ENRON CORPORATION Mademtor Mark Koenig 10-16-0119:00 g.m. CT Confirmation #836246 Page 1 Revised Ill 1/2006 EN RON CORPORATION Moderator: Mark Koenig October 16, 2001 9:00 a.m. CT Operator: Good day, everyone. We thank you for your paV~nce, and welcome to the Enron third quarter earnings release conference call. This call is being recorded. At this time, I would like to turn the conference over to the Chairman and Chief Executive Officer, Mr Kenneth Lay. Please go ahead, sir. Kenneth Lay: Uh, Good morning. This is Ken Cay, Chairman and CEO of Enron. I have with me today Mark Revert, Vice Chairman; Greg Whalley, President ahd Chief Operating Officer; Mark Koenig, Executive ¼ Vice President Investor Relatons; Paula Rieker, Managing Director, Investor Relations; Rick Causey, E*ecutive VP and Chief Accounting Officer; Andy Fastow, Executive VP and Chief Financial Officec and Steve Kean, the Executive VP and Chief of Staff. First, thanks for joining us on the call and Web broadcast this morning. Earlier today, of coUrse, we reported our third quarter results. I wil! provide a brief overview of our quarterly results, and then open the call for a questions. For the third quarter of 2001, Enmn reported strong recuning operating performance, which indudeda 35 percent increase in recuning net income to $393 million versus 292 million a year ago, and a 26 percent inci~ase in diluted recurting earnings per share to 43 cents a share compared to 34 cents a share a year ago. ENRON CORPORATION Moderator Mart Koenig 1O-16-0119:00 am. CT Confirmation #636248 Page 2 As these numbers show, Eriron's core energy business fundamentals are excellent. We are recording nonrecurring charges of slightly over a billion dollars this quarter. The recognition of these chargesis the result of a thorough review of each of our businesses. We are committed to making the resuits of our core energy business more transparent to investors and not douded by non-core activities. And I will, of course, provide mare detail on these charges later in the call. - 4 Today we also reaffirmed that we are on track to meet our previously stated targets for recurring earnings per diluted share. Those targets include 45 cents for the fourth quarter of this year, $1.80 forthe full year 2001, and $2.15 for the full year 2002. We have also provided significantly more visibility into our earnings. We've changed our segments to be more reflective of our businesses. Wholesale services is now.reported in two new segments - Ameilcas, ~k-i& consists frimarily of our gas and power marftet-maldng operations and merchant energy activities in North America, and also includes our merchant activities in South America. Europe and other commodity markets, wtiicti includes our European gas and power operations and our other commodity businesses such as metals, coal, crude and liquids, weather, LNG, forest products, and steel. Of course, and then, retail services continues to be reported separately. Transportation and distilbution is reported in three segments. Our natural gas pipelines, Portland General - of course, the large electric utility in Oregon - arid global assets, which include primarily international utility operations. And then broadband services and Corporate and Other also each continue to be reported separately. In addition to expanded segment disclosure, we have added significant additional financial and operating data in the tables of the release, including income statement data for each operating segment and volume data on all our bus~nesses. - - ENRON CORPORATION Moderator; Mart Koenig 1016.O1I9:00a.m. CT Confirmation #636246 - PageS Let me start with wholesale services. Wholesale services, our largest operation, has led the company's growth for the past decade. Total income, before interest, minority interest, and taxes, or BIT, f& the quarter forif-is wholesale group, increased 28 percent to $754million from 589 million a year ago. Total volumes increased 65 percent to 88.2 billion cubIc feet equivalents per day versus 53.5 billion cubic feet equivalents per day a year ago. Let's just go to Americas next. Our Americas business uses its broad scale and scope to package and reliably deliver energy commodities and provide risk management services at the lowest available cost. Third quarter IBIT for the Americas increased 31 percent to $701 million flvm $536 million a year ago, driven by strong results from North American natural gas and power businesses. Total physical volumes in the Americas increased 35 percent to 58 billion cubic feet equivalents aday versus 43 billion cubicfeetequivalentsaday a yearago. Poiver volumes increased 77 percent, to* 290 million megaWatt hours versus 164 million megawatt hours a year ago. Both our East and West regions were strong contributors to profitability this quarter. We have become the leading power merchant in the Eastern U.S., which makes up about two-thirds of our total power volumes. Our unmatched market-making