1. Proposal as of 4/18/01 Donahue/Detmering/Busby / Ward
Proposal for Restructuring of Enron’s Positions with Sithe Independence
Proposal as of 4/18/01
Donahue/Detmering/Busby / Ward

2. Restructuring Proposal
Contents
Enron Positions
Restructuring Proposal
Transaction Overview
4/18/01

3. Enron Positions Tracking Account Basis Differential Account
Demand Charge Account
Combined Positions Cash Flow and Income
4/18/01

4. Enron Positions - Tracking Account
Account Basics
Account receivable from Sithe Independence for book and tax
Account sources from Enron’s Gas Services Agreement with Sithe Independence (rated BBB-, Baa3) which expires November 2014
Account changes by monthly Tier 1 and 2 additions or subtractions, interest compounding and any unpaid demand charges
Tier 1 and 2 have only had additions to date
Each Tier 1 and 2 addition represents negative Enron cash flow (gas purchases>gas payments) and has no direct tax or income effect
Interest compounding has no direct cash flow effect but is treated as current period income for book and taxes (therefore a potential indirect negative cash flow effect)
4/18/01

5. Enron Positions - Tracking Account
Account Basics (continued)
Beginning in 2002 and if then current account balance is equal to 50% of the plant’s current appraised value the account reduces by cash distributions from Sithe Independence
Sithe may raise legal arguments to delay these cash distributions
Cash distributions are subordinate to all other project expenses
Cash distributions limited to ~63% of total potential equity distribution
Cash distributions by themselves have no direct book or tax income effect
4/18/01

6. Enron Positions - Tracking Account
Account Basics (continued)
At the end of the agreement Sithe Independence may give the Sithe Independence facility to Enron rather than paying the outstanding account balance
When the account balance begins to exceed the expected end plant value, book and tax treatment will change for Enron
Enron will write-off, for both book and tax, any amount which exceeds the expected end plant value
Each write-off will equal the total Tier 1 and 2 additions to the account less any cash distributions from Sithe Independence
Tracking account cash outflow will match the amount of each write-off (these will be partially offset by the liquidation of the mtm accounts)
Enron will essentially be left with a “non-earning” asset on the balance sheet
4/18/01

7. Enron Positions - Tracking Account
Account Basics (continued)
Enron’s inability to recover any value above the expected end plant value has a significant negative cash flow and opportunity cost
At this time, Sithe Independence has no corresponding account payable on their accounting or tax books
4/18/01

8. Enron Positions - Tracking Account
Projected June 1, 2001 Account Balance
Projected to be $400 mm
Negative cash effect of interest compounding has been offset in 2001 by using a contra-account for both book and tax
4/18/01

9. Enron Positions - Tracking Account
Projecting the Account For the Term
Based upon Enron’s gas and power mid curves
Projections: Tier 1 and 2 Additions (all cash)
Additions of $100 mm for June to December 2001 and $152 mm for 2002
Increases from $137 mm in 2003 to $186 mm in 2014
Average additions of $159 mm/year for 2002 to 2014 for total additions of $2.2 bb
NPV of additions equal to $1.5 bb at 6%, $1.3 bb at 8% and $1.2 bb at 10%
4/18/01

10. Enron Positions - Tracking Account
Projecting the Account For the Term (continued)
Projections: Interest compounding using the contra account to reduce book and tax income
Dependent upon Enron’s view of the terminal value of the plant, continuing to use the contra account delays the beginning of the excess value write-off by lowering the rate of increase of the account by sacrificing all interest income.
4/18/01

11. Enron Positions - Tracking Account
Projecting the Account For the Term (continued)
Projections: Equity Distributions (all cash)
Since the projected tracking account by the end of 2001 ($525 mm) will already be greater than 50% of the expected appraised plant value, equity distributions begin immediately in January 2002
Distributions of $88 mm for 2002 and $85 mm for 2003
Increases from $80 mm in 2004 to $95.9 mm in 2014
Average distributions of $75 mm for 2002 to 2014 for total distributions of $971 mm
NPV of distributions equal to $592 mm at 8%, $533 mm at 10% and $483 mm at 12%
4/18/01

