Mahonia Commodity Prepay Restructuring Proposal 7172000 Restructure Overview

Mahonia Commodity Prepay Restructuring Proposal 7/17/2000

Restructure Overview · Existing forward sale agreements are based on prices significantly lower than current market Forward Sale · Posting margin against the forward sale and the financial swap will tie up significant capital Volumes Prepay $ Mahonia · Chase wants to rebook physical forward under new physical master agreement Fixed $ Enron Chase Volumes Index $ Chase Physical forward Financial Swap · Restructure existing agreements by: – Amending forward sale agreement to revise the volumes due, and pay the market value of the volumes removed from the agreement – Terminate and cash settle existing financial and physical hedges with Chase – Execute new financial and physical hedges under existing and new master agreements – Obtain letters of consent from surety bond providers acknowledging the change in the structure of the forward sale agreements · Zero P&L effect

P&L effects · Basic prepay structure hedges price movement of a physically delivered cash flow with a financial contract · Cash delivered under the financial contract occurs 5 days after the beginning of the month; the physical contract cash settles 55 days after the first of the month · When market prices are equal to the financial hedge strike price, the financial swap pays nothing and all cash flows are settled on day 55 · When market prices increase, Chase pays Enron the difference between the market price and the strike price on day 5 under the financial hedge – Enron doesn’t return that money until day 55, when the cash is delivered under the physical settlement – Therefore, Enron has been booking earnings on the 50 days of “float” while market prices have been rising over contract strike prices – The value of the financial contract is defined to be greater than the value of the physical contract assuming that the time value of money is positive – The difference between the cash value of the financial contract and the cash value of the physical contract is really a cash settlement of earnings that were made on a markto-market basis as the financial and physical contracts were revalued during the market price increase · If prices had decreased, this gain would have been a loss

Restructuring Proposals · 6 prepays are currently outstanding with Chase – Sep-95 $225 MM - Natural Gas • – – – This prepay will expire in Sep-00 and therefore is not proposed to be restructured Dec-97 $300 MM - Natural Gas Jun-98 $250 MM - Natural Gas Dec-98 $250 MM - Crude Oil Jun-99 $500 MM - Natural Gas Jun-00 $650 MM - Natural Gas • This prepay was recently executed and therefore is not proposed to be restructured · Basic prepay restructure strategy – Reduce volumes required to be delivered under the forward sale agreement – Increase fixed prices in the financial hedge so that periodic cashflows are nearly the same as under the previous arrangement – Given similar periodic fixed cash flows, the outstanding prepayment obligation will amortize similarly without requiring alteration to the fixed/floating interest rate hedges

December ‘ 97 $300 MM · Balances as of July 31, 2000 – Existing forward sale volumes • • • Transco Sta. 65 TGT/SL Columbia Gulf La. 45, 000 MMBtu/d 40, 000 MMBtu/d 30, 000 MMBtu/d – Forward sale remaining volumes MTM value: – Existing financial hedge fixed prices • • • Transco Sta. 65 TGT/SL Columbia Gulf La. $(218, 596, 625) $2. 2244/MMBtu $2. 1794/MMBtu $2. 1394/MMBtu – Financial hedge MTM value: $96, 211, 925 – Existing daily cash flow: $251, 456. 00 · Restructure existing forward sale agreement by: – Proposed volumes would be: • • • Transco Sta. 65: TGT/SL: Columbia Gulf La. : 26, 000 MMBtu/d 17, 000 MMBtu/d 22, 000 MMBtu/d – Margin reference price would be: $3. 898/MMBtu on 65, 000 MMBtu/d – Applicable delivery dates would be: August, 2000 through December, 2001 – Value of the volumes removed from the FSA: $95, 032, 291