capabilities and structuring expertise allow us to provide the customers higher value transactions. We structure commodity transactions custom-tailored to customer-specific load requirements, which may include peaking services and load shSping, We also leverage our market knowledge and our plant development expertise to site, permit, and selectively develop generation projects, which we may retain or we may sell to independent power producers and generators. Natural gas volumes increased six percent to 27 BCF a day in the quarter versus 25 BCE a day a year ago. Our U.S. natural gas business was a significant contributor to profitability in the third quarter. Enron's A' - - physical volume activity, which is almost three times the size of our nearest ENRON CORPORATION Moderator Mark Koenis 10-18-01/9:00 am. a Conlbmationt 836246 Page 4 competitoi~ allows us to understand supply and demand across the entire US. on a real-lime basis. As a result, we are best positioned to provide the entire - best to provide structured transactions to meet our customers' specific needs. Some of examples of structured tansactions that we have offered to date include utMV outeourcing arrangements where we manage all aspects of our customers' gas needs, operational outsourcing services, where we madag~ the commodity as well as the entire back office for our customers, and temi capacity products far customers desiring the fln~pod of natural gis. Turning to Europe and other commodity markets, physical volumes increased dramatically for each commodity in the segment European gas and power volumes more than tripled to 21 BCF equivalents a day from a little less than - oralfleaverIveBOFequivalentsad~ylastyear. Metal volumes increased 144 percent, to 2, 362,000 tons from 969,000 tons last year. Coal volumes increased 150 percent to 25 million tons from 10 million tons last year. Crude oil liquids volumes increased 50 percent to 157 million barrels from, 105 million last year. Forest products volumes increased eightfold to 899,000 tons from 101000 last year. And finally, steel volumes ware 648,000 tons in our first ypar of operation. In Europe, we expect Enron's most profitable opportunities to come from our unique ability to package customized products from our broad slate of skills - commodity risk ma9agement, asset expertise, cross- commodity and weather products, and rene~table energy products. Although recent deal flow continues to be veiy strong in Europe, volatility in the European energy markets has been relatively low. Ournew businesses in other commodity markets are experiencing rapid growth and are contributing positively to our growth. For the third quarter of 2001, IBITforthe segment remains unchanged at $53 million as compared to last year. - ENRON CORPORATION Moderator: Mark Koenig 10-18-0119:00 am. CT Confimiation #836246 Page 5 Enron Onlihe continues to be an enomibus accelerator for our wholesale businesses and a very important tool for ourcustomers. With Enron's very competitive pricing and the ease of use of our system, we are tracking an increasing number of both existing and new customers. Activity on Enron Online includes inception to date notional value of $SSO billion, an average of 4,000 customers logged onto our site each day, 1,800 products currently being offered online, and about 5,000 transactions per day. Retail services. Retail services product offerings include pricing and delivery of natural gas and power, as well as demand-side management services to minimize energy costs for business consumers in North America and Europe. Retail services had an outstanding third quarter, with IBITof $71 million,> representing more than a 3.5- more than 3.5 times that of the third quarter last year. We continue to experience high demand for our retail products, and are expanding our market share at a very rapid pace as the only nationwide provider of energy management services to commercial and industrial customers of all sizes. We have very successfully penetrated the large consumer market. On a year to date basis, we have completed over 50 large consumer transactions, including the recent signing of contracts with Wal-Mart Northrop-Grumman, the city of Chicago, Equity Office Properties, and Wend/s in the U.S.. and with Sainstury and Guinness Brewery in the U.K We am also significantly expanding our retail business in the U.S. by implementing the Enrun Direct model that we have used so successfully in Euroj~e. In the U.S., we completedaver 12,000 transactions in the third quarter of this year with small business, compared to 1,800 in the same quarter last year. Including our well- established operations in the U.K., We've completed over 95,000 transactions with these small customers year to date. With shorter sales cycles and ENRON CORPORATION Moderator Mark Koenig 10-18-0119:00 an. CT Confirmation #838248 - Page6 standardized products, this part of our business is poised to scale rapidly with