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Enron Mail |
Please excuse the long e-mail below - I knew we'd never get a chance to all=
get together, and this is somewhat urgent as I have to complete the Financ= e Committee presentation for the upcoming BOD meeting by the end of next we= ek, and it will include trading results for the 1st quarter, reported in ac= cordance with the risk management policy. Due to issues noted below, this = may require immediate attention by your staff as we have a few short days t= o come up with the best quality numbers we can. I talked to Beth already, = and MRM met with Chris Abel's group to see if there was a short cut, but ou= r joint conclusion was that the business unit controllers need to be involv= ed in this process as you are the experts on your businesses and can apply = the best judgment to decide on the trading results to be reported to the BO= D. We'll probably need to go with our best estimate of 3/30 #s as of end o= f the day next Tuesday or Wednesday at the latest. As you recall, the February 12th BOD meeting resulted in a clarification th= at the BOD approved trading limits were limits on the generic commodity gro= ups defined, and accordingly the trading results must be reported consisten= t with that limit structure (management reporting can be different of cours= e). Chris Abel's global energy operations group has prepared a "RAC" DPR t= hat attempts to aggregate the commodity groups in accordance with the risk = management policy, so that top management and the BOD can see Enron's expos= ure to individual commodities on a consolidated basis. (A) This DPR wil= l not impact actual sharing of P/L from a management reporting/business uni= t perspective - this is purely for market risk management purposes and repo= rting to the BOD. But commercial management will need to review and sign o= ff on the RAC DPR and monitor limits accordingly, as these limits are at an= Enron level. The specific trading results we need for the BOD presentation are the first= quarter P/L and average daily VaR, by commodity group. The first RAC DPR = available is as of 3/30 - so while it has cumulative P/L, VaR is only as of= 3/30. (Note - we're also comparing to 1Q 2000, but we're not going to at= tempt to resolve cross-commodity reporting for that period except at a high= level). Your participation is needed in resolving: 1) cross-commodity reporting per= the new RAC DPR - both retroactively for the 1st quarter, and going forwar= d, and 2) ROVAR (return on average daily VaR by commodity group) for the 1s= t quarter. This aggregation of cross-commodity activity has been completed= by Chris as of 3/30, so he has what he believes to be P/L aggregated for t= he quarter in accordance with the policy. What we don't have is VaR on a da= ily basis as the first time it was calculated on an aggregated basis was on= 3/30. Obviously we're not going to be able to go back and calculate daily= VaR for the entire quarter by commodity group aggregated in this new manne= r - especially within a week. So it appears we'll need to "swag" average d= aily VaR - by reviewing the cross commodity positions aggregated at 3/30, b= y considering cross-commodity activity you're aware of that took place thro= ughout the quarter, and using our best estimate of the impact on VaR for th= is cross commodity activity. =20 Due to this adjustment in historical reporting practices, we feel a certain= level of due diligence is required for us to feel confident we're reporti= ng to the BOD in accordance with the policy. And since we only have a few d= ays, I thought a team approach to tackling the review would facilitate a pr= ompt resolution of material issues, and then you and Chris' group can work = out your processes and procedures on how to handle going forward as you see= fit. When you consider materiality, please involve your Market Risk conta= ct - while a transaction/position/book may not be material to gas or power,= it may be material to Global Products, Weather, etc.. Would you please help us with the following: ?=09Confirm your review of Chris' aggregation on the RAC DPR at 3/30 (Chris= ' staff can walk you through) ?=09are all the cross-commodity positions you're aware of being reported co= rrectly? ?=09is there other cross-commodity activity not present at 3/30 and consequ= ently not aggregated for the quarter's results, but actually present during= the first quarter and material? If so, estimate impact on P/L and average = daily VaR. ?=09we're not expecting an exhaustive search or analysis - perhaps you can = simply discuss this issue with the traders who handle this type of activity= to get a feel, and if they point on specific material transactions, we can= address those; you can determine best approach ?=09are there certain books in RisktRAC that have cross-commodity positions= imbedded/combined - either held currently or those that generated signific= ant VaR or P/L during the quarter? Going forward these will need to be rep= orted separately to facilitate risk reporting, but in the next week what we= need is an estimate of the impact on the corresponding commodities, or a c= onclusion that the impact is immaterial. ?=09Once you've reviewed the summary of cross commodity activity per the RA= C DPR and per your own knowledge, help us estimate the impact on the respec= tive commodities' average daily VaR for the quarter - you can discuss with = your market risk contact your recommendation on a reasonable "swag" approac= h. After considering the information above, please provide your assessment on = whether you are in fact able to capture and report all the cross-commodity = activity, and if not, identify the issues involved and whether it is someth= ing that market risk needs to address, or if it will simply take more time = to resolve the reporting details. If you have other recommendations on how to get comfortable with the tradin= g results for the quarter, please feel free to pursue those. I do not mean= to imply I know how to do your jobs, or that you're not doing them - I sim= ply want to coordinate with you to ensure the #s we report to the BOD are t= he numbers you agree with, and that if they're not completely accurate give= n recent implementation, that we are able to articulate and estimate the po= tential misstatement, if any. As you are the experts on your businesses' r= esults, I simply wanted to make sure I closed the loop with what we in MRM = understand regarding your reporting of the cross-commodity activity and tra= ding results and the application of the policy. On a separate note, we need you to identify P/L related to special transact= ions that flowed through the DPR, but do not really represent trading activ= ity - examples in the past are SFAS 125 transactions and other unique gain/= loss events - we're reporting 1Q 2001 and 1Q 2000, so whatever we can recal= l about last year will also be considered. We will be sending you a reconci= liation from the DPR to the BOD package that we use to document any special= adjustments, and will discuss this with you to come to an agreement on adj= ustments to the DPR reporting to derive true trading activity. These adjust= ments should be minimal, but we'd like your input to conclude. =20 Thank you for your cooperation, Regards, Cassandra Schultz x30429 713 858 2618 cell 936 321 2185 home (A) For example, North American Electricity limits represent Enron's conso= lidated NA Electricity trading activity, without regard to which business u= nit or commodity group actually executes the trades or holds positions. So = if Power has some gas positions for hedges or other reasons, these gas trad= es need to be removed from Power VaR and P/L and combined with Gas' VaR and= P/L, etc.. Heating oil positions held outside Global Products should be a= ggregated with Global Products; Global Products' positions in gas and power= should be aggregated with gas and power, with corresponding adjustment to = Global Products' results.
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