risk and corporate reporting, and/or a systems roadmap for that development * Appropriate involvement in business for specialist services (Legal, Tax and HR) * Sufficient resourcing both in quality and quantity for all processes * Global databases are in place and updated to accommodate business counterparties * Trading/origination activities and trading limits have been approved and authorized by Enron management * Credit limits have been defined and approved and capabilities exist to monitor credit q exposure by counterparty * Transaction approval process has been defined and communicated Define functional responsibilities across business/offices and ensure segregation for the following duties * Execution (Commercial) * Controls (Commercial Support) * Review (RAG) These are guidelines and may be updated periodically. EC46849AtJO3og22 EXHO64-OO1 39 Enron Corp. Page 0-1 Risk Management Pobicy Proprietary end Confidential Appendix G - Operational Risk Considerations * PeoDle * Incompetence * Fraud * Excessive dependence on a few top level employees * Lack of institutional knowledge Organizational * Improper segregation of duties * Lack of governance * Operational constraints - Efficiency risk - Scalability or transaction volume risk Process Risk * Model risk - Wrong algorithm - Misuse of a correct model - Wrong inputs to a cored model 'a - Control over changes to model - Combination of above * Position and P&L Reporting - MTM error - Risk Books, Infinity, RisktRAC, CAS and DPR do not reflect correct positions - Limit Violations Transaction Specific Risk * Pricing error * Execution error * Product complexity/transaction complexity misperception * Booking error * Settlement error * Documentation/contract risk * Unexpected cost - legal or other transaction fees * Unidentified risks These are guiderines and may be updated periodically. EC46O4SAg~3Qg~3 EXHO64-0O 140 Enron Corp. Risk Management Policy Proprietary anti Confidential Technology External Appendix G -Operational Risk Considerations * * Computer system failure * Programming error * Communication infrastructure breakdown * Blind acceptance of system-generated valuations * Regulatory * Legal * These are guidelines and may be updated periodically. Page G-2 EC46948Aoe3eg24 EXHO64-00141 IC IC Page f-I-i Enron Corp. Risk Management Policy Pro pnetary and Confidential Appendix H - Sample Documentation of Employee Acknowledgement of Policy Enron Corp. Risk Management Policy Acknowledgement of Review and Compliance _______________________________ do hereby acknowledge that I have read and understand the Enron Corp. Risk Management Policy (the "Policy"). I hereby certify compliance with such policy statement since my employment, or since I last so certified. I will continue to comply with such policy statement. I understand that I may not engage in the trading of any position for the benefit of any party other than Enron Corp. and its subsidiaries (the "Company"), whether for my own account or for the account of any third party where such position relates to any security, commodity, contract or derivative thereof within any Commodity Group listed in Appendix A of the Policy, except that I may trade for my own account those items included under the heading "Financials" in Appendix A with which I am not involved as part of my employment for the Company. Date: Employee Signature C N Mg Ac Employee Name Printed Enron Business Unit Any exceptions noted below: EC4694oMoa4Jg~ EXH064-OO 142 AGENDA ITEM 5(a) ENRON CORP. RISK MANAGEMENT POLICY (SUGGESTED FORM OF RESOLUTIONS) WHEREAS, the Board of Directors of the Company approved resolutions on August 13 - 14, 2001, adopting the Enron Corp. Risk Management Policy (the "Risk Management Policy") which established a comprehensive means of evaluating, managing and controlling the Company's exposure to risk and under which capital will be allocated and preserved; WHEREAS, the objective of the Risk Management Policy is to ensure that the Company's capital is allocated efficiently and that appropriate action is taken to preserve the Company's capital in accordance with the Company's disposition for risk; WHEREAS, it would be in the best interest of the Company to revise the Risk Management Policy to that which is attached to these minutes and as is described therein; NOW THEREFORE BE IT RESOLVED, that the revisions to the Risk Management Policy be, and the same hereby is, approved and adopted, in the form presented to and discussed at this meeting, a copy of which is attached to the minutes of the meeting, and that the persons, officers and approving units identified therein shail perform the responsibilities as specified therein; RESOLVED FURTHER, that all actions heretofore taken by the Chairman of the Board and Chief Executive Officer, the President and Chief Operating Officer, the Vice Chairman, the Chief Financial Officer, the Chief Risk Officer (or his or her designee), the Treasurer or any Vice President, in the name and on behalf of the Company, related to or in connection with transactions of the type contemplated by the revised Risk Management Policy attached to these minutes but which originated prior to these resolutions, including, without limitation, the execution and delivery of any instruments or other documents as any such officer shall have deemed necessary, proper, or advisable, are hereby adopted, ratified, confirmed, and approved in all respects; and RESOLVED FURTHER, that the Chairman of the Board and Chief Executive Officer, the President and Chief Operating Officer, the Vice Chairman, the Chief Financial Officer, the Chief Risk Officer (or his or her designee), the Treasurer, any Vice President of the Company, or any other person designated or authorized by the Board to act on behalf of the Company be, and each of them hereby is, authorized, directed (any one or them acting alone) to take any and all such further action, to amend, execute, and deliver all such further instruments EC46949AO03o926 EXHOS4-00143 and documents, for and in the name and on hehaif of the Company, under its corporate seal or otherwise, and to pay all such expenses as in their discretion appear to be necessary, proper, or advisable to carry into effect the purposes and intentions of this and each of the foregoing resolutions. EC4ug49Mo~g27 EXHO64-OO 144 an S 0 I5 U C C 4 ECA69A9P&9~'28 EXHO64-OO1 45 Project Southwood Georgia Pacific - Leaf River Enron Industrial Markets Presentation to Enron Corp Finance Committee For Recommendation to the Board of Directors IC October 8, 2001 EC46949Ao~g~g EXHO64-OO 146 Project Southwood Why ElM Needs a Pulp MW? * Market Pulp is a $20B Global Market ($90B integrated pulp) with significant volatility including * Asset ownership increases credibility with industry players * Physical supply enhances marketability of products financial * ElM's ability to contract for tons has been limited to date due to lack of physical presence * ElM's purchase of newsprint assets (Garden State Paper - 3rd Quarter 2000, Stadacona - 1st Quarter 2001) have had a positive effect on ElM's ability to transact business: Trading Hubs Total Notional Value of Trades Jan 01 2 $2MM Counterparties 11 June 01 6 $70 MM 150 EC4694gMoafg~ Inc C~n!rdema~ EXHO64-OO 147 N 'a Project Southwood Georgia Pacific's Leaf River Pulp Mill High Quality Asset * State of the art facility; one of the largest single-line pulp mills in the world. * Ranks 5th out of 50 North American softwood mills for lowest cash costs. * Extremely well maintained with a history of proactive maintenance. * Greenfield construction in 1984 - clean environmental record. * 99% of energy produced on site with 87% of steam requirements generated from mill byproducts. C., * High quality, properly incented, non-union workforce. Structure Mitigates Risk * Fixed price, full requirements fiber supply contract for 7 years with Georgia-Pacific. (Fiber represents 70% of variable costs and 40% of total costs.) * Mutually agreed upon capex budget with a 3-year risk sharing provision with Georgia-Pacific. * ElM pulp desk pays the mill a fixed price for 50% of the physical output; floating price (based on RISI index) for the other 50%. Separate Financial Pulp Swap Transaction * ElM pulp desk enters into a financial pulp swap with Georgia-Pacific far 277,250 MT/yr (roughly equivalent to 50% of the mill's annual production). GP pays fixed; ElM pays floating.