From: mike.jordan@enron.com
To: richard.causey@enron.com, rick.buy@enron.com, sally.beck@enron.com
Cc: fernley.dyson@enron.com, michael.brown@enron.com, ted.murphy@enron.com
Date: 2001-02-26 19:11:00+00:00
Subject: Metals - Imminent Actions - an update

Rick / Rick / Sally 

I attach the  'executive' summary of a note sent to the office of the chair 
last week detailing current operational difficulties with the Metals 
Merchanting business. Subsequently an 'all hands' meeting was called to 
discuss the operational issues and the business imperatives of 
Off Balance Sheet Facility ("OBSF") renegotiation
Minimising working captial
SAP implementation
The notes of that meeting are also attached at the bottom of this email

Should you require any further information please call, otherwise I will 
forward updates as they are completed.

Regards

Mike



ISSUE

The Physical metals business implemented an Off Balance Sheet Structure 
(OBSF) pre year-end to meet Enron requirements for gearing ratios.

Whilst this does not present undue problems for LME warrants, these being 
bearer documents, it does present an issue when physical metal, the value of 
which depends upon brand and location, is placed into the facility. Given the 
hard deadline of year-end the operational support of this process initially 
took place on spreadsheets.

The impact of the OBSF on the operational side of the physical business 
should not be underestimated. The process of moving material off and on 
balance sheet places considerable strain from trading through to settlements, 
particularly when there is an absence of necessary control functionality in 
the AS400. With the specified functionality it is believed that all 
operational and trading issues arising from OBSF can be managed 
satisfactorily.

The core functionality, which was due prior to the year-end, was released 
during January but was subsequently found to have introduced +bugs, to the 
integrated business control processes. Whilst an improvement on having no 
OBSF functionality, the +bugs, have had an increasingly negative effect on 
the control environment, compounded by the fact that IT can not provide a 
guaranteed delivery for the +bug, fixes and non core ,reporting, 
functionality.

This has given rise to the following concerns:

? There are insufficient experienced resources to fully reconcile stock at a 
brand & location level to coordination records (the global position is 
reconciled however).
? It is not possible to substantiate the DPR for EM&CL as:
? a) P&L on spread moves from Cash to 3 months positions (and related cash to 
3 months provisions) can not be produced by the system and must be estimated, 
and
? b) System bugs have created uncertainties over trial balance values.

These concerns are compounded by the following:

? The most experienced AS400 IT developer for the EM&CL business has 
resigned. He is currently working his 6 months notice which will expire in 
July 2001.
? The most experienced AS400 IT developer on the EML side of the business has 
also resigned. He left in January 2001. 
? There is no documentation for the AS400. It is therefore difficult for 
experienced AS400 programmers to get upto speed on the system.

Conclusion

It is essential that we do not become hostages to the development of the 
AS400 system and the renegotiation of the OBSF facility with Barclays. The 
current situation has arisen due to non-delivery of IT developments and tight 
timescales on the finalisation of the OBSF facility.

To meet Q1 end requirements (i.e. full production of the DPR and stock 
reconciliation), IT and the OBSF deal team must make concrete commitments on 
delivery timeline. The business will not be able to commit to successful 
implementation of the facility and resubstantiation of the Trial Balance 
without these

---------------------- Forwarded by Mike Jordan/LON/ECT on 26/02/2001 16:18 
---------------------------


Mike Jordan
26/02/2001 16:18
To: Michael R Brown/LON/ECT@ECT, Fernley Dyson/LON/ECT@ECT, Joe 
Gold/LON/ECT@ECT, Michael Farmer/EU/Enron@ENRON, Michael J 
Hutchinson/EU/Enron@Enron, Anne Edgley/LON/ECT@ECT, Melissa 
Allen/LON/ECT@ECT, Mark Pickering/LON/ECT@ECT, Paul Chivers/LON/ECT@ECT, 
Robert Campbell/LON/ECT@ECT, Andrew Cornfield/LON/ECT@ECT, Howard 
Carter/EU/Enron@Enron, Bill Appleby/LON/ECT@ECT, David P Tregar/EU/Enron@Enron
cc:  

Subject: Metals - Imminent Actions - notes of meeting 23 rd Feb

To all

I seek to clarify the actions discussed at Friday's meeting and to emphasise 
the critical importance of getting all the below completed as quickly as 
possible to meet our Q1 requirements ( revenue targets, balance sheet 
targets, interest expense minimisation etc ). The proposed tactical plan that 
was circulated is not attached as it has already been superceded!

There was agreement on several broad areas of immediate focus with specific 
objectives and accountabilities - 

IT resourcing

Communicate priority to HR about the importance of obtaining skilled AS400 
programmers - for tactical short term and for long term work - action MP
Resourcing for long term AS400 'off-load' initiative to be completed asap - 
action MP
Merchanting resource focus to be on bug fixes impacting MO ability to update 
OBSF options in AS400 and for traffic to update recent location movements of 
stock in OBSF - action RC ( deadline 1 week )
Completion of inception document for full OBSF inventory control 
functionality - action RC ( deadline 1 week )
Split of resources for SAP interface - only EML SAP implementation is now 
planned for 1/4/01 - action RC to confirm resource reallocation 27/01
Immediate improvement in IT Operations support required ( including 
completion of transfer of support responsibility from Dev. to Ops. ) - action 
MP

Operational Support

MO risk/trade accounting resources to focus on rebooking all remaining 
transactions on OBSF inventory spreadsheet - action HC ( deadline asap )
Validation of system generated p&l to commence following the above - action 
HC ( deadline asap )
Timetable for catch up of traffic OBSF location movements to be completed 
with John Lunzer 27/02 - action HC 
Determine action for improvement in delivering metal to facility ( initial 
assumption for recent working capital increase was that we had operationally 
slowed down in placing qualifying material into facility ) - action HC / AC 
(deadline asap)

Working Capital 

Detailed daily analysis of working capital movements to be produced and 
formatted in style of sources and uses of funds   ( including facility 
headroom ) - action AC ( deadline asap )
Forward estimate of working capital to be produced for rest of quarter and 
used for estimation of full interest expense - action AC, MJ & MA ( deadline 
asap )
Analysis for trade receivables ( and reasons for recent increase ) and 
investigation of possible factoring - AC/MJ and AE/BA ( deadline asap )
Determining extent to which pricing signals for working capital usage can be 
communicated to traders, traffic and operations - action JG, MJ ( contingent 
on above )

OBSF negotiation

Documentation of current negotiation issues ( including AA sign-off issues ) 
to be drafted and circulated with clear accountabilities  - action MA/DT/BA 
(deadline 26/3)
Operational impact of agreement to be considered in parallel to negotiation - 
action HC/AC/BA

LME relationship

Consider utilising a US subsidiary to book OBSF transactions to negate LME 
reviewing facility as part of regulatory regime - action MA/FD
Monitoring notice of investigation issued by LME  -action FD/DT