commensurate increases in profitability. In total, we added over 5000 facilities to our service portfolio during the quarter for a total of over 40,000 facilities under management. Enron is the largest manager of customer energy assets, with more than four billion square feet of facilities under management. We are no longer reporting the total contract value, the TCV, for our retail business. This memo was an important measure at the inception of the business to demonstrate su~ess in acquinng new contracts, but is no longer that relevant its no longer howwe're managing ourbusiness or incentivizing our workforce. As contract up sales, restructuring, and Enron-Direct become signiflcantcontributors to profits, and with the commodity portion of our retail contracts being managed by wholesale and ~eflected in their results, more traditional measures, like gross margin and earnings, are better indicators of this business's success. These financial measures are Included in the tables attached to todays e&nings release. Moving to transportation and distribution, our transportation and distribution business is comprised of three segments - natural gas pipelines, Portland General and global as&ets, First Natural Gas pipelines. This segment providas $85 million of BIT in the current quarter, which is up slightly from last years' results. This business continues to experience strong demand for our natural gas pipeline services, which transport approximately 15 percent of U.S. gas demand, We continue to expand in the fast-growing Florida area and plan to complete another expansion in April2002 which will bring our Florida gas transmission capacity to 2.1 billion cubid feet a day. We also plan to complete an expansion by our trans-western pipeline in June 2002 which will increase * I capacity by 150 million cubic feet a day in the rapidly growing Arizona market ENRON CORPORATION Moderator Mark Koenig 10-16-01/9:00 air, CT Confirmation #636240 Page 7 Portland General - Portland General reported an IBIT loss of $17 million in the curTent quarter, compared to IBIT of 74 million in the same quarter a year ago. In prior periods, Portland General entered into power c6ntracts to ensure adequate supply for the recent quarter at prices mat were significanily higher than the actual settled prices during the third quarter of 2001. Although the rate mechanism in place anticipated and substantially mitigated the effect of the higher pumhased power costs, only the amount in excess of a defined baseline was recoverable from rate payers. Increased power cost recovery was incorporated into Portland General's new 15-month rate structure, which became effective October 1st, 2001 and included anavemge 40 percent rate increase... Last week, we announced a definitive agreement to sell Portland General to Northw&st Natural Gas for approdmately $1.9 billion and the assumption of approdmately $1.1 billion in Portland General debt. The proposed transaction, which ~ subject to the customary regulatory approvals, is expected to close by late 2002. Looking to go to global assets, the global assets segment includes other assets not part of Enron's Wholesale or retail energy operation~; Major assets included in this segment are electro andelectxic utiFity in Brazil, Dabho4, the power plant in India, TGS, the natural gas pipeline in Argentina, Azurix, and our wind operations. For the third quarter of 2001, IBIT for this segment remained unchanged at $19 million as compared to last year. Broadband services. Enron makes markets for bandwidth, IP, and storage products, and bundles such products for comprehensive network management services. IBIT losses were $80 million in the current quarter, compared to a $20 million loss in the third quarter of last year. This quarter's results include significantly lower investment-related income and lower operating costs. , Vt ENRON CORPORATION Moderator Mark Koenig. 1O~16-01/9:OO G.m. CT Confirmation #636248 PageS We continue to actively participate in the intermediation market. Although the overall market has 2 contracted recently, we entered into 405 intermediation transactions during the quarter. We're reducing our cost structure to be more properly sized for the current ehvironment. We continue to see long-temi opportunities in this business, and We're exploring alternatives to preserve the business option value at a reasonable cost. Corporate and other. Corporate and other reported an IBIT toss of $59 million for the quarter compared to 106 million a year ago. Corporate and other rep?esents the unatlocatedportion of expenses related to genera! corporate functions. Turning now to the nonrewriing charges of about $1.01 billion, and they consisted of $287 million related to asset impairments recorded by Azudx primarily reflecting the Azurix planned disposition of its North American and certain South American service-related businesses, and goodwill associated with these assets. Upon completion of these