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Date: Fri, 21 Dec 2001 14:32:34 -0800 (PST)
From: ze.powergroup.inc.@mailman.enron.com
To: vkamins@ect.enron.com
Subject: Were You Ready For the Enron Credit Collapse?
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=09Were You Ready for the Enron Credit Collapse? When Could You Have Known?=
 What Could You Have Done?=09=09
=09[IMAGE]=09=09
[IMAGE]=09 The fall of Enron, the fall of the Cal-PX and the fall of the fi=
rst  giant, PG&E, have each been significant wake up calls to the industry.=
    The Power industry is an uncertain and volatile market rife with price,=
  regulatory and other market risks. To the unprepared it may seem that  di=
saster strikes unexpectedly and without warning. In reality, disaster  is n=
ever all that sudden, although our realization of it may be sudden,  and as=
 such, unprepared.  Looking closely at the most recent fall, that of Enron,=
 warning signs  have been present for some time indicating that all was not=
 right with  one of the world's leading energy companies. The current clamo=
ring of  credit agencies and financial institutions is akin to the reaction=
 a  flock of birds has after one of their own has been killed by a predator=
,  too little too late.  The market participants that retain their composur=
e are those that  can foresee events coming. There are tools and methodolog=
ies available  to the market savvy that allow for the mitigation of credit =
and other  risks. Still, application of these tools requires significant kn=
owledge  and skill, but more so, the rigor, policy and corporate resolve to=
 use  the tools available.  Access to a utility specific credit analysis an=
alytic tool like ZE  PowerGroup's Credit Risk Manager (CRAM) application wo=
uld have provided  preemptive warning signals.  As the share price dropped =
a score reflecting low solvency would  have prompted a reduction of Enron c=
redit limit, ultimately flagging  the account early on, months prior to Enr=
on's current situation. Each downgrade by an agency would have generated a =
lower credit  limit - ultimately flagging the account when it hits the firs=
t unacceptable  level.  Consistent downgrades would have put them on a "cre=
dit watch  list". When the financial statement was pulled/declared inadequa=
te, corporate  credit policy could have dictated the cessation of any furth=
er trading  with ENRON without security.    The demise of Enron was months =
in the making; average stock prices  have been falling from the start of 20=
01. Interested parties watched  as credit rating agencies such as Moody's, =
Fitch and Standard &  Poor's decreased Enron's credit outlook. These declin=
ing credit ratings  signaled the beginning of the end for Enron as corporat=
e debt was called  again and again. The asset light corporation was unable =
to stave off  the downward credit spirals that ultimately lead to bankruptc=
y.   At its height, Enron and its EnronOnline trading site were averaging  =
over $3 billion in trade transactions per day. Enron was once the country's=
  top buyer and seller of natural gas, and the No. 1 wholesale power market=
er.  The company operated a 25,000-mile gas pipeline system, and marketed  =
and traded metals, paper, coal, chemicals, and fiber-optic bandwidth.  Enro=
n's bankruptcy is recorded as the largest case in history, encompassing  $6=
2 billion in assets and affecting 21,000 employees. Its shares went  from $=
85 to $0.25 in a span of 12 months. CRAM would not have been able  to predi=
ct a low of $0.25/share (nor could anybody for that matter)  but the system=
 would have capitalized on all signs and provided the  proper warning signa=
ls.  The figure below shows an example of how the CRAM rating of Enron base=
d  on a sample credit risk policy has changed over the last year.  [IMAGE] =
 What is interesting to Note is that the CRAM system, in the last year,  ha=
s never rated Enron highly. The Table below describes the CRAM scoring  and=
 rating system. Please note that the table is only a sample as could  be de=
rived for a small public utility. CRAM is a tool that enables the  developm=
ent and implementation of a corporate credit policy; it is not  the policy.=
  [IMAGE] Based on this specific rating system, Enron never scored above 18=
50,  putting it into an N3 CRAM rating (moderate risk). The first CRAM cred=
it  alert would have come right in the beginning of the year in January  wh=
en the rating would have been downgraded to N4 and a much higher risk  of d=
efault, i.e. market reactive. By July, and with a CRAM rating of  N6, Enron=
 would have been rated as a high risk with insufficient financial  strength=
; Trade with Enron would have been severely curtailed. This  down grading w=
ould have called for possible contract adjustments and  demand for collater=
al, depending on whether the corporation had safeguards  in its credit poli=
cy and contracting. Before December, CRAM had rated  Enron as an NN, or a p=
arty with which no trade can occur.   By using the CRAM, transactions with =
Enron would have demanded caution  from throughout 2001 and there would hav=
e been severe constraints on  contract amount, type and duration. As can be=
 seen by the scoring table,  the CRAM would have progressively, and aggress=
ively reduced exposure  to Enron over the year to a point where the largest=
 contract would have  been small, manageable and for short duration. The co=
ntinued downgrades  would have placed Enron on the Credit Watch List and tr=
ansactions would  have required manager approval and most likely collateral=
. Having a  rigorous credit policy, and the means to implement it, could ha=
ve minimized  if not avoided any credit risk exposure to Enron, and in the =
best case  scenario allowed the corporation to unwind high-risk deals as cr=
edit  strength of the counter-party fell.  CRAM primarily determines counte=
r-party credit limits as well as clients'  own credit (transactional) limit=
ations. Through a series of rating-agency  evaluations, user defined criter=
ia and detailed counter-party financial  profiles, the system dynamically c=
reates and tracks counter-party credit  and transactional limits to manage =
and minimize clients' credit risk  exposure. CRAM utilizes these inputs to =
assign a client-specific credit  rating, monetary trade limits and maximum =
contract lengths for all counter-parties.  These limits are used to ensure =
corporate credit and risk tolerances  are not jeopardized prior to authoriz=
ation being given to execute a  trade. As an independent tool, the applicat=
ion immediately enables clients  to determine their existing credit risk ex=
posure and begin ongoing,  near real time, counter-party monitoring and ass=
essment processes. The  application's effectiveness is further enhanced whe=
n integrated with  the full suite of ZE PowerTools applications.   [IMAGE] =
 ZE PowerGroup offers a variety of services to enhance client credit  analy=
sis and credit mitigation. CRAM is only one tool that ZE PowerGroup  offers=
. We also develop credit policies, provide monthly market and  credit monit=
oring, conduct operational audits, forecast forward natural  gas and electr=
icity prices and a host of other tools.   We encourage you to contact us to=
 discuss your credit and portfolio  needs. We can provide you a ready fit p=
roduct or develop customized  products to meet your specific requirements. =
Please contact:  Paul Seo, Marketing Manager    paul@ze.com   , 604-244-146=
9  Aiman El-Ramly, Vice President Marketing and Business Development  aiman=
@ze.com   , 604-244-1654  For more information on other services and produc=
ts go to www.zepowertools.com         =09[IMAGE]=09
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=09[IMAGE]=09=09
=09Link to www.zepowertools.com =09=09
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