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Enron Europe Project Doorstep Enron Australia Pty. Ltd. Sydney, Australia April 2001

Enron Europe Project Doorstep Enron Australia Pty. Ltd. Sydney, Australia April 2001. DRAFT. Confidential. Enron Europe. Project Participants. & Objectives. The objective of this review.

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Enron Europe Project Doorstep Enron Australia Pty. Ltd. Sydney, Australia April 2001

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  1. Enron Europe Project Doorstep Enron Australia Pty. Ltd. Sydney, Australia April 2001 DRAFT Confidential

  2. Enron Europe Project Participants & Objectives The objective of this review We performed an on-site review of processes, procedures and controls that support the trading and operations activities of Enron Australia Pty. Ltd. located in Sydney, Australia. Our review procedures included interviews with key office personnel on April 23-24, 2001. We also performed a test of commodity transactions from deal execution through settlement. Doorstep Team Members Brent Price, Enron Global Markets Juan Camarillo, Enron Assurance Services Office Personnel Interviewed Jez Peters, Associate – Coal Trading Paul Quilkey, Managing Director Ramond Yeow, Director - Trading Allan Ford, Manager - RAC Heidi Mason, CFO David Minns, Senior Legal Counsel Justin De Hertog, Risk Manager Dzung Tran, Trading Support Christian Werner, Risk Manager - Weather Takehiro Miyai, Manager – Coal Trading Questions? For further understanding of objectives or observations, please contact Brent Price at (713) 853-7647 or bprice@enron.com 1 Sydney Office Review – 04/01 Confidential

  3. Enron Europe Summary of Office Highlights Office Profile The office has thirty-eight local office personnel and one Ex-pat (the Managing Director) Primary emphasis of office is marketing risk management products in Power, Weather and Coal Power P&L is consolidated within EEL; Coal & Weather P&L is consolidated within EGM Most deals executed have been in Power which are all financial with some having physical characteristics - Settlement Residue Auctions (A regional basis spread position) The office has several originators who focus on Power asset opportunities, as well as Metals Middle and Back Office support services are provided to Japan and EGM Weather (Houston); Australian Coal activity is supported by EGM operations in London Counterparties Counterparties are primarily Power retailers and generators Three counterparties make up approximately forty-nine percent of volumes (See page 5) Competitors include Duke, TXU and Utilicorp Transaction Data (1Q2001) 408 Power trades (401 swaps and 7 swaptions) were executed with a total volume of 10.12TWh 7 Weather trades were executed, all of which were financial swaps - Weather is consolidated in EGM Houston risk books 9 Coal deals were executed, all of which were physical - Coal is carried in the EGM London risk books Financial Data Year-to-date profit from trading operations was A$10.2 million P&L is primarily impacted by curve shifts and new deals The one day VaR at 3/30/01 was US$488,312; VaR limit for Enron Australia is US$3 million 2 Sydney Office Review – 04/01 Confidential

  4. Enron Europe Organization Chart - Commercial Staff Paul Quilkey MD EAPL Coal – Staley/McClellan Beyer RAC - Murphy Metals – Bacon/ Hainsworth Portfolio Management Origination Coal RAC Metals EBS Raymond Yeow Director Stephen Lowe Director Trading John Suttle Manager Owen Murphy General Mgr Patrick Leahy Manager Takehiro Miyai Manager Connell Burke Manager Paul Smith Manager David Bartnik Director Allan Ford Manager Max Soble Director Jez Peters Associate Karl Tomlinson Trd Analysis Robert Heynen Director Sarah Brown Associate Cheryl Smith Associate Finance Peter Doherty Director Troy Wilson Analyst Jerven Zhang Analyst 3 Sydney Office Review – 04/01 Confidential

  5. Enron Europe Organization Chart - Admin & Support Staff Paul Quilkey MD EAPL PCG Admin IT/Sys Dev Public Affairs LEGAL HR Accounting Risk Weather Settlements Justin Timothy Associate Rachel Bejma Manager Justin Den Hertog Manager Christian Werner Weather Risk Mgr Heidi Mason Snr Director Jennifer Savage PA to MD Elliott Katz Manager IT/Ops David Minns Snr Legal Counsel Melissa Pullar HR Rep Heidi Mason Snr Director Colin Wood Specialist Rob McGrory Manager Dzung Tran Trading Support Alison Keogh Secretary (Legal) Roz Ti Accountant Dave Waterworth Enrgy Mrkt Sys Fiona Skinner Admin Assist. (Coal) Charbel Aklian Assistant Accountant Megan Smaller Admin Assist. (Reception) Edward Hwang 4 Sydney Office Review – 04/01 Confidential

  6. Pulse Energy Pty Ltd Advance Energy Yallourn Energy Pty 1% 1% Ltd Westpac Banking 4% AGL Electricity Limited Corporation 2% 2% Citipower Pty TXU Trading 17% 10% Tarong Energy CS Energy Limited Corporation Limited 3% 2% Southern Hydro Duke Energy Australia Partnership Trading & Marketing 6% Pty Snowy Hydro Trading 6% Pty Limited 3% Energy Australia 4% SG Australia Limited 3% Ergon Energy Pty Ltd 6% RMB Australia Limited Integral Energy 2% Powercor Australia 4% Limited Macquarie Generation Northpower 1% 1% 22% Enron Europe Power Counterparties by Volume – 2001 YTD 5 Sydney Office Review – 04/01 Confidential

