Enron Mail

To:jeffrey.shankman@enron.com, mike.mcconnell@enron.com
Subject:Unit Contingent Outage Options - Hedge for Notional P100 Risk
Cc:vince.kaminski@enron.com, vasant.shanbhogue@enron.com, john.best@enron.com,david.hoog@enron.com, greg.whalley@enron.com, per.sekse@enron.com, chip.schneider@enron.com
Bcc:vince.kaminski@enron.com, vasant.shanbhogue@enron.com, john.best@enron.com,david.hoog@enron.com, greg.whalley@enron.com, per.sekse@enron.com, chip.schneider@enron.com
Date:Thu, 31 May 2001 15:59:00 -0700 (PDT)

Working with Amitava Dhar, Vasant Shanbhogue and John Best, we completed
the following analysis to determine max loss for our portfolio of
transactions for the balance of 2001.

A Model simulation yields max loss of less than $60 million for our total
portfolio in 2001.

Comments: We ran several simulations in the model with 10,000 trials
showing a max loss without hedges of $49,500,000 - $52,000,000. In
otherwords, the highest possible loss experienced in all runs was less than
$52 million. We also ran one simulation at 30,000 trials and the max loss
did not vary significantly from the earlier trials. Our conclusion from the
results of the model runs is that the 1 in 100,000 trial would produce a max
loss (P99.999) of less than $60 million vs the notional P100 payout of $280

This does not address the "Venus falling into the Sun" scenario. Since
running the simulation does not produce a max loss approaching the P100, we
had to go outside the model and create a spread sheet that would force a
scenario that generated the full loss.

B. Worst case scenario of all units down on day 1 hits maximum payout of
$280 million over 5 days.

Comments: In the spread sheet we assumed an unrealistic scenario that all
units go down on day one for 5 days. Taking the total MWh covered for each
unit, we then calculated the power price necessary to hit the maximum dollar
payout for each unit given a 5 day outage. The 5 day price spike for each
power market ranged from $1,500 in Entergy to $700 in PJM. Under this
unrealistic scenario we would reach our maximum payout of $280 million in 5

C. Power option hedges generate offsetting cash value of $ 215 million,
reducing our net P100 exposure to less than $65 million

Comments: We then layered our proposed hedging strategy on top of the
unrealistic spread sheet scenario in 2 above. Assuming the 5 day price spike
replicated the forward curve in the MidWest during 1999, a spot market at
$1,500 pulled forward prices up to a range of $250-$300/MWh. The option
hedges we would put in place would cost $14-15 million and would yield $215mm
in positive MTM to offset the payout of $280 million, giving us the net
Maximun risk of $65 million.

We need to present our calculations to Vince tomorrow morning to get his sign
off and can then go over the analysis in detail with you and Greg immediately
afterwards. We are still not recommending we put the full hedge in place to
cover this unrealistic scenareo, but the analysis shows we can significantly
cover the tail risk in our book without having insurance in place. Our
recommendation remains to put a smaller hedge in place while we continue to
pursue a insurance partner during the month of June.

Speak to you tomorrow.