Don Black Vice President, ENA Origination

1. Answering Key Strategic Plant Acquisition QuestionsInfocast Plant Acquisition Conference2/28 - 3/1 Orlando, Florida Don Black Vice President, ENA Origination

2. Today’s Subjects • What is your business? • What risks have you assumed? • What is your end-game? • Commercial Strategies • Enron Direction

3. “I’m in the business of owning and operating assets” Most auctions or development projects to date have been for baseload coal-fired or natural gas fired generators These units are not mobile You have not just invested in assets, you have invested in a market area Returns begin with revenues… revenues begin with wholesale and retail customers Assets are COGS or at best allow you to arb. MMBtu markets What is your business?

4. “I’m in the business of owning and operating assets” “We want to be the low cost provider” Baseload units are price-taking units because they are usually always in merit Assuming you planned to be an efficient operator when you bought/built the units, then your investment is in a pro-forma price line Returns will be determined by your ability to realize or exceed that line… this is a marketing business, NOT a operating business What is your business?

5. “I’m in the business of owning and operating assets” “We want to be the low cost provider” “We build against long-term tolling/off-take agreements” This is just a variation of the regulated ROR model Your contract counter-party will try to reverse engineer and negotiate around your equity returns If Enron were to toll through your plant, then why would we pay more than we would any other lender? Enron will pay you to wear risk: firm power termination, extension options Nothing wrong with this business, just realize what your doing What is your business?

6. “I’m in the business of owning and operating assets” “We want to be the low cost provider” “We build against long-term tolling/off-take agreements” “We own assets to support our commercial businesses” This is the Enron model Assets are hedges against commodity pricing and physical flow related risks If Enron can’t buy, we will manufacture an offer: by building assets by tolling from others by marketing arrangements Requires sophisticated risk management and pricing algorithms What is your business?

7. Merchant price line A pro-forma is a static, snapshot of your best market guess An economic dispatch model does a poor job of modeling: panic, regulatory intervention, hoarding, dumping, and seemingly irrational behavior Think of price lines in the context of their PV effect How much of a curve shift is required to wipe out your equity? What risks have you assumed?

8. Merchant price line Fuel price line Generators are conversion devices…converting fuel into electricity Fix the fuel cost and you have created a fixed price offer The real issue is correlation… What are the relative price movements, volatilities of fuel vs. output What do changes in correlation do to your equity returns? What risks have you assumed?

9. Merchant price line Fuel price line Firm, LD market Most major wholesale market participants prefer a firm product with liquidated damages This is, of course, at odds with mechanical equipment which will break at times Market based LD’s in an illiquid market can kill you Equity investment is always at risk but if you limit credit to the LLC to protect yourself from market based LD’s, you may hinder your market access What risks have you assumed?

10. Merchant price line Fuel price line Firm, LD market Environmental Who knows exactly what the future holds for environmental costs What will be the cost of compliance? NOx traded at $7000/ton, if you could find it How sensitive is your pro-forma to environmental issues? What risks have you assumed?

11. Merchant price line Fuel price line Firm, LD market Environmental Many others A fixed asset is a fixed target for: Regulators Environmentalists Competitors ISO effects Some of these risks are unhedgeable Diversification could be the key to survival What risks have you assumed?

12. Dominant national generator If lights are to stay on, someone has to generate Size is everything in the game Need to push the envelope of monopoly power Risk mitigation through asset, location, fuel diversification Arbitrage returns will be a function of asset optimization against the grid What is the end game?

13. Dominant national generator IPO Could fit with the dominant national generator theme Everybody wants to be AES & Calpine Yet EIX, NSP, SO, REI have yet to realize benefits of asset strategy in stock price…why do we think an IPO would realize it? Equity capital markets seem to be ignoring heavy industry lately in favor of NASDAQ Major risk is that someone beats you to the market and performs poorly What is the end game?

14. The IPO Goal: 40-50x Earnings

15. Dominant national generator IPO Sell to a balance sheet player Ride the auction wave Sell to someone that will pay you for the opportunity to be large Key is cost basis It’s hard to beat a national player at auction and then resell at profit Reliant buys Sithe/GPU Must be creative to execute, extract value in other ways What is the end game?

16. Dominant national generator IPO Sell to a balance sheet player Midsize regional player The modern business dynamic seems to be heading in a direction of “winner take all” Microsoft GE (#1 or #2 or out) Internet Co’s - very few will grow into their valuations Concept is to gain increasing margins as you gain size Midsize players by definition lack the flexibility and scope to compete in this dynamic market What is the end game?