December ‘ 97 $300 MM (con’t) · Restructure financial and physical hedges by: – Existing hedges would be terminated – New financial hedge proposed volumes and prices would be: • • • – – Transco Sta. 65: TGT/SL: Columbia Gulf La. : 26, 000 MMBtu/d @ $3. 8500/MMBtu 17, 000 MMBtu/d @ $3. 7755/MMBtu 22, 000 MMBtu/d @ $3. 9626/MMBtu New physical hedge would be struck under new physical master with Chase Applicable delivery dates: August, 2000 through December, 2001 Value of the proposed financial hedge: $520, 650 Restructured daily cash flow: $251, 456. 30 · Transaction steps: – Enron restructures forward sale agreement with Mahonia, reducing volumes to be delivered according to the above proposal - in consideration, Enron would wire to Mahonia $95, 032, 291. 00 – The financial and physical hedges between Enron and Chase would be terminated - in consideration, Chase would wire to Enron $95, 691, 275. 00 – Enron and Chase would enter into new financial and physical hedges at the proposed volume and prices · The surety companies would provide a letter of consent agreeing to the amendments to the original transaction. Supporting letters of credit would remain in effect unchanged.

June ‘ 98 $250 MM · Balances as of July 31, 2000 – Existing forward sale volumes • • • Transco Sta. 65 TGT/SL Columbia Gulf La. 40, 000 MMBtu/d 25, 000 MMBtu/d – Forward sale remaining volumes MTM value: – Existing financial hedge fixed prices • • • Transco Sta. 65 TGT/SL Columbia Gulf La. $(220, 941, 369) $2. 35065/MMBtu $2. 30065/MMBtu $2. 25315/MMBtu – Financial hedge MTM value: $86, 607, 756 – Existing daily cash flow: $207, 871. 00 · Restructure existing forward sale agreement by: – Proposed volumes would be: • • • Transco Sta. 65: TGT/SL: Columbia Gulf La. : 25, 000 MMBtu/d 15, 000 MMBtu/d – Margin reference price would be: $3. 79/MMBtu on 55, 000 MMBtu/d – Applicable delivery dates: August, 2000 through June, 2002 – Value of the volumes removed from the FSA: $85, 908, 953

June ‘ 98 $250 MM (con’t) · Restructure financial and physical hedges by: – Existing hedges would be terminated – New financial hedge proposed volumes and prices would be: • • • – – – Transco Sta. 65: TGT/SL: Columbia Gulf La. : 25, 000 MMBtu/d @ $3. 7610/MMBtu 15, 000 MMBtu/d @ $3. 7553/MMBtu 15, 000 MMBtu/d @ $3. 8345/MMBtu New physical hedge would be struck under new physical master with Chase Margin reference price: $3. 79/MMBtu on 55, 000 MMBtu/d Applicable delivery dates: August, 2000 through June, 2002 Value of the proposed financial hedge: $109, 586 Restructured daily cash flow would be: $207, 872. 00 · Transaction steps: – Enron restructures forward sale agreement with Mahonia, reducing volumes to be delivered according to the above proposal - in consideration, Enron would wire to Mahonia $85, 908, 953. 00 – The financial and physical hedges between Enron and Chase would be terminated - in consideration, Chase would wire to Enron $86, 498, 070. 00 – Enron and Chase would enter into new financial and physical hedges at the proposed volume and prices · The surety companies would provide a letter of consent agreeing to the amendments to the original transaction.

December ‘ 98 $250 MM · Balances as of July 31, 2000 – Existing forward sale volumes • ARCO Cushing 391, 000 Bbl/month – Forward sale remaining volumes MTM value: $(269, 651, 460) – Existing financial hedge fixed prices • ARCO Cushing $16. 08/Bbl – Financial hedge MTM value: $103, 730, 044 – Existing monthly cash flow: $6, 287, 280. 00 · Restructure existing forward sale agreement by: – Proposed volumes and prices (delivery point is ARCO Cushing): • • Aug-00 to Jul-01: Jul-01 to Dec-02: 222, 000 Bbl/mo @ $28. 33/Bbl 260, 000 Bbl/mo @ $24. 19/Bbl – Margin reference price: Same as above – Applicable delivery dates would be: August, 2000 through December, 2002 – Value of the volumes removed from the FSA: $102, 393, 904