  7. Comparison of Power Enron Europe Volumes Traded (’00 vs. ’01) 25 25 20 20 15 15 (TWh) 10 10 5 5 0 0 Jul Jun Jan Oct Mar Feb Sep Dec Nov Apr May Aug 2000 2001 YTD 6 Sydney Office Review – 04/01 Confidential

  8. Enron Europe Power Profitability: High Returns on Low Risk 7 Sydney Office Review – 04/01 Confidential

  9. Enron Europe Observations and Action Steps Control Strengths • Risk Management (RM) creates a weekly risk and market review report that is submitted to local management and London. RM also creates a monthly curve validation and profit & loss report, which is reviewed by RAC. • Ninety-five percent of Power Counterparties have signed ISDA Master Agreements. • Requirement by NEMMCO (National Electricity Market Management Company) for all regulated traders or brokers in the Power Markets to utilize only the Austraclear clearing system. All Austraclear members must go through an approval process, and counterparty performance is guaranteed by NEMMCO. • Confirmation process is working effectively whereby counterparty confirms are typically executed within seven days (except ENA - Weather transactions, which may take 3-4 months). • Middle and Back Office puts high priority on reporting daily against the Global Standards established by the Risk Controls Group in Houston. • Local office management actively provides oversight to commodities traded outside of Enron Australia P&L responsibility (i.e. Coal and Weather). • Credit consolidated across commodities to calculate total Australian credit exposure. • Segregation of duties exists between cash settlements and reconciliations. • Houston Treasury controls access to cash receipts and disbursements in the Austraclear clearing system; authorized local office personnel have no access to cash accounts except for local G&A expenditures. 8 Sydney Office Review – 04/01 Confidential

  10. Enron Europe Observations and Action Steps Priority Owner & Target Date Code No. Observation Root Cause Action Step Heidi Mason 6/30/01 The characteristics of SRA’s do not allow for input into Enpower without refining Enpower IT programming. SRA’s (A$ 9 million portfolio value) are not captured in Enpower and are valued in excel pivot tables. Accelerate efforts to get SRA deals into Enpower as this has been an issue since last Doorstep. Resource has been allocated in Sydney to the task and is currently testing the enhancements programmed to date. 1 Heidi Mason 6/30/01 It takes approximately four hours to run the P&L and DPR from Enpower and as a result is run overnight. This becomes a problem if books need to be re-calculated and prevents the trading group from receiving daily P&L until at least 10: 30 next day. . Problems exist within the Enpower version being utilized by Enron Australia that have not been adequately addressed. Identify IT resource that can assist users to significantly reduce the calculation run-time. New programmer hired in Sydney is currently reviewing the options for improvement, but Houston will be required to make any major improvements. 2 Priority Code: Low High Medium 9 Sydney Office Review – 04/01 Confidential

  11. Enron Europe Observations and Action Steps Priority Owner & Target Date Code No. Observation Root Cause Action Step Credit support has been managed in Houston and part-time in Sydney by a RAC resource which has prevented a complete set of credit tools from being developed. John Suttle (RAC) will be filling this role for Enron Australia when he relocates in the next few months. John Suttle 6/30/01 No Credit Watch Report is distributed for commercial personnel to reference. In addition, Coal Trading is actively pursuing markets in credit risk areas such as China and Indonesia. 3 Implementation by Treasury of an adequate Corporate policy to ensure currency translation risk is not an issue for remote offices. This issue was raised previously by the Sydney office with Management but no final resolution to date. A corporate-level policy will be developed in the near future. Enron Australia uses the Australian dollar as its functional currency and the US$ as its reporting currency and thus is exposed to currency valuation changes. David Port 9/30/01 Enron Australia has F/X translation risk when monthly P&L is converted to US Dollars for reporting purposes. F/X transaction risk does not exist because all transactions are executed in Australian dollars and are not converted into another currency. 4 Priority Code: Low High Medium 10 Sydney Office Review – 04/01 Confidential

  12. Enron Europe Summary of Deal Test Deal Test Sample 10 Power Trades 01 Settlement Residue Auction Trade 02 Weather Trades 02 Coal Trades - only tied contract to deal log as settlement takes place in London Summary of Findings • Did not substantially verify Credit’s approval to check if counterparty was approved and within limits at deal execution. However, credit approval and tracking process should be improved when permanent credit individual is relocated from Houston. • 1 deal ticket did not show evidence of sign-off by Head Trader. Local procedures require that Head Trader sign-off on all system deal tickets • 1 trade did not have an executed ISDA, which is in the process of being executed. Other • In general, local office was able to easily retrieve requested documentation and has effectively segregated most of the important duties. 11 Sydney Office Review – 04/01 Confidential

  13. Enron Europe Office Analysis Framework Market Structure Power Deals are financial, primarily OTC, and traded for quarterly or yearly terms. Physical trading market does not exist as all physical power within Australia is dispatched to users through a compulsory pool operated by the National Electricity Market Management Company (NEMMCO) Weather Market is still in its early development stage and focus is on educating potential customers on the advantages of weather derivatives. Enron Australia has executed sixteen Weather transactions since June 2000 with the majority of those transactions done with Aquila/Utilicorp. Coal Deals are physical and were executed primarily in markets in Japan, Indonesia and Australia. Current strategy is to continue to develop these markets and also expand into China and Malaysia. Metals Origination currently working to expand Enron presence in the Asia/Pacific market and facilitate potential cross-commodity transactions. Transactions conducted in the region will be executed through London Metals Group. Broadband/Pulp & Paper Business units currently studying feasibility of placing commercial resources in Sydney. 12 Sydney Office Review – 04/01 Confidential

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