FW: IMPORTANT: Illinois - Creditworthiness Issues

Colleagues:

I am re-forwarding Gloria's memo on Illinois for your information.

Brgrds

AI
-----Original Message-----
From: Ogenyi, Gloria
Sent: Thursday, November 08, 2001 12:28 PM
To: Bradford, William S.; Kingerski, Harry; Hughes, Evan; Fite, Rebecca; Frederking, William; Tribolet, Michael; Gorte, David; Gahn, Scott; Wood, James M.; Dietrich, Janet; Ibrahim, Amr; Steffes, James D.; Shapiro, Richard; Nicolay, Christi L.; Herndon, Rogers; Sharp, Greg; Merola, Jeff; Bertasi, Ron; Hetrick, Nancy; Dietrich, Sarah
Cc: Buerger, Rubena; Barnes, Lynnette
Subject: IMPORTANT: Illinois - Creditworthiness Issues

Unlike TX, creditworthiness standards for Alternative Retail Electric Suppliers (ARES) in IL is not uniform accross utility lines. The creditworthiness standards vary by utility, and also depends on the billing option chosen by the ARES. However, the single billing option (SBO) has creditworthiness standards that have general application because SBO certification is an ICC responsibility with uniform qualification criteria. All the applicable credit requirements set out below are cumulative.

Enron's Credit Rating of BBB(S&P), and Baa2(Moody's)
General Creditworthiness: Under Section 451.50 Subchapter C of the IL Admin. Code, as part of the qualification as an ARES all applicants must fulfill a general license bond requirement. In IL, EES is licensed to serve nonresidential retail customers with maximum electrical demand of 1MW or more. To secure this license, EES was required to post bond in the sum of $30,000. The bond is valid for one year, and conditioned on the full and faithful performance of all duties and obligations of EES as an ARES. If the license bond is cancelled, modified, expires or is drawn upon, EES must execute and maintain an additional or replacement bond, such that the cumulative value of all outstanding bonds never falls below the required amount. The EES license bond expired on June 2001. EES must issue another bond or provide an extension certificate up to June 2002, and annually thereafter.

Registration Under SubPart B:
EES is registered as an ARES under Subpart B of Section 451.100 - expedited certification for ARES that seek to serve only non-residential customers with maximum demand of 1MW or more. Subpart B has additional financial qualifications
1. To maintain certification under Subpart B, EES needs to maintain at least one of the following long-term credit ratings of BBB- (S&P), Baa3 (Moody's), BBB- (Duff & Phelps), or BBB- (Fitch); or

2. Maintain a borrowing agreement with an affiliate that has the above ratings. The amount of credit available to EES under the borrowing agreement shall
not be less than $500,000 or 5% of EES' revenue for last fiscal year; or

3. Show that the EES obligations arising from electric energy and fuel purchases are covered by an unconditional guaranty, bond, or LC, in an amount not less than $500,000 or 5% of EES's revenue for the last fiscal year; or

4. Certify that it will reimburse its IL retail customers for additional costs they incur to acquire electricity upon EES' contractual failure. This certification shall be covered by an unconditional guaranty, bond, or LC in the sum of 1080 times the maximum MW EES estimates to schedule in the next 12 months, multiplied by the average of the 45 highest daily market prices of energy traded in the previous year; or

5. EES maintains a line of credit or revolving credit agreement in the amount of $500,000 or 5% of its revenue for last fiscal year, from an "A" rated financial insitution; or

6. EES earns 12 points on the financial ratios - pre-tax interest coverage, funds from operations interest coverage, funds from operations to total debt, and total debt to total capital.

Enron's Credit Rating and downgrades: To satisfy the Subpart B requirements, EES provided an unconditional guaranty from Enron Corp. Given our current credit rating of BBB(S&P) and Baa2 (Moody's), that guaranty is still valid. However, if Enron Corp is downgraded below the required credit level, EES will have to provide any of the above alternative forms of creditworthiness.

IMPACT: The above creditworthiness requirements relate to EES's ability to do business in IL. Failure to maintain the foregoing standards will result in the loss of our IL license. This will trigger contractual default for all our customers, both financial and physical. Please note that, EES is out of compliance on the license bond and needs to post a new bond ASAP.

Single Bill Option:
Pursuant to Section 451.500, Subpart F, any ARES that chooses the Single Bill Option (SBO), must demonstrate ability to establish and maintain sufficient financial resources to satisfy the obligation to remit to the utilities, monies that it collects under the SBO tariff. To satisfy these additional creditworthiness standards, EES must either:
1. Post and maintain bond in the amount of 15% of its estimated obligation to the utility under the SBO

2. Provide an irrevocable LC issued by a financial insitution with an "A" rating

3. Maintain at least the following long term credit ratings, a BBB- (S&P), Baa3 (Moody's), BBB-(duff &Phelps, BBB- (Fitch)

4. Provide an unconditional guaranty from an affiliate with the above ratings.
Enron's Current Rating: EES is currently working to obtain ICC certification under the SBO tariff. This means that EES must maintain the minimum long term credit ratings set out in 3, or provide a guaranty from an affiliate with those ratings. EES is not rated. However, given Enron Corp's current credit rating of BBB and Baa2, a parental guaranty will suffice to meet the qualification under the SBO tariff.

Further Downgrades: If Enron Corp is down graded below the required minimum ratings, EES will need to provide a bond or LC, or forego the SBO option.

IMPACT: EES will continue to do business in IL as an ARES. Thus EES will maintain its ability to service its customers both financial and physical. However, there could be substantial impact on EES customer service and operation, particularly our ability to meet customer expectations and timely collect outstanding receivables.

Instrument Fund Charges: (akin to stranded costs)
Under the Illinois tariffs, EES can choose annually, one of two remittance timelines for IFC charges. (1) To remit IFC charges within 7 days of receipt of customer payment, or more frequently as required; or (2) within 15 days of utility invoicing, whether or not customer has paid. If EES chooses the 2nd option, it has to provide a security deposit equal to one month's estimated IFC charges for all EES' customers. Deposit amount will be determined based on monthly KW customer usage, and the IFC charge per KWH. If the expected IFC charge for EES' customers is $5,000,000 or more, this deposit amount will be revised monthly.

If EES chooses the 2nd option - remittance of bills within 15 days of utility invoicing, we will be required to provide the deposit.

IMPACT: This deposit requirement for the IFC charges relate to Illinois Power customers and not to ComEd. For ComEd, IFC charges nets out to zero, and customers do not pay those charges. EES is currently doing business as a billing agent in IP's service territory, and is required to execute the Billing Agent Agreement which will implement the deposit requirement. If EES chooses the first remittance option, it will avoid the deposit requirement. However, this may have operational implications.