Enron Europe Project Doorstep Enron Nordic Energy Oslo, Norway May 2001

1. Enron Europe Project Doorstep Enron Nordic Energy Oslo, Norway May 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 Nordic Energy located in Oslo, Norway. Our review procedures included interviews with key office personnel on May 14-16, 2001. We also performed a test of commodity transactions from deal execution through settlement. Doorstep Team Members Stacey W. White, Enron Net Works Cindy Horn, Enron Net Works Homan Amiry, Risk Assessment & Controls Office Personnel Interviewed Thor Lien, V.P. Ørjan Agdesteen, Manager Mid & Back Office Trond Branem Hanse, Power Risk Controller Berit Løkken, Acct & Settlements Controller Yumi Takei, Documentation Tim Rear, Systems Developer Didrik Thrane-Nielsen, Weather Risk Mgmt Rein Amund Schultz, IT Development Anita Stensbøl, Scheduling Peter Bekkestad, Power Risk Management Rune Hereton, Acct & Settlements Weather Questions? For further understanding of objectives or observations, please contact Stacey White at 713-853-1870 (swwhite@enron.com) or Cindy Horn at 44 207 783 74560(chorn@enron.com) 1 Oslo Office Review – 05/01 Confidential

3. Enron Europe Summary of Office Highlights Office Profile The office has approximately 60 local office personnel. Primary emphasis of office is marketing risk management products in Power and Weather. The office is also responsible for all Nordic Origination activity including Norway, Sweden, Finland & Denmark. A Structuring desk was recently created in the Oslo office led by Stefan Fastesson. Power P&L is consolidated within EEL; Weather P&L is consolidated within EGM. Most deals executed have been in Power which are primarily financial. Physical transactions consist mainly of partnership transaction entered into to service load in Norway, Sweden & Denmark. Counterparties Counterparties are primarily NordPool and various full-requirement partnerships. Most deals are cleared through NordPool. Transactions with NordPool make up approximately 80 percent of volumes. Competitors include TXU, Vattenfall, Statkraft and Morgan Stanley Capital Group. Transaction Data (As of 4/30/2001) 8,604 Power trades were executed with a total volume of 213 TWh. 87 Weather trades were executed. Weather trade deal types includes both swaps and options for Heating Degree Days, Average Temperature and Event Indexes such as Cold Temperature and Precipitation. 2 Oslo Office Review – 05/01 Confidential

4. Enron Europe Summary of Office Highlights Financial Data Year-to-date loss from power trading operations, including FX and IR trades, was (250)million NOK and from weather trading operations was (1.7)million US$. P&L is primarily impacted by curve shift and new deal; an options position existed during Summer 01 The one day VaR at 4/30/01 was US$ 1.77mm; VaR limit for Norway Power is US$ 5.0mm. Market Structure Power Over 90% of deals are financial, primarily traded on the Exchange. They have positions out to 2012, however over 80%, volumetrically, are in the next 2 years. Nordpool transacts up to 2004 so that is the extent of the transparent market . Weather The weather indices are mainly London and Paris. Many of these trades were publicity traded. _____ % of deals are financial, primarily traded on the Exchange, and traded for ____ terms. 3 Oslo Office Review – 05/01 Confidential

5. Enron Europe Comparison of Power Volumes Traded (’00 vs. ’01) 4 Oslo Office Review – 05/01 Confidential

6. Enron Europe Observations and Action Steps Control Strengths • Risk Management performs curve validation on a daily and monthly basis • Security and access rights were defined by staff roles • Daily DPR sent to London for review and consolidation 5 Oslo Office Review – 05/01 Confidential

7. Enron Europe Observations and Action Steps Priority Owner & Target Date Code No. Observation Root Cause Action Step Transactions with NordPool & Statnett resulting from physical spot deals are not entered into Power 99. They are maintained in scheduling spreadsheets for settlement purposes. Physical spot transactions are not captured in the trading system. 1 Agree. However, satisfactory controls and adherent routine descriptions are implemented to adress this specific issue. Functionally to be considered on subsequent release of Riskdesk. M The P&L 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 late the next day. Calculation engine takes one and half to two hours and is run overnight. L Ørjan Agdesteen, Ultimo July 2001. 2 Completed. A new risk management system, RiskDesk, is currently being installed. Expected to go live in July, 2001. Estimated time for the valuation engine is approx 45 minutes. Priority Code: Low High Medium 6 Oslo Office Review – 05/01 Confidential