sales, Azurix's assets will consist of water and wastewater operation in the U.K and Aigentina, and of course, primarily consists of Wessex. One hundred eighty million dollars was associated with the restructuring of broadband services, including severance costs, loss on the sale of inventory, and an impairment to reflect the reduced value of Enron's content services business. After these charges, we have a remaining net investment in our broadband business of approximately $600 million; primarily associated with our network,. And $544 million related to losses associated with certain ini'estments, principally Eriron's interest in lie new power corhpany, as well as broadband and technology investments, ~nd also early terminaton during the third quarter of certain structured finance arrangements with a previously-disclosed entity. In conndction with the early tem,ination, shareholders equity will be reduced approximately $1.2 billion, with a corresponding significant reduction in the number of diluted shares outstanding. ENRON CORPORATION Moderator Mark Koenig 1O-18-0119:OOa.m.CT Confirmation# 838248 Page 9 Pd like to also now address afew other areas before we turn to questions. First, operating cash flow, we expect reported cash flow from operations to be approximately $350 million positive for the third quarter, bringing the year*to date cash flow from operations to a negative $1 billion. As a reminder, our deposit and margin activity for the first nine months of this year is estimated to be a net outflow of $2.6 billion. This is primarily a timing difference, as the fourth quarter of last year included $1.9 billion of netoash inflowfxvm deposit and margin activity. Excluding deposits, cash flow from operations for the first nine months of this year is expected to approximate $1.6 billion. With additional estimated cash flow of $1.4 billion in the fourth quarter, we expecttotal operating cash flow, excluding deposits, to be approximately $3 billion for the entire year. The estimated significant cash flow in the fourth quarter represents the timing of settlementof ournet price risk management assets. I'd also like to speak to liquidity and funding and the rating agencie& We have worked closely with the rating agencies, and we are committed to keeping our current investment grade rating. S&P and Fitch have reviewed toda/s announcements, and th~y have indicated there will be no change in our rating. When we publish our third quarter 10-0 in a few weeks, you will see that our debt to total capital ratio is about 50 percent. With the announced asset sales, We would expect the debt ratio to be dose to 40 percent by year-end 2002.. We are vey comfortable '4h our current liquidity position, even in these Crfflct~t capital markets. We are actively, issuing commercial peperforourcurrent short-term needs, aridour$3 billion committed revolver remains undrawn. Capital spending. Year to date, our capital expenditures and equity investment are estimated to be $2.7 billion, with the majority being in our wholesale services gr6up. Including proceeds from sales, the estimated net spending amount is $1.3 billion for the first nine months of this year - ENRON CORPORATION Moderator Mark Koenig * IO-18-0119:OOa.m.CT aOOk~je Corillimation Page 10 Asset sales. We continually review our portfolio of assets to detemtne whether the greatest long tam value lies in selling the assets or continuing to operate them. In addition tome sale of Portland General for $1.9 billion, plus the $1.1 billion in debt reduction, we're currently negotiating to sell other assets primarily located overseas. Three of the sales that we expect to close by year end are CEG RIO in Bratil, for approximately $250 million. Our Puerto Rican power plant project, also should close for approximately $250 million. And the India E&P properties should close for approximately. $390 rnillibn. Each of these sales is subject to the customary regulatory approvals, but we certainly expect to get those before year-end; Goodwill. We and our outside auditors have recently completed our preliminary evaluation of goodwill. Enron h~s $57 billion of goodwill currently in two places on our balance sheet, on the goodwill line separately reported in our balance sheet, and in ourequity investments. Our goodwill is concentrated in three major areas - Portland General, Wessex Water, and Electm. We currently esbmate, based upon this recent review, that up to $200 million good~dll adjustments may be necessary, and will be recorded as required by '~th~accotntng principles in the first quarter of 2002: Equity issuance, triggers, and certain financing arrangements, which have gotten some attention, mere's been quite a bit of discussion, and perhaps misinformation, about two of our financings. Each of the l1n~ncing is backed first by undert~ng assets, and we anticipate sales of assets to be the primary source of repayments. These financing include t&ms that, if a combinMion - if a