December ‘ 98 $250 MM (con’t) · Restructure financial and physical hedges by: – Existing hedges woul be terminated – New financial hedge proposed volumes and prices (delivery point is ARCO Cushing): • • – – Aug-00 to Jul-01: Jul-01 to Dec-02: 222, 000 Bbl/mo @ $28. 33/Bbl 260, 000 Bbl/mo @ $24. 19/Bbl Physical hedge would be struck under new physical master with Chase Margin reference price: Same as above Value of the proposed financial hedge: $287, 398 Restructured monthly cash flow: $6, 287, 450. 00 · Transaction steps: – Enron restructures forward sale agreement with Mahonia, reducing volumes to be delivered according to the above proposal - in consideration, Enron would wire to Mahonia $102, 393, 904. 00 – The financial and physical hedges between Enron and Chase would be terminated - in consideration, Chase would wire to Enron $103, 442, 646. 00 – Enron and Chase would enter into new financial and physical hedges at the proposed volume and prices · The surety companies would provide a letter of consent agreeing to the amendments to the original transaction.

June ‘ 99 $500 MM · Balances as of July 31, 2000 – Existing forward sale volumes • • • Transco Sta. 65 TGT/SL Columbia Gulf La. 50, 000 MMBtu/d 40, 000 MMBtu/d – Forward sale remaining volumes MTM value: – Existing financial hedge fixed prices • • • Transco Sta. 65 TGT/SL Columbia Gulf La. $(606, 701, 479) $2. 4862/MMBtu $2. 4612/MMBtu $2. 4623/MMBtu – Financial hedge MTM value: $179, 018, 630 – Existing daily cash flow: $345, 862. 00 · Restructure existing forward sale agreement by: – Proposed volumes would be: • • Aug-00 to Jul-01 Aug-01 to Jul-02 Aug-02 to Jul-03 Aug-04 to Jun-04 Transco Sta. 65 31, 000 MMBtu/d 35, 000 MMBtu/d 41, 000 MMBtu/d 44, 000 MMBtu/d TGT/SL 25, 000 MMBtu/d 28, 000 MMBtu/d 31, 000 MMBtu/d 35, 000 MMBtu/d Columbia Gulf La. 31, 000 MMBtu/d 35, 000 MMBtu/d 41, 000 MMBtu/d 44, 000 MMBtu/d

June ‘ 99 $500 MM (con’t) – Proposed margin reference prices would be: • • Aug-00 to Jul-01 Aug-01 to Jul-02 Aug-02 to Jul-03 Aug-04 to Jun-04 $3. 9888/MMBtu on 87, 000 MMBtu/d $3. 5385/MMBtu on 98, 000 MMBtu/d $3. 2285/MMBtu on 113, 000 MMBtu/d $3. 1509/MMBtu on 123, 000 MMBtu/d – Value of the volumes removed: $179, 526, 085 · Restructure financial and physical hedges by: – Existing hedges would be terminated – New financial hedge proposed prices on the restructured volumes would be: • • Transco Sta. 65 TGT/SL Columbia Gulf La. Aug-00 to Jul-01 $4. 0100/MMBtu $3. 9397/MMBtu Aug-01 to Jul-02 $3. 5518/MMBtu $3. 5176/MMBtu Aug-02 to Jul-03 $3. 2714/MMBtu $3. 1772/MMBtu Aug-04 to Jun-04 $3. 1875/MMBtu $3. 1772/MMBtu $3. 9697/MMBtu $3. 5160/MMBtu $3. 2385/MMBtu $3. 1554/MMBtu – New physical hedge would be struck under new physical master with Chase – Restructured daily cash flow: $345, 866. 14 · Transaction steps: – Enron restructures forward sale agreement with Mahonia, reducing volumes to be delivered according to the above proposal - in consideration, Enron would wire to Mahonia $179, 526, 085. 00

June ‘ 99 $500 MM (con’t) · Transaction steps (con’t) – The financial and physical hedges between Enron and Chase would be terminated - in consideration, Chase would wire to Enron $180, 753, 564. 00 – Enron and Chase would enter into new financial and physical hedges at the proposed volume and prices · The surety companies would provide a letter of consent agreeing to the amendments to the original transaction.

Action steps · Confirm prices and volumes are acceptable for each restructure (Chase) · Confirm that restructures are acceptable to Sureties (Enron) · Prepare documents (Enron, V&E) · Document review (Enron, Chase) · Trade execution & wire transfers (Enron/Chase/Mahonia)