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Sao Paulo Rev OAF by xiaopangnv


            Sao Paulo
        Office Visit- February 14-15, 2000
        Report Issued- February ___, 2000


DRAFT               February 2000
                                  Project Doorstep- Sao Paulo
                                           Review Highlights
Project Objective:

We performed an on-site review to gain an understanding of the processes, procedures and controls
within the Sao Paulo office. Our procedures included interviews with key commercial and
accounting personnel. We also performed a test of commodity transactions from deal execution
through settlement.

           Team Members:                             Key Office Personnel:
           Sally Beck                                Joe Kishkill - CFO
           Ted Murphy                                Don Black - VP Direct Sales
           John Sorrells - AA                        Kent Castleman - Controller
           Mike Jones - AA                           Brett Wiggs - VP Wholesale
           Kate Agnew - AA                           Plenio Prado - Treasurer
                                                     Sue Frusco - Houston
                                                     Christine Garcia - Houston

DRAFT                                       February 2000
                                Project Doorstep- Sao Paulo
                                          Current Portfolio
  Portfolio Profile:

  •5 third-party power transactions executed in the last 9 months (3 purchases, 2 sales)
  •All transactions are physical, fixed price
  •Term ranges from one month sale to recently signed nine year purchase (Moema)

  •All transactions were tested from deal execution through settlement.

DRAFT                                     February 2000
                               Project Doorstep -Sao Paulo
 Control Strengths:

 •Strong ex-patriot presence
      - Jim Bannantine, Joe Kishkill, Kent Castleman, Brett Wiggs, Don Black

 •Cash disbursements for commodity transactions are reviewed and approved

DRAFT                                   February 2000
                                                     Project Doorstep -Sao Paulo
 Observation                                                      Action Step                                                    Target Date
 Experienced and knowledgeable energy operations group not        Ensure adequate infrastructure to support origination and      September 30
 in place. Office personnel are strategic for assets and equity   trading model

 Positions and P/L are not aggregated daily                       Current positions should be captured, valued and reported      June 30
                                                                  using current available systems

 No pricing curves developed for Brazilian markets as of          Through market research, develop necessary pricing curves      February 29
 February 1, 2000

Two of the five contracts did not have English translations       Obtain certified English translation for all contracts         February 29

Commercial phone lines are not taped                              Establish taped commercial phone lines and retention policy    September 30

Cuiaba valuation models have not been independently               Perform comprehensive independent review of valuation models   June 30

Cuiaba WTI positions are not centrally managed with global        Transfer price WTI positions to centrally managed crude oil    June 30
crude oil positions.                                              positions.

DRAFT                                                               February 2000
                                  Project Doorstep -Sao Paulo
 Areas for Further Review:

 •Development and integration of Retail products and services
      - Direct sales group formed recently to target retail activity and total energy management

 •Integration of procurement activities into Enron South America
       - Elektro, the recently acquired LDC, is moving operations to ESA

 •Monitoring of Cuiaba operational risk
     - Operations are directed and records are maintained at the plant site in western Brazil

 •Supervision and interaction with other Southern Cone offices
      - Offices also exist in Rio de Janeiro, Buenos Aires, Cuiaba, Caracus, Bogota

DRAFT                                        February 2000
                                        Project Doorstep- Sao Paulo
                                        Office Analysis Framework
          Environment                             Management                                   Strategy
• Market currently does not support     • Current management primarily           • Increased focus on development of
  “open market” trading and rapid         strategic for assets and maintenance     origination groups:
  expansion of the trading model. (6      of capital investments.                    • Pursuing “shared savings” and
  deals to date)                        • Enron experience and culture                 energy management programs
• Regulatory authorities require all      present in commercial groups and           • Focus on “creating” electricity
  third-party and self-dealing            current supporting operations                and gas marketing.
  (Electro) commodity transactions to     groups.                                    • Pursuing 20-year long position
  be approved by Aneel (30 day          • Risk management and origination              in gas (27mmbtu/d @ index to
  period to deny)                         groups currently being developed             swap to fixed at ~$1.00)
• Currently no significant excess         and responsibilities defined.              • Focus on developing generating /
  electricity generation, market is     • Moving support for development of            offtake capacity to sell to Elektro
  supported primarily by hydro.           independent back-office function to    • Introduce trading model and pursue
• Stability established and               support trading and origination          organized effort to develop
  maintained for the local currency.      efforts.                                 independent back-office function.
• Contracts are accepted in English                                              • Elektro Positioning
  or Portuguese, these contracts are                                                 • Currently fully contracted
  required to be denominated in Reais                                                • Initial supply steps down 25%
  (with few Central bank exclusions).                                                  each year beginning 2002
• Industrials capital expenditures                                                   • 30% of capacity can be self-dealt
  directed at maintenance of current                                                     • 400-500 mw (2002)
  asset base, no significant                                                         • Anticipate growth potential to
  investment in long-term efficiency.                                                  manage

DRAFT                                              February 2000
                                       Project Doorstep-Sao Paulo
                                       Office Analysis Framework
             Systems                             Information                          Counterparties
 • No formal trading or risk           • Weekly trading position reports      • Focus on equity investments and
   management system support at this     (prepared in Houston) for South        asset portfolio (TGS, Elektro,
   time (will mirror Buenos Aires        America prepared for power and         Transredes, Cuiaba, BTB, Ceg,
   environment when appropriate).        natural gas. Crude oil positions       Riogas, etc.)
 • SAP implemented January 1, 2000       monitored daily.                     • Marketing positions between
     •Accounts Payable                 • Profit/loss from all trading           consolidated and unconsolidated
     •Financial Reporting                activities forwarded to management     (Electro) affiliates.
     •Project Management                 weekly by Houston risk               • Santa Erisa, Moema, Maringa -
 • Lotus Notes Databases                 Management.                            power counterparties.
 • ADP outsourced payroll              • Primary management reports:
     •To bring in-house during 2000        • Deferred cost analysis.
      using SAP Payroll module             • Weekly net income forecast (by
                                             business unit).
                                           • Budget / Actual cost center
                                                                              • Electricity - existing LDCs
       Business Processes              • Weekly cash position reports.
                                                                                  • Elektro fourth largest in Sao
 • Legal (Coordinate with Houston on                                                Paulo
   policy exceptions and litigation)                                              • ~25% of customers at risk
 • Local HR Admin, currently                                                  • Generation - Hydros, furnas
   outsourced payroll to ADP                                                    coming on-line with 800-1,300 mw
 • Local Treasury and Accounts                                                  nuclear
 • Project operations
 • Commercial - See attached
   reporting matrix
DRAFT                                          February 2000

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