Risk Memo - Coal Supply Master Agreement with Edison Mission

---------------------- Forwarded by Robert Quick/LON/ECT on 07/15/99 03:37 PM
---------------------------

Nina Edmonds
07/15/99 03:06 PM
To: Robert Quick/LON/ECT@ECT
cc:
Subject: Risk Memo - Coal Supply Master Agreement with Edison Mission

---------------------- Forwarded by Nina Edmonds/LON/ECT on 15/07/99 15:06
---------------------------

Nina Edmonds
15/07/99 11:49
To: Mark E Haedicke/HOU/ECT, Julia Murray/HOU/ECT
cc: Mark Frevert/LON/ECT, Danny McCarty/LON/ECT, John Sherriff/LON/ECT, Rick
Buy/HOU/ECT, Steve W Young/LON/ECT, Scott Sefton/LON/ECT, Michael R
Brown/LON/ECT, George McClellan/HOU/ECT, Stuart Staley/LON/ECT, Alan B
Aronowitz/HOU/ECT
bcc:
Subject: Risk Memo - Coal Supply Master Agreement with Edison Mission

This risk memo relates to the sale by Enron Capital & Trade Resources Ltd
("ECTRL") of coal to a subsidiary of Edison Mission, Edison First Power
Limited ("EFPL"). EFPL is in the process of acquiring from Powergen two power
plants (Fiddlers Ferry and Ferrybridge) which are coal fired. The
anticipated financial closing of the acquisition is 19th July.

The sales to EFPL will be done under the basis of a master agreement ("the
Master") subject to English law and LCIA arbitration. This is based on our
international coal sale and purchase master agreement, but has been the
subject of significant negotiations between EFPL and Enron. There is no
obligation on either party to complete any actual transactions, but it is
anticipated that all of EFPL's short-term coal requirements will be met by
ECTRL under the Master.

The arrangement reflected in the Master and the confirmations give rise to
the following legal risks:

(1) General

EFPL appears to be in the process of acquiring the power stations without
thinking through the commercial and logistical constraints on the supply of
coal to the plants. In effect EFPL is seeking to hedge with Enron their
fuel supply, by requiring Enron to deliver coal to the power plants. EFPL's
situation has been made worse by virtue of the fact that they have negotiated
a very unfavourable agreement with Powergen, which owns a terminal for bulk
delivery of coal into the port of Liverpool ("LBT"). Fortunately there are
separate confirmations for LBT deliveries, and the commercial people are
aware that any LBT deliveries are fraught with legal, logistical and
commercial risks.

(2) Compliance with all Laws

EFPL has tried to insist that ECTRL represents that it shall comply with all
applicable laws, regulations, orders etc in any relevant jurisdictions.
Bearing in mind that we could be sourcing coal from a number of different
jurisdictions, such as Indonesia, Australia, South Africa, Poland etc., this
would clearly be a significantly onerous provision, especially as should we
be in breach of this representation could trigger an event of default under
the Master. The position at the moment is that we have proposed that this be
diluted by our agreeing to use reasonable endeavours to comply, and our fall
back position is that we would agree to use best endeavours subject to a
proviso that we not be required to commit undue expenditure to so comply (the
basic difference between reasonable and best endeavours under English law is
a question of how much cash is spent).

(3) Sampling

The question of sampling and quality control is crucial in respect of EFPL's
rejection rights under the Master. EFPL to date has insisted that
sampling/quality control be determined effectively at the power plants.
ECTRL has countered with sampling/quality control being determined at the
port of loading (so that we are back to back with our purchase agreement and,
if EFPL rejects, ECTRL can in turn reject and put the coal back onto the
supplier). If ECTRL agrees to EFPL's proposal, then ECTRL will be taking
significant basis risk in that coal could be rejected at a point inland in
the UK, which would leave ECTRL with possibly limited rights of recourse
against its supplier and with significant quantities of coal which may have a
low resale value at the delivery point in the UK.

(4) Force Majeure

In relation to LBT deliveries only, specific so-called force majeure
provisions would apply (overriding the f.m. provisions in the Master) which
would in effect mean that ECTRL would have little if no force majeure
protection at all. This goes back to the point that LBT deliveries carry
significant risks.

(5) Energy Levy

Negotiations are still continuing with regard to who should bear the risk of
the climate change levy which is due to be imposed on coal in the near future.

The commercial leader of the transaction, Stuart Staley, has been full
apprised of the above legal risks.

If you have any queries or comments, please do not hesitate to contact me in
London on extension 7265.

Best regards.

Robert Quick