combination of certain conditions is met, could result in ftinding obligations by Enron. The first financing isWhite Wing, an unconsolidated equity affiliate which has raised capital based upon the 4 value of the underlying assets. We anticipate sale of the assets will be the primary source of * - 'U, repayment bf this financing. In addition, White Wing owns 259,000 shares of Series B preferred stock, convertible in to 50 million coitmon shares of Enmn, which is reflected in our recurring earning per share calculation The financing includes terms that obligate Enron to 4 r .t+ p ENRON CORPORATION Moderator Mark Koenig 10-18-01/9:00 ani. CT Confirm ation # 638248 Page 11 issue shares in amounts sufficient to repay the related debt if our credit rating is downgraded to below investment-grade, and if the market price of the converted Enron common share is less than about $60 The other financing relates to our investment in Azurix, where Enron is committed under certain conditions to issue Eriron convertible preferred stock, again, if our credit rating is downgraded to below investmert grade, and if Enron's stock price is below about $34 a share. It is important to notethat each of the financing include double triggers. So, although our stock has dropped below the specified levels, we have not had the changes in our credit rating that would require the issuance of addition~l shares. Furthermore, we expect no credit downg?ades. We discussed the quarterly results with the credit rating agencies that I indicated. And of course, Enron also has the option to settle both of these obligations in cash. C Now let me conclude. In summary, our third quarter recurring operating results were outstanding, and our business fundamentals remain very strong. We hope our expanded disclosures help you to better understand our operations. Our new businesses are expanding and adding to our earnings powerand valuation, and we are well potitioned for continued success. And with that, we'd now turn to questions. Operator: Thank you, gentlemen. Our question and answer session will be conducted electronically. If you would like to ask a question, please press the star key, followed by the digit one on your telephone. We'll take: your questions in the order that you signal us, and we'll take as marry questions astime permits. Once again, if you would like to ask a question, please press star one. And we'll pause for just a moment. ENRON CORPORATION Moderator Mark Koenig 10-16-0119:00 am. CT~ Confirmation #638248 Page 12 Our first question comes from Raymond Niles with Salomon Smith Barney. Raymond Niles: Good morning. Its nice to see the actions on the balance sheet, as well as the overa!l operating results. Just a couple questions. Can you go into a little more detail in regard to Europe and perhaps the ouflook for Europe, because it locks like this quarter was a little Nt weaker than sante of your prior quarters or last year, in terms of year over year perfonnance? 'I Kenneth Lay: Ray, we're very optimistic on Europe. And of course, if you'll 106k at the first nine months of this year, Europe was up - Europe and other was up about 20 percent. Europe - a couple at things. Firstof all, as I said in my comments, volatility in the Europe market in third quarter was very low. But also, as you know, because of the vacation schedules in Europe, third quarter is always slow, and usually. things start picking up in September, once everybody gets back to work, but of course, once they got back to work in September this year, we had the September 11th event which pretty well distracted everybody around the world. So a lot of what would have happened in September will probably happen now in October. And we are, as we previously announced - or Enron Europe, as they previously announced, theV are trimming back their employee force a little'bit. I think, probably that got a little bit outacurced, or a little bit outsized, and that will bring the costs down somewhat. But you can see what's happening tothe volumes; enormous growth in volumes. And of course, we've been very successful in the U.K., very successful in the Nordic countries. We think the Spanish model - the Spain model is one where we can make good money. Other countries are beginning to open up, both gas and electricity. . .. r ENRON CORPORATION Moderator Mart Koenig 1O-1840119:00 am. CT ConfIrmation #636248 Pap 13 S But let me turn mat to Greg here fore minute, because he follows that very closely, and see if he wai?ts to add something to it. A 4. Greg Whalley: Jutt that our throughput volume growth, physical volume growth has been - has been exceptional, while there has been very low volatility on the continent. The base is starting to be established where we have sufficient liquidity and transparency in the markets to be able to offer a much broader set of products in Europe. So, while the growth, quarter on quarter, wasn't quite - wasn't quite wasn't quite what we would have