Lumber Reload Facility

You asked that we share successes with you. I believe the attached
situation is an excellent example of out proactivity and mitigation of
operational risk.

As indicated below, once we learned of financial difficulties, we pulled
together a team which included Commercial to evaluate next steps. The team
went to Chicago and met with the owner of the reload facility business. He
had a financial representative present, and our concerns were validated. The
owner of the business currently leases the facility from the railroad, and he
has not paid his lease in 7 or 8 months. Additionally, he has not filed
federal income taxes for: payroll, corporate or personal business. He
estimates that he owes about $250M. The facility is not fenced so our
inventory of about $1MM is not secured. He did sign a one page document,
prepared by Enron legal, declaring that the lumber on site marked "Enron" was
in fact ours and was not owned by his company. This was a saftey measure in
case the IRS came in and started seizing inventory. All actions were
initiated by Energy Operations personnel.

The team also visited another facility, and in contrast to the first
facility, witnessed a more sophistocated operation. The business is
privately owned and audited by PriceWaterhouseCoopers Although they would
not share financial statements, PWC's audit opinion was provided.
Additionally, PWC prepares the taxes also. The team made the decision to
move the inventory to the new location ASAP. This decision was approved by
Houston Commercial, and efforts began to relocate the inventory.

I feel very strongly that had we, Energy Operations, not taken the lead, the
Commercial team would have continued in the original facility, leaving $1MM
of inventory at risk. Although they had sold about 50% of it, the inventory
would not have been delivered out of the faciity until about mid-March.
Commercial did not have any plans for the other 50%. While we certainly
don't know if the outcome would have been negative if left in the original
facility, we know that we certainly mitigated the potential risk.

Furthermore, last week I established cross-functional weekly meetings
between: Legal, Credit, Tax, Financial Reporting, Fundamental Analysis, IT
and Operations to ensure open lines of communication. In the meeting, I
discussed this issue, and everyone agreed that we needed to develop policies
and procedures for warehousing facilities. EIM currently has inventory in
about 15 to 20 facilities, some internationally. Kent Castleman has taken
the lead on this.

If you have any questions, please let me know.
---------------------- Forwarded by Brenda F Herod/HOU/ECT on 01/30/2001
05:55 PM ---------------------------

Enron North America Corp.

From: Brenda F Herod 01/24/2001 08:54 PM

To: Raymond Bowen/HOU/ECT@ECT, Jeffrey McMahon/Enron@EnronXGate
cc: Sally Beck/HOU/ECT@ECT, Kent Castleman/NA/Enron@Enron, Robert
Scheuer/HOU/ECT@ECT, Michael E Moscoso/HOU/ECT@ECT, Romney
Ruder/NA/Enron@Enron, Delmar Davis/ENRON@enronXgate,
Dan.Hamilton@SAPPI-NA.com
Subject: Lumber Reload Facility - Premier

Yesterday I was informed that there was a concern about the financial
stability of one of the reload facilities we currently use in the Chicago
area, Premier Reload Inc. I met with Romney Ruder, Lumber trader, Roy
Lipsett, Logistics, and Mike Moscoso, Lumber business controller, this
morning to gather information and develop a plan. This is summarized below.

General Information:

Premier is a facility we have been using for a few months, located in
Franklin Park within Chicago. We deliver to the facility via railcar, and
ship out via truck. We currently have about 3.8 million board feet, valued
at about $1 million, in the facility. During the holidays, we began
experiencing problems with our railcars not being unloaded timely. We have
been pressing for information, and are hearing rumors that have raised
significant concerns. Although Enron has not received written notification,
we learned today that Premier notified customers that they would not be
taking in any more products. Additionally, we have heard that the owner,
Jeff Leske, is closing the facility, and will be going to work for another
reload facility in Chicago, Reserve Marine Terminal (RMT). We have been in
negotiations with RMT for a long term arrangement, and much of the
information we have obtained is through our contact there. In fact, we have
diverted recent shipments to RMT. There is a rumor that Premier and /or
Leske may declare bankruptcy. There is a rumor that Premier has been
incurring "switching" fees with the railroad (IHB) and has not been paying
them. There is a rumor that Premier has not been paying employment taxes and
there are problems with the IRS. All in all, there are many rumors but very
few known facts.

Plan:

Met with Legal today to get advice. They recommended moving the product
ASAP, but until moved, we needed to confirm the product was marked as "Enron"
product, and that it is stored separately from other product. They are
drafting a contract to specify the arrangement with Premier. It will be
ready tomorrow.
Met with Credit. They are not a included in the reload selection process, so
the financial stability of the company has not been reviewed. A D&B was
pulled today, and it confirms a lien filed by the IRS on 6/22/00 for
$86,128. There is one suit pending by a trucking company in a nominal
amount, filed 1/13/00. The company is owned 100% by Leske, and was started
in 1995. Very little other information is available, and D&B did not assign
a PAYDEX score.
Mike Moscoso and Romney Ruder are going to the premises tomorrow to: gather
financial information, intentions of the owner and the associated timeline,
substantiate the inventory, and get the contract signed that Legal is
drafting. On Friday morning, Roy Lipsett will join them to meet with RMT,
discuss movement of the product and complete the negotiations.
Depending on the information gathered tomorrow, we will determine next
steps. If we start moving the product to RMT, the estimated timeline is
about 13 to 14 days, moving 10 trucks per day (total truckloads = 135).
Estimated cost for the movement is about is $25,000. Another $25,000 would
be incurred for unload fees at RMT if we can't get them to wave them. About
half of the product has already been sold, and will be delivered over the
next 5 weeks. Romney is working with customers to determine if they can take
the product earlier.

I will keep you informed as to the next events. However, we need to take
immediate steps to put a policy and process in place for warehousing
facilities. I have initiated weekly cross-functional staff meetings (Tax,
Legal, Credit, IT, Logistics, Fundemental Analysis, Accounting, etc.), and
our first meeting is scheduled for tomorrow. I will have this on the agenda,
and will lead the effort to develop the process.

Please let me know if you have any questions.

Brenda
x35778