12. Enron Positions - Basis Swaps
Mark-to-Market (“MTM”) account in gas book
Amount in account is NPV of pre-tax cash LIBOR
Corresponding deferred tax account offsets expected cash taxes
As gas is delivered and payment received, the account is reduced and the payment flows through taxable income
Estimated MTM value of $75 mm on June 1, 2001
At this time, Sithe Independence has no corresponding liability on their accounting or tax books
4/18/01

13. Enron Positions - Demand Charges
MTM account in gas book
Amount in account is NPV of pre-tax cash LIBOR
Corresponding deferred tax account offsets expected cash taxes
As charges billed and payment received, the account is reduced and the payment flows through taxable income
Estimated MTM value of $200 mm on June 1, 2001
At this time, Sithe Independence has no corresponding liability on their accounting or tax books
4/18/01

14. Combined Enron Positions
Combined Current Positions
$400 in account receivable
$275 in MTM accounts
$112 in deferred tax accounts (adjustment for MTM accounts)
4/18/01

15. Combined Enron Positions
Incremental to the projections which drive the Tier 1 and 2 additions, the forward value of the combined positions is highly dependent upon the expected end plant value and discount rate
Plant value example
A $750 mm plant value delays income write-off’s until 2005
A $450 mm plant value incurs income write-off’s in 2001
Discount rate example for pre-tax value of plant at $750 mm
An 8% discount rate gives a pre-tax value of $274 mm
A 10% discount rate gives a pre-tax value of $216 mm
a 12% discount rate gives a pre-tax value of $170 mm
4/18/01

16. Combined Enron Position Valuation
Income and cash flow from projections (8% DCF - $750 Plant Value)
- The $750 mm plant value represents $274 mm of pre-tax and $400 mm of after tax NPV
- A $450 mm plant value lowers the pre-tax income to ($678) mm and lowers the pre-tax and after tax NPV of the combined positions to ($300) mm and ($236) mm, respectively
- The after tax value of the plant is higher than the pre-tax value since Enron’s tax basis in the tracking account, and subsequently the plant, is significantly higher than the plant’s value
4/18/01

17. Restructuring Proposal for Sithe Independence
Goals
Transaction
Steps
Valuation and Sensitivity
4/18/01

18. Goals of Restructuring
Increase Enron’s pre and after-tax income relative to the projection
Increase Enron’s pre and after-tax cash flow relative to the projection
Minimize possible current period loss
Efficient use of cash relative to other investment opportunities
4/18/01

19. Restructuring Transaction
Step 1 - Sithe Independence enters into Tolling Agreements with counterparties effective June 1
Step 2 - Sithe Independence amends Enron Base Gas Sales Agreement:
$400 mm loan to Enron to replace tracking account
Enron assumes Sithe Independence’s transportation agreements
Enron credits MTM accounts to step 3
Step 3 - Enron purchases 45% of the equity in Sithe Independence from Sithe Energy
4/18/01

20. Step 1 Details - Tolling Agreements
Tolling timeline
Indicative bids received March 26
Draft agreements transmitted to top bidders April 11
Final bids due late April
Negotiation of final agreements and amendments between Sithe Independence, Sithe Energies, tolling parties and Enron in May
Agreements and amendments become effective June 1
4/18/01

21. Step 2 Details - Gas Services Agreement Amendment
Conversion of $400 mm account receivable into a $400 mm note receivable
Note Characteristics
Interest rate % - equivalent to 14 year LIBOR plus a 120 bps spread
Amortization - 14 years interest only, 20 years thereafter mortgage style principal and interest
Security - Secured by current lien, subordinate to existing project debt
4/18/01