liked itto be, given the airrent drtumstances of the quarter, (think the basis for grdwth going forward is exceptional. P k '~ Kenneth Lay: And part of the - part of the piece of me price, or for the benefit of breaking the data down into smatter Ii' segments like we are - certainly them will, from quarter to quarter, be a little more variability. But I mink that's what many of you would like to see, so you can really kind of track the trends in different markets.' - Raymond Niles: Absolutely. In terms of, maybe, a related question that's included in the same category, how V about in your other- because you've shown tremendous volume growth in yourottier commodities - coal, 'WV weather, LNG. Can you comment a little bit on the profitability outlook there, if it's notyetpr~fltable, you know, when, and maybe which commodities you feel better about than, you know, which ones maybe you don't feel as good about? Kenneth Lay: Well, I think - well, first of all, that segment together is profitable. And the profitability: has been growing at a very sharp rate here in the last three quarters. We're seeing tremendous growth, as you see, in all of the volumes. Probably, on the profitability side, certainly coal's profitable, very 'profitable. Pulp and paper's very profitable. It's - e~en.though it's in early stages, they're beginning to make a little money in steel already. Metals is getting in pretty good shape. They've got off to kind of a slow staff. You've got anything ebe you want to add to that, Greg? . ., J 4 ENRON CORPORATION Moderator: Mark Koenig 10-18~O1I9:OO am. CT ConfIrmation #636240 Page 14 Greg Whalley: No, just that -justthat all of them are growing in physical volume, and growing in gross margin numbers. And we've - we don't have anything throwing substantial losses out. It's all growth. Raymond Niles: And just one final question, if I may. Just in terms ofEurope, follow up on that, how about Germany and sort of the heart of the continent? What - give us - can you give us a little bit of sense of the envhonment there, and what we might expect? Greg Whalley: Well, we're seeing very stable pricing, although we're seeing substantially increased numbers of transactions. And a lbt more cross-border transactions are starting to occur alsb, which we think is very good and will contribute to the growth of business. Well, all in all, I think the setup for how Europe's going forward looks quite good for the development of the wholesale business. Right now, though, as we said before, we had difficulty closing a lot of originated ~ transactions in the third quarter. But the ability to manage the risk and offer the outsourcing praduds, to be able to offer somebody either supply source or procurement sources, or ahy other logistics servides, is very good. Raymond Niles: OK, great. Thank you very much. & Kenneth Lay: Thank you. Operator: And our next questio'n now comes from David Fleischer with Goldman Sachs. David Fleischer: 0h Ken and others, on thenonrecurring items first, you've taken a number of charges here; you've told us what they're related to. I guess my first question was going to be, well, you know, can we det some breakdowns of this, but you basically indicated mostof itwas new power in this 544 million. But my real question relates to how confident can we ENRON CORPORATION Moderator Mark Koenig - 10-16-0119:00 an. CT Conflnnation #636246 Page IS be that these will not be, you know, the last write-offs, you know. As far as these businesses, how comfortable are you in sa~dng that these are - you know, that the charges that we're going to see? Kenneth Lay: First, David, I think new power was about hail of the 544 milliop in that last segment. But as to your other question, I mean, number one, if we had - if we thought we had any other impaired ass~ts, it would be in mis list today. But we do still have at least three areas of uncertainty in the company, wtiich you're aware ot p. Of course, one's California. We think were adequately reserved there, and if anything, the regulatory trend is beginning to move, I think, ourway, and toward a little more certainty ir~ that - both the re~uI~tory 4 environment and the bankruptcy court, in PG&E's case. We've got India, and we're of course tr)ing to achieve a settlement on India, and were going to keep flying to do that But Were also actively and a~gr~ssiveIy pursuing all of our legal remedies, and We think that our legal remedies are substantial, just like the'y were when we had to exercise them five years ago. And then, of course, finally broadband. Now, as we said, broadband, with what we did this time, brought the total net investment on our books down to $600 millidn. We still mink there is a business a valuable business there longer term. But we are looking at a number of different strategy options on that. But basically this is what we tried to do here, is clean up anything that we thought needed deaning up, to kind of get these distractions out of the way so we can get a better focus on our strong fundamentals, and the strong growth in our core businesses. David Fleischer: OK. Two things' that you mentioned, I'd like to just follow-up on. You know, on& of them is broadband, where you've been downsizing. We saw significant losses last quarter, this quatter. You've taken this down to a size. Can you tell us when you expect this business to be - or what is the goal in terms of, say, next year being able to get the loss down, and what the run rate of -, ., ~1 >. Ii - Et4RON CORPORATION Moderator: Mart Koenig . 