FX Taskforce Phase One

1. FX TaskforcePhase One December 2000 Version Date: 4 January 2001

2. FX Taskforce • Taskforce Issues and Objectives Why was there a taskforce? • Overview of FX Exposure What FX risk do we actually have? • FX Responsibility by Function Who should be accountable for FX? • Systems Overviews How to capture FX exposure? • Management Information Flow How to manage FX exposure? • High Level Changes Required What changes need to be made? • High Level Implementation Plan Who is going to track the changes?

3. Taskforce Issues and Objectives • FX Issues • Exposure is unknown • Hedging policy for trading exposure is not well understood or adhered to • Exposure is sometimes unidentifiable within the commodity book • Accountability and performance measures are unclear • A formal hedging policy does not exist for non-trading costs • Objectives • Establish FX framework detailing: • Responsibilities • Internal control structure • Performance measures • Outline implementation plan identifying: • “Quick wins” • Systems implications • Management reporting • Hedging strategy i.e. authorised instruments and counterparties

4. Current Overview of FX Exposure Transaction Currency Local (EEL) Currency Book Currency Enron Corp Currency e.g. Mainly GBP* CHF EUR USD Economic/ inherent exposure Transaction exposure Book to local currency exposure Translation exposure arising on consolidation Respon sibility NO ONE! Traders Traders Financial Operations KPIs 2. 1. Traders measured on gross margin by book currency as reported on management reports Enron Europe’s performance is measured on USD equivalent gross margin and net income based on management reports FX Book profit and Book profit and Company profit and CTA reserve Impact loss loss loss on a/cs Monthly gross margin reporting to Houston is computed directly from Book to Group currency at month average rate Financially reported gross margin is computed from Book to Local at spot and then translated from Local to Group at month average

5. Example of FX Transaction Exposure Transaction Currency Local (EEL) Currency Book Currency Enron Corp Currency Summary DPR CHF EUR GBP USD ManagementReporting Enpower MthAve spot 1. Power Trade: Day 1 1000 600 650 0.923 0.65 Power Trade: 1000 Day 30 spot 620 660 MthAve 0.66 0.939 -10 FX Hedge MTM: -9 1. 2. 650 611 SAP SAP Local SAP Month End FinancialReporting Transaction Ledger CCY Translation CCY USD Day 30 Euro MTM GBP MthAve 2. P&L spot 650 390 573 cr 1.47 0.6 3. 3. Mth endspot B/S spot 650 390 585 dr 1.5 0.6 CTA B/S 12 cr • Implications: • The management reported P&L is exposed to intra month EUR/USD movements. In the above example this has resulted in a USD11 movement • The management reported P&L of USD611 is USD38 different to the financial P&L of USD573 • Even though the trader has hedged the CHF trade to EUR, Enron still remain exposed to EUR/GBP (spot) and GBP/USD (spot and month average) exchange movements

6. Proposed FX Responsibility by Function Office of the Chair Commodity Trading Financial Ops • Report G&A FX exposures to FX desk • Report translation exposures to Treasury • Report book to local exposure to Treasury on a monthly basis • Enforce policy/ control framework Risk Management • Manage economic and transaction exposure to book currency • Alter hedges when size of exposure changes • Monitor and report economic and transaction exposure to book currency • Report book to local exposure to Treasury on a daily basis Settlements Treasury FX Book • Manage the rollover of hedges, cash and funding based on forecasts from settlements • Manage book to local exposure (conversion p&l) • Manage Balance Sheet exposure for trading and non-trading books • Manage cash to local currency or currency of funding • Match cash receipts to debtors • Produce cash forecast (minimum short term requirement is 30 days forward) • Execute hedges • Actively manage consolidated transaction exposure • Actively manage G&A FX exposure

7. “Plan A” Short term fix Capture FX trading economic and transaction exposure information through a front end Management Information System (MIS) which could be excel based “Plan B” – Strategic Multi-currency balance sheet for each trading desk Traders responsible managing allocated items on balance sheet to book currency This option would require balance sheet items to be broken down into profit centres Two Options for Capturing FX Exposure

8. Infinity FX hedges Key System already exists System Process Commodity Trading Risk Management FX Book Treasury Settlements Financial Ops Systems Overview- Daily trading exposure management Excel Consolidated cashflows Excel Transaction exposure management by currency and book Summary DPR cashflow for managing trading Risk Management transaction exposure System Deals booked in transaction currencyand legal entity identified Excel Excel Consolidated Mapping from book to Book to Local exposure management trading book to local local currency exposure Monthly reconciliation SAP Monthly book to local balances