22. Step 2 Details - Gas Services Agreement Amendment
Conversion of $400 mm account receivable into a $400 mm note receivable (continued)
Rationale
Although the note will be subordinate to existing debt, when the period of principal repayment is reached the senior debt will have been retired
The senior debt is extremely over-collateralized given the ICAP-only nature of the restructured ConEd PPA
The note’s interest will be paid rather than accrue such that timing of cash flow will now match timing of income recognition for book and tax
Recent months’ growth in Tier 1 and 2 additions further accelerated the timing and recognition issue noted above and initiated efforts to solve the increasing account receivable (as witnessed by Enron’s ceasing to take interest income since January 2001)
4/18/01

23. Step 2 Details - Gas Services Agreement Amendment
Enron assumes Sithe Independence’s above market 3rd party transportation agreements
Does not include the NIMO and Empire agreements which will be used by the tolling party
Total of payments is equal to $302 mm at 8% NPV
Rationale
Enron expects to be able to resale the transportation for a portion of the total of the payments
Worst case projection of value is ($199) mm pre-tax cash flow and ($81) mm after tax cash flow over the 14-year term at 8% NPV
Enron’s projected pre-tax negative cash flow under the Gas Services Agreement is equal to the worst case projection for the transportation agreements by 2005
4/18/01

24. Step 2 Details - Gas Services Agreement Amendment
All remaining rights and obligations in the Gas Services Agreement are deleted and Enron applies the net value of the MTM accounts on its gas book towards Step 3 (equity purchase)
Net value is equal to $163 mm ($275 mm gas book account less the $112 mm deferred tax liability)
Rationale
Enron is indifferent to applying value to purchase equity as long as Enron is getting equivalent value
4/18/01

25. Step 3 Details - Enron Purchases Equity in Sithe Independence
Sithe Energies sells its 45% LP interest in Sithe Independence to Enron for $167 mm in cash
Distributions have a pre-tax cash flow of $268 mm and after tax cash flow of $138 mm at 8% NPV
Enron has an inside/outside partnership basis differential for tax which lowers tax income
20 years MACRS deduction of the equity difference
$36 mm of value at 8% NPV
Enron will need to utilize a “friend of Enron” ownership structure for the project until such time as Portland General is sold or Sithe Independence relinquishes its QF status
4/18/01

26. Restructured Valuation
Equity Purchase
Transport Liability
Equity Distributions
Note Principal and Interest
Pre-Tax Cash Flow
Tax Benefit of Tax Basis Adjustment
Tax Benefit of Transportation Liability
Tax on Equity Distributions
Tax on Note Interest
After Tax Cash Flow
- $mm’s at 8% NPV and $750 mm Plant Value
($167)
(199)
268
365
$267 36 81
(130)
(125)
$129
4/18/01

27. Transaction Summary Simplified Overview Risk Profile Change
Valuation Change
4/18/01

28. Simplified Overview Enron no longer has gas supply obligations
Enron replaces account receivable with note receivable still secured by subordinate lien
Enron assumes Sithe Independence’s 3rd party transportation agreements
Enron purchases a 45% LP interest in Sithe Independence
4/18/01

29. Risk Profile Change
Replacing the significant, unhedged and long dated commodity exposure with the capped loss exposure of the assumed 3rd party transportation agreement
Removal of plant terminal value exposure without prior ownership participation
Credit relief from rating agencies’ due to release of implied credit support of Sithe Independence’s senior bonds
Reduced reliance on project-derived equity distributions ($971 mm reduced to $518 mm nominal)
4/18/01

30. Risk Profile Change (continued)
Relief from litigation risk accompanying equity distributions
Assume similar QF/ “Friend of Enron” structure risk as in other QF facilities
Enron’s subordinated loan and LP interest in Sithe Independence might be difficult to monetize
4/18/01

31. Valuation Change Pre-tax Cash Flow – NPV After tax Cash Flow – NPV
Current
Status
($190)
(172)
Restructured
Status
$267
129
Change in
Value
$456
300
- $mm’s at 8% NPV and $750 mm Plant Value
- $167 mm Equity Investment achieves a 71% pre-tax return on capital and a 78% after tax return on capital when measured against the change in value
4/18/01