Power Systems Mfg., LLC

It just keeps getting better....
----- Forwarded by Dan Lyons/HOU/ECT on 10/20/2000 01:31 PM -----

Greg Johnston
10/20/2000 01:25 PM

To: Michael Miller/EWC/Enron@ENRON, John Howton/HOU/ECT@ect, Robert P
Virgo/HOU/ECT@ECT
cc: Kyle Kitagawa/CAL/ECT@ECT, Duncan Croasdale/CAL/ECT@ECT, Richard B
Sanders/HOU/ECT@ECT, Dan Lyons/HOU/ECT@ECT
Subject: Power Systems Mfg., LLC

Gentlemen, as you are likely aware, PSM has discovered certain fundamental
flaws with the FT4A9 engine that formed part of the PG&E mobile pac which ENA
purchased from PG&E as part of the Advanced Mobile Power Systems project. As
you will recall, PG&E had difficulty starting the unit, apparently as a
result of a faulty gearbox in the original FT4A11 engine, and therefore we
agreed to swap out the A11 engine and replace it with the A9 engine. It was
apparently represented to PSM by PG&E that the replacement A9 engine had been
completely overhauled. PSM's testing and discussions with the shop that was
to have performed the overhaul, both of which occurred subsequent to closing,
have confirmed that the A9 was not overhauled but was simply serviced in
order to allow it to start.

PSM prepared a letter to send to PG&E demanding that the faulty A9 engine be
replaced with the original A11 engine. I have reviewed that letter and
revised it substantially. I enclose a copy of that letter as revised by me
for your review and comment.

Also, given that PSM was acting on ENA's behalf in performing the due
diligence on the PG&E unit and given that ENA relied on PSM's due diligence
in acquiring the PG&E unit, I have prepared an additional cover letter to
PSM. I attach a copy of that cover letter for your review as well, which
letter is fairly aggressive in its current form. It clearly identifies both
that (i) my comments on the PG&E letter are made only to protect and preserve
ENA's rights and interests and do not represent legal or other advice to PSM
regarding their position and may not be relied upon by PSM as such and (ii)
that we are preserving all of ENA's rights and causes of action that ENA may
have against PSM with respect to these matters. It seems to me that, if the
engine is in fact in such poor condition, PSM should have discovered that
prior to our closing the deal. I understand the PSM may have performed
boroscope testing on the original A11 engine but did not, for whatever
reason, perform the same test on the A9 prior to our closing the deal with
PG&E. In any event, I realize that we have other issues to consider in our
approach to this, such as the finalization of the joint venture, under which
we have around $8 million at risk currently, and also that Principal
Investing is negotiating an equity position in PSM, so I will leave it up to
the commercial people as to how agressive we want to be. Regardless, even if
we remove the last paragraph of the cover letter, I think that the point made
in the second paragraph regarding legal advice needs to remain.

Thanks

Greg