Rating Agency Discussion Merchant Plant Price Risk Proposal ® Rating Agency Discussion Merchant Plant Price Risk Proposal January 2000

Overview Merchant generators face significant financial hurdles Low credit ratings High coverage requirements Low leverage ratios This is particularly true for mid-merit and peaking units The financial community seems fixated on intrinsic value Profits from energy sales dominate the analysis Minimal consideration for extrinsic value (optionality) Possible reasons for this include: No familiarity with underlying commodity markets Lack of conviction around modeled future price lines Uncertainty with collateral valuations

Enron’s Perspective Unlike other lenders, Enron can: Manage the commodity price risk position Take possession of and operate the collateral to our best commercial advantage Be more creative with debtor restructurings Enron can consider other commodity and geographic alternatives Enron’s overall objective is to protect MTM earnings This represents an obvious commercial opportunity for Enron to earn fees assisting merchant generators to access lower cost of capital Absorb some merchant price line risk Concept is only valuable to merchant generators if we can accomplish an investment grade rating or at a minimum higher leverage at project level

Basic Business Deal Enron will enter into commodity price risk management contracts designed to provide a minimum amount of commodity revenues sufficient to meet at least 1.0x debt service On a par amount of bonds we will specify in advance Our obligations must not be considered a guarantee of debt or hit Enron’s credit or balance sheet on any basis other than a commodity price risk management contract Payments owed Enron under any contract will be secured by a second mortgage Subordinate only to senior bonds Exercisable after fairly short cure period Enron’s ultimate hammer over equity is the mortgage

Contract Features The two contracts require performance regardless of the operable status of the power plant The two contracts are not linked to each other as to performance Each of the two contracts can be terminated due to non-performance Payments required under the two contracts will exactly offset each other The two contracts are non-invasive on plant operations Financial only, no physical elements No effect on dispatch of plant, no consumption of environmental permit capacity, or influence on the marketing of capacity, energy and ancillary services

Basic Contract Diagram EPMI Financial - Buy Contract $ Fixed Project $ Formula floating Revenues: Energy, capacity, ancillaries Insurance proceeds, LD pmts. And all other $ Formula floating EPMI Financial - Sell Contract $ Fixed Financial contracts: Payor: Fixed D/S Receivor: Formula floating The positive difference, if any, between a market based index and a strike price = Fuel Price * heat rate + VOM. Based on continuing legal and regulatory work, the contracts may be written to the Project LLC, the Trustee for the debt or an intermediary SPV

Flow of Funds Revenues: Revenues from commercial activities Insurance proceeds, LD payments and other Order of expenditures: 1. Debt service and net payments under financial- buy contracts 2. Payments under financial-sell contract 3. Repayment of any other monies owed to Enron 4. O&M expenses 5. Replenishment of reserves 6. Equity distributions

Mechanics of the Two Contracts Enron’s contribution to project credit is in the respective positions of the two contracts in the flow of funds Net payments under financial-buy are on parity with debt service Payments under financial-sell are after debt service Both financial-buy and financial-sell contracts are terminable for non-performance Non-payment Bondholders are looking to financial-buy for minimum revenues to meet debt service Parity is not an issue since performance is necessary to assure a demand charge

Mechanics of the Two Contracts The MTM value of the two contracts will move in tandem and inverse to each other When one contract is “in the money”, the other contract will be “out of the money” Revenue deficiencies will likely appear under the financial-sell contract When market prices are low, the financial-sell contract will be out of the money to the Project Revenue deficiencies will show up as a payment default of the demand charge owed back to Enron Financial energy payments as calculated by the two contracts will always arise when the Project is in merit relative to market prices

Risk Allocation of Project Enron takes merchant price risk. This is mostly due to the susceptibility of the financial-sell contract to lower prices Lower than expected commodity prices will likely bring pressure on Projects ability to make payments to Enron Risks not covered by Enron Risk Mitigant Construction completion EPC contractor Unit operation Operator and equity Explosion, fire, etc Business interruption insurance Unit availability Market based LD insurance Most of the risks not covered by Enron are typically covered in the normal course of business for merchant generators

Enron Risk Management Strategy Enron needs to manage its risk position as if we were the senior lender Enron needs to have the option of assuming the senior position if we have to Enron must have the right to purchase the outstanding senior bonds when project is in distress Third party creditors (i.e. market based LDs) must be subordinate to Enron Hedging strategy from Enron’s perspective: Collateral value + market based hedge values >= par amount of senior creditors + other amounts owed Enron

Example: Simple Cycle Peaker Project development cost: $500/kw Par amount of bonds covered by Enron: $375/kw 75% leverage Typical leverage under merchant scenario: $250/kw 50% leverage or less Financing details Rating Term I-Rate EPMI product BBB 20-yrs. T + 175-200 Merchant B-BB 10-15 yrs. T + 350-500 Incremental equity returns of Enron’s concept vs. merchant is in the range of 5% - 10% against pro-forma future commodity prices

Example: Simple Cycle Peaker Debt = $375/kW $40/kW-year (20-years at 8.5%) Demand charge for both financial-buy and financial-sell = $40/kW-year O&M Expenses = $9/kW-year Debt service schedule ($/kW per year) Measure of Enron collateral value exposure is the market value of the plant versus its liabilities: Year: 1 2 3 4 5 Outstanding par amount: $375 $340 $276 $180 $37

Example: Simple Cycle Peaker Scenarios 3,6,9 - In each case, the net loss equals the financial-sell demand charge As long as the financial-buy contract is kept current, there will be revenues sufficient to pay debt service As long as the financial-sell contract is in place, there will be financial energy revenues sufficient to keep the financial-buy contract current Financial energy payments only arise when the Project enjoyed intrinsic value

Key Credit Points If the Project has zero intrinsic value, Enron will continue to make demand charge payments under financial-buy because the contract is current Financial energy payments offset each other. However, even if the financial-sell contract is terminated, the Project should be able to generate the energy revenues to keep the financial-buy contract current During periods of distress, the MTM value of the financial-buy combined with collateral value of the Project should be at least as large as the par amount of bonds outstanding Minimize risk of Enron accelerating bonds through exercising its our mortgage

Summary The financial-buy contract assures a minimum commodity market price The structure protects the zero intrinsic value case The structure eliminates systemic risk The principal credit feature of the two contract structure is their respective positions in the flow of funds As long as Enron makes payments under the financial-buy contract, bondholders are being paid The Project has to keep the financial-buy contract current There are risks relating to incompetence or some other counter party default Is the elimination of systemic risk enough to achieve an investment grade rating if other risks are covered by credit worthy counter parties?