1O-i6O1/9:O0am~T~ Page 16 I { loss, you know, given the current level of business, and I'm assuming that things pick up there that would be kind of the first question mere. Then, secondly, you know, on the asset side, where you've mentioned these assets, there are others that, yab know, that deanyhave forsalethat, Vou know, are not classified as impaired, and yet were - if youwere to sell them today, you know, things like Electra probably would go for losses. You know, when might n~e we hear more an some of these other assets and the timing of the sales from them? -4 Kenneth Lay: I think, speaking to the broadband first, I mean, we - as I said, the IBIT loss for the qUarter was about $80 million, and that*probably would translate into 60 million, or a tie le~s as far as our cash GSA loss. We think we can probably get that down to $60 million or so loss IBIT by the first quarter, which would be about a I $40 million cash G&A loss. And we will keep bringing that down over next year. * .4 .But again, it's goingto depend on the.opportunitks.we see in this business. And then we'll 3ust try td right-size it to kind of make sUre that the costs We're incurring ~re certainly justified by the option value we think exists in that business two orthiee years out. 4. Now, as to the other items, like Electra and others, now, of course, one mason we went ahead and did this .4,- preliminary review, including with Arthur Andersen before we released this,~these earnings, is to make sure we -.4 didn~ have any other goodwill adjustments except the 200 million I mentioned that we had to deal with, because we 4', wanted to get as much of that on the table at this - with this report as we could. Now, from the standpoint of Electra, as you well know, we're beginning to develop a wholesale and ~ retail - , V business around that and other assets down in Brazil. And we may well have that asset and operate that asset for quite some time. Ifs not a bad asset its a good asset just like a * 6 4*,. Li V ENRON CORPORATION. Moderator: Mark Koenig 1O-lGjOl/9:OOa.m.CT ± Con&natiorit6SBZ4S - Pagel7 1 lot of the other assets in Uui~ portfolio. We will keep, We ~vill keep lookir~ for opportUnities to sell. S '4 off those assets that don¶, in fact, either have a strategic advantage to us or in fact, just, lust don't make' sense to kinda keep bperating. I But those that do, and of course we have Stan Horton overseeing that as you well kno Arid Stan has had a lot of experience both domesticaily and intematonally in running Utility businesses. And I'm convinced~that he Will do an excellent job of finding ways to bring more net income and cashflowoutof some of thes& assets overthe nextyearor so. David Fleischer: OK. Thank you, Ken. A Operator: Thank you. Our n~xt question now comes from Carl.K'4rtz (ph) with Merrill Lynch. Carl Kirst: Good morning, everybody. Ken, actually, I just wanted to follow up with what Dave was talking K I -, about and really kind of Iboking at the futUre of the blobal assets division. Just to make sure~l understand t. correcfiy, there's probably about eitherdimdor; you know, indirect investments to the tune of about $6 billion. Obviously the EBIT this quarter shows, I think, some of the challenges there. At first I thought maybe that was kind of the budet, that you know, over the next three years, is going to be wl'ded down capital redeployed and so forth, but is that not going to be the case? I m4an, you know, is Electro possibly still going to form that base of future operations? And if so, you know, givenlhatoverall global assets is ~. *1 4 2 - , only reporting minimal EBIT, how much i~ Bectro doing, if you can help break that out a little bit. It Kenneth Lay: Well, it's been very modest this quarter in part because theyVe had a curtailment program down there ad a V result of their shortage, and ifs kind of tough on Eiectm but that has now been lifted. So, even starting this quarter, they ought to be doin~ quite a bit better ENRON CORPORATION Moderator Mark Koenig 10-16-01/9:00 am. CT Confirmation #838248 Page 18 But the main point I was hying to make to David is we are evaluating all of these assets and by to determine which ones we, from a standpoint of priority, which ones we want to dispose of first, and which ones we want to see if maybe in fact build meaningful profitable businesses around And right now, at least Eledro we're going to hold