DRAFT - HPL Cushion Gas

1. DRAFT - HPL Cushion Gas Strictly Confidential & Subject to Attorney Client Privilege January 17, 2000

2. Pad Gas Obligation • Enron to transfer 65.5 bcf of Cushion Gas to AEP at Closing: • Treated as PP&E on the HPL balance sheet • Specific obligation under the Purchase and Sale Agreement • Uncertainty as to when Closing and transfer will occur: • Best Case: 1 April 2001: indemnify AEP for A/S costs, quick HSR approval • Expected Case: 1 June 2001: limited A/S repair required • Worst Case: 1 September 2001: delay in HSR process • Key Seller Conditions to Close: • Receipt of 3rd party consents - banks for the monetizations • Cost and impact of A/S line testing and repair known/agreed • Key Buyer Conditions to Close: • HSR approval - potential that AEP will have to sell power plant assets • IT Systems operational - ENA IT department installing systems link • Cost and impact of A/S line testing and repair known/agreed

3. Cost of Pad Gas Obligation • How big is the obligation? • As of 1/16, 5.5bcf x (April @$6.37, May@$5.97, June@$5.96) equals between $35MM to $33MM • Cost of a call option at 1/16 strip price ~ $0.70 provides for a total option price of $3.85MM • Hedge our 5.5 bcf obligation? If we do then, either: • High Probability Outcome: Enron has to satisfy obligation: • Option cost = $3.85MM, Gas purchase cost = $34MM, • Total Cost = $38MM • Low Probability Outcome: Enron’s obligation goes away: • Option cost = $3.85MM (may be in the money on the day) • Medium Probability Outcome: Obligation to deliver is extended • Option cost = $3.85 (roll option to a later date), Gas purchase cost: ? • Recommendation: Purchase a call option now: • Probability that we can get out of our obligation is low. • Option may be in the money or can be extended

4. Strategy for discussion with AEP • Raise the issue now with AEP? • Pros: The issue will come to light anyway and must be dealt with prior to Close. Addressing it now will not delay Closing. • Con:As soon as we raise the issue, AEP will want us to resolve it. This will gives AEP trading leverage for items/changes that they want in the deal • Recommended Strategy: • First: Engage AEP to establish a bid/ask for items they are interested in from ENA: • Allow AEP to purchase pad gas • ENA agrees to raise its A/S liability by from $15MM up to $50MM • Second: Make AEP aware of the 5.5 bcf shortfall as a 2007 liability that was mistakenly omitted from the HPL balance sheet. • Enron agrees to inject 5.5 bcf of gas into Bammel at end of the Entex contract, or • Enron agrees that AEP is only required to give us back the amount of Cushion Gas that is in Bammel upon Closing (60.5 bcf) • Third: Settle by striking a compromise: • Price that AEP purchases the pad gas • Enron assuming a higher liability for the A/S refurbishment liability.

5. Potential Cushion Gas Sale Structure • Current treatment of HPL Cushion Gas as PP&E: Monetized cushion gas: 50.0 bcf @ $2.90 = $[ ]MM Non-monetized cushion gas: 11.4 bcf @ $2.34 = $[ ]MM Unrecoverable cushion gas: 1.2 bcf @ $2.34 = $[ ]MM Total Cushion Gas 65.5 bcf @ [ ] = $ [ ]MM Less: Swap Cost of Monetized gas 50.0 bcf @ [ ] = $ [ ]MM Net PP&E Cushion Gas 65.5 bcf @ [ ] = $[ ] MM • Treatment of purchase of 5.5 bcf of Cushion Gas: • May be able to reclassify 5.5 bcf of Cushion Gas from PP&E to long term asset: • The 5.5 bcf of Cushion Gas would be written up from $2.34 to $6.00 to reflect the current market price of replacement gas • Cost of replacing the 5.5 bcf of Cushion Gas ($38MM) would be depreciated over the initial term of the lease (38MM / 30 yrs = $1.3 MM/yr ) • Default case is to depreciate ($38MM) over the term of the Entex Contract • Reflects Enron’s obligation to replace the Cushion Gas had the transaction not occurred. • Cost to Enron of $5.4MM / yr.

6. Potential Cushion Gas Sale Structure • ENA and AEP share the benefits of re-monetizing the Cushion Gas at a higher basis. • Enron sells the Cushion Gas to AEP and uses the proceeds to unwind monetization • Enron receives a call option on 65.5 bcf gas in Bammel at the end of the lease at a pre-agreed strike price [assume $3.00] • Enron’s call option is extended if AEP renews the lease. • ENA sells 60.5 bcf of Cushion Gas to AEP at a price that will pay for replacing the 5.5 bcf shortfall of Cushion Gas without incurring a loss: • Enron sells to AEP 65.5 bcf @ $2.67 = $174.6 MM • Enron records a gain on the sale of 60.5 bcf of Cushion Gas to AEP [60.5 bcf x ($2.67 - $2.34) = $20.1MM] • Enron records an offsetting loss on the replacement of 5.5 bcf of Cushion Gas [(5.5 bcf x ($2.34 - $6.00) = -$20.1 MM] • Enron’s net gain/loss position is 0; AEP’s basis in the Cushion Gas is $2.67 • AEP re-monetizes Cushion Gas subject to Enron’s [$3.00] call option at the end of the lease term (unless extended).

7. Potential A/S Liability Deal • Enron/El Paso each bear 50% of associated A/S line costs: • El Paso is operator and bears [ ] of initial cost • Enron bears 50% of the costs above …. • Line is currently back in service and additional work is being completed to meet Texas Rail Road Commission (TRRC) requirements. • ENA absorbs up to $15MM with respect to its share of costs to test and repair the A/S line to meet TRRC requirements • Upgrade 60 miles of pipe to allow for a smart pigging: $1.6MM • Smart pig line (w/ associated loss of load): $[ ]MM • Analyze data and make required repairs to pipeline: unknown cost - est. $5MM • If cost to Enron is above $15MM, then: • Enron can walk the deal, unless AEP forces Enron to close by bearing the additional cost above $15MM, or • AEP can walk the deal, unless Enron forces AEP to close by bearing the additional cost above $15MM. • Enron could agree to absorb up to $50MM of potential liability (est. of full replacement cost)