9. Key System already exists System Process Commodity Trading Risk Management FX Book Treasury Settlements Financial Ops Systems Overview- Monthly/Quarterly non-trading transaction exposure management SAP Actual costs in transaction, local and group currencies Excel Consolidated G&A by transaction, local and group currencies Adaytum Comparison to budget (USD only) Local GeneralLedgers (i) Actual costs in transaction currency Trial Balance Used in upload process, reporting in local currency Excel High level calculation of FX impact on G&A and review of hedging policy as appropriate (i) This is required for entities whose primary reporting system is not SAP such as Metals, Australia, Japan and Teesside. Apart from metals, reporting of G&A costs in transaction currency will only require monitoring annually depending on materiality and growth

10. Key System already exists System Process Commodity Trading Risk Management FX Book Treasury Settlements Financial Ops System Overview – Monthly translation exposure management Excel SAP (i) Consolidated P&L and Local to group currency balance sheet balance sheet and P & L translation exposure (i) Hyperion (sourcing its data from SAP) is the current consolidation tool, however there are plans to use SAP as the consolidation tool in the foreseeable future

11. Key Management Information Process Commodity Trading Risk Management FX Book Treasury Settlements Financial Ops Management Information Flow – Trading foreign exchange transaction exposure management Traders hedge exposures to book currency to expected date of cash receipt / payment Analysis of incrementalcommodity& FX hedge cashflows MIS Consolidated transaction to book currency exposure FX desk places hedge with external market Commodity deal ticket identifiesexposure FX desk monitors and manages consolidated transaction exposure daily Traders alter FX for significant movements in exposure amount / timing Suggested KPI: Exposures are managedwithin defined limits

12. Key Management Information Process Commodity Trading Risk Management FX Book Treasury Settlements Financial Ops Management Information Flow – Trading cash management Unliquidated dealsin maturity order • Suggested KPIs • Treasury should be measured on the maximum cash balance held in bank accounts overnight • Treasury should be measured on investment return Infinity FX hedgecashflow Cashflows from commodity trades and FX hedges settled by settlements Short term cashflow forecast produced by settlements Treasury manage cashto currency of funding / local currency Accruals - liquidatedbut not invoiced Daily cash position reporting SAP Accounts payableAccounts receivable Daily bank balance reporting

13. High level changes/action required to implement FX framework “Quick wins” highlighted in blue Office of the Chair Financial Ops Commodity Trading Risk Management • Review profit centre/ legal entity structure proposed by CFO and align book and local currencies where possible • Record all commodity deals in transaction currency • Alter Infinity reporting to incorporate movement in positions and profit & loss • Consolidate and report G&A by transaction currency • Consolidate and report book to local currency on a monthly basis to Treasury • Report historical and forecast translation exposure to Treasury • Capture consolidated economic and transaction exposureand report to FX desk • Capture daily trading book to local currency exposure and report to Treasury FX Book Settlements Treasury • Need to receive consolidated transaction exposure information • Need to receive forecast consolidated G&A exposure by transaction currency • Execute hedges for G&A, book to local and local to group as appropriate • Produce a cash forecast which captures unrealised, accruals (liquidated but not invoiced) and outstanding invoice data – initially to meet short term objectives • Manage the rollover of hedges based on forecasts from settlements • Manage book to local exposure on a daily basis (conversion p&l) • Manage translation exposure

14. High Level Implementation Plan

15. High Level Implementation Plan

16. High Level Implementation Plan

17. High Level Implementation Plan

18. Next Steps… • Review year end exposure value as at 31 December 2000 for the following: • UK Gas • Continental Power • Spanish/Italian proposed power plants • G&A • Funding • Metals balance sheet • Trakya • Sarlux • J Block

19. Next Steps… • Continue with taskforce approach to implement agreed changes: • Review profit centre/ legal entity structure proposed by CAO and align book and local currencies where possible • Establish feasibility of recording deals in transaction currency in all Risk Management Systems • The flexibility to hedge FX is removed from the commodity desks, with the exception of options and volumetric fluctuations • Book to local exposure should be regularly reported and monitored • Forecast FX translation exposure should be captured, reported and monitored • Develop detailed implementation plans