8. Enron Europe Observations and Action Steps Priority Owner & Target Date Code No. Observation Root Cause Action Step Credit support has been managed in London by a RAC resource which has prevented a complete set of credit tools from being developed. No Credit Watch Report is distributed for commercial personnel to reference. 3 M Agree. Credit limit monitoring should be performed on a real time basis. This is being restricted by the current IT environment. In the interim a daily report should be prepared and distributed to traders showing counterparty limits and current utilisation of those limits. Rod Nelson, Credit The documentation team in Oslo have, arguably, the most manual roles to play in the process. However, changes on deals will not og unnoticed as risk management reviews and verifies all changes in the system on a daily basis (Rebooked report and Deal Audit report). Given the current routines, the residual risk is considered acceptable. On that basis, this observation has not been prioritised. However, we are awaiting development of Autoconfirm Phase 2 – i.e. the Web-based solution. This is expected to be implemented ultimo Q4 2001. Confirmation system has not been implemented in Oslo office. Secure system is not in place for the confirmation process. Templates are manually created in Word and changes to deals will go unnoticed and not reconfirmed unless documentation employee is told of the change. Furthermore, confirmations are not connected to GCP for counterparty specific data. M 4 Gail Hill, Documentation Q4 2001 Priority Code: Low High Medium 7 Oslo Office Review – 05/01 Confidential

9. Enron Europe Observations and Action Steps Priority Owner & Target Date Code No. Observation Root Cause Action Step Asian option deal type is not supported by Power99 code. Minimum requirement deals are never changed to actual in the system. Asian options and minimum requirement transactions do not liquidate correctly in Power99. 5 M Agreed. A new risk management system, RiskDesk, which is currently being installed will treate the Asians correctly. Expected to go live in July. Ørjan Agdesteen, Ultimo July 2001. Risk system does not generate a cash liquidation report by deal. Rather it creates a margin (MTM) liquidation report by deal. The task of comparing DPR liquidations to cash settled liquidations is not performed at a deal level until a difference between the two is noted. Once the differences are noted, the discrepancies are investigated and explained to commercial at a deal level through another reconciliation process. Due to current system restrictions, the reconciliation is first performed on an aggregated level. A process review associated with the implementation of Riskdesk will be completed.. M 6 Ørjan Agdesteen, Q3 2001. The system produces a settlement report by deal. The report is used for reconciling risk management system with invoiced amounts per settlement. As a result we are able to examine differences on a deal by deal level. Priority Code: Low High Medium 8 Oslo Office Review – 05/01 Confidential

10. Enron Europe Observations and Action Steps Priority Owner & Target Date Code No. Observation Root Cause Action Step • Action plan: • Continuous communication and regular visits to and from London covering all functionla areas (James New visited the Oslo office 7 times last year). • Internal org.charts will be amended to reflect appropriate London links. Being a satellite office, it is much easier to communicate with local personnel rather than with London. Some staff perceive the chain of command to be Oslo controller then commercial head rather than the London controller. In addition, current organizational charts do not show the appropriate link to London. 7 James New & Ørjan Agdesteen Continuous H 8 Transactions between Norway and London are not treated as inter-company in SAP; therefore, ‘Seller Rules’ does not apply. M Intercompany out of balances exist between Norway and London that are remedied through a top sided Hyperion balancing entry. Completed. Transactions between UK and Norway are recorded as intercompany transactions. Priority Code: Low High Medium 9 Oslo Office Review – 05/01 Confidential

11. Enron Europe Observations and Action Steps Priority Owner & Target Date Code No. Observation Root Cause Action Step Waiting for weather trading system. Weather trading is all handled in Excel – no trading system exists. 9 Plans has been made to build a RM system based on Enron Data Manager (EDM). This will be made step by step as functions are moved from the Excel based book to EDM. Due to the resource situation on IT development in Oslo and the split between GM and EEL of the weather trading the timing of this development has been postponed to Q4. Didrik Thrane-Nielsen Q4 L 10 Norwegian legislation does not allow Nord Pool to net payables and receivables. This issue is the responsibility of the Credit Department, London. The exposure is followed up periodically by Credit. See note from Minna Taponen, Credit. However, we are awaiting the promulgation into law of the recent netting regime proposed by the Norwegian government. If the bill will be passed, it is expected that power derivatives cleared through a licensed clearing house and OTC instruments becoming nettable against Norwegian entities, whilst weather deals remaining potentially cherry-pickable It is anticipated that these points of the bill will be promulgated into law before mid-year. Credit exposure related to Nord Pool is US$ 700mm. Minna Taponen, Credit Continuous H Priority Code: Low High Medium 10 Oslo Office Review – 05/01 Confidential

12. Enron Europe Summary of Deal Test Deal Test Sample 13 Power Trades 6 Weather Trades • Confirmation were dated 4 days prior to to the system deal dates on 2 deals • Enron and counter party have signed separate copies of the confirmation • Counter party name on the deal ticket was not Global Compliant • Confirmation bank swift code was different to that in global counter party for 2 deals 11 Oslo Office Review – 05/01 Confidential

13. Enron Europe Summary of Deal Test Summary of Findings Lack of systems requires staff to do manual checks and balances multiple times throughout the mid and back office process. This lends itself to human errors which was observed through the testing process. This problem is not unique to the Oslo office. As Oslo is a remote office it is very important to stress the importance of a high level of interaction and communication with London. This is critical for a remote office. Other • In general, local office was able to easily retrieve requested documentation and has effectively segregated most of the important duties. 12 Oslo Office Review – 05/01 Confidential