17. Know your risks You can’t hedge/manage something until you know what it is Run stochastics against equity returns, ability to meet end game objectives Determine what effects your business most dramatically and act accordingly Transact, don’t worry too much about what the other side is doing Commercial strategies to accomplish goals

18. Know your risks Find help If its difficult to build…hire it! Enron has spent hundreds of $ millions in risk analysis and controls Can you afford to do the same? A good trader/deal-maker will cost you $$, but nothing when compared to your initial investment A good partnership has an alignment of interests this does not mean guarantees Negotiate deals…you’ll get better service Commercial strategies to accomplish goals

19. The Value Creation ProcessReal Option Theory • Power plants must be viewed as “real” options with the ability to convert one form of energy to another. The valuation of power plants can be modeled as a strip of spark spread options • Valuation of options are calculated based upon the volatility of prices in the applicable energy commodity market(s) • Power plants are multi-dimensional optimization problems and cannot be analyzed in a single variable world • multi-commodity and intra-commodity price movements • Operational constraints • Behavior of competitors (game theory) • Intangible considerations (regulatory, legal) • Replacement economics, technology improvements, etc. • Real Option Theory indicates that plants have value even when not on the margin (intrinsic vs. extrinsic value)

20. Valuation MethodologyIntrinsic vs. Extrinsic Value

21. Know your risks Find help IPO end game? Calpine, AES enjoy high multiples because of their growth story Calpine, AES do not wait for auctions, they build What is your growth story? Feed the beast with permitted sites, slots in turbine que, etc. Build or hire a trading and risk management function to help optimize earnings Consider merging with another IPP player to gain scale and scope Exchange assets for shares First IPO could set standard Commercial strategies to accomplish goals

22. Commercial strategies to accomplish goals IPO Player 1 Assets IPO New Co. Equity Markets Shares Assets $ Marketing Agreement IPO Player 2 Shares Nationally Recognized Marketer

23. Know your risks Find help IPO end game? Dominant National Player Need to grow fast Consider exchanging services for assets POLR service to Wires Co. Exchange customers for assets to Customer Co. Ancillary services, derivatives, basis hedges to Trading Co. for assets, sites, que slots, development capital Only way to optimize your strength is through a trading and marketing function Commercial strategies to accomplish goals

24. 1996 Enron Global Power & Pipelines to Acquire Interest in Centragas Natural Gas Pipeline Enron Capital & Trade Resources Finances Buyout of Hardy Oil & Gas, USA Enron/Amoco Solar to Form Solar Rooftop Joint Venture in Japan Enron Corp. Announces Plans to Develop Gas Processing Plant in Vietnam Enron Global Power & Pipelines Acquires Interest in Dominican Republic Power Project Enron Purchase Shares of Portland General Corp. Northern Border Partners, LP Invests in Coal Slurry Pipeline Enron Corp. Signs Energy Conversion Agreement with Guam Power Authority 2000 Enron Launched EnronCredit.com, the First Real Time Credit Dept. for B2B Customers Enron Wins 3-Yr. Contract to Stream Broadband Content for Digital Entertainment Network Enron and Chase Manhattan Bank Sign Long-term Energy Management Agreement Enron and Sun Microsystems, Inc. Team to Accelerate Adoption of Broadband Internet Services Enron Launches Global Web-Based Commodity Trading Site Enron Entity to Purchase Las Vegas Cogeneration Enron Communications Introduces Global Bandwidth Commidity Market Columbia Energy Services Sells Wholesale Energy Marketing Operations to Enron What is Enron Doing?Headlines: 1996/2000 Assets, commodity, finance Retail, internet, broadband

25. What is Enron Doing?Evolution of Business Models EOG GPG ECT-Gas ECT-Power ECT-Coal ECT-Weather PGE AZX EES EBS 1995 1996 1997 1998 1999 2000 Growth Business Cash Cow Mature Business

26. What is Enron Doing? • Opportunities with new business requires capital • Enron North America seeks to continue to expand our wholesale business to raise that capital: • Retain leadership position • Expand beyond hubs into market areas • Assume and manage risks related to our core businesses • More client-agency relationships versus principle counter-party relationships • Enron will accomplish goals through: • Selective acquisition, origination of contractual positions • Asset management and other service relationships with IOU’s, LDC’s, merchant generators • Expand marketing force and penetration into down-stream, mid-stream and up-stream businesses • Continue to expand product offering

27. Heat rate contracts If your investing in a market area, wouldn’t a commercially equivalent contract get you to the same point? For example: (Index-power) - (Index-fuel) *10.000 is equivalent to a 10,000 HR generator in a market area determined by power and gas references Creates mechanism for risk diversification for both generators and load Potential New Products

28. Heat Rate Contracts Sell: 500 MW @ 6500 Buy: 250 MW @ 10,000 Buy: 250 MW @ 15,000 All for 5-years HR HR 15,000 15,000 10,000 10,000 5,000 5,000 500 1000 MW’s 500 750 1000 MW's • Single CC Plant, 6,500 HR • in market area • Portfolio equivalent • Monatize value of 6500 HR • Convert portion of position • from price taking to price • setting profile

29. Heat Rate Contracts • 500 MW SPP CC • 500 MW Com Ed Coal • 1,000 MW; 6,500 HR • CC facility in SPP Sell: 500 MW, 6,500 HR for 5-years referencing Henry Hub & day-ahead SPP index Buy: 500 MW, 8000 HR for 5-year referencing PRB & day-ahead Com Ed index • Net result is geographic diversification

30. Heat rate contracts Emission management services Enron will enter into an executory contract for emissions management Fixed price & long-term Enron assumes emissions credit price and technology risk Create certainty; helps to price auction bids; hedge environmental cost exposure Potential New Products

31. Heat rate contracts Emission management services Financing assistance Enron will assume merchant price line risk to support project credit Product is non-invasive to equity pro-forma returns or plant operations Product designed to “bridge” period required to develop earnings history & refinance on more favorable terms Net result: Investment grade More leverage Longer terms bps of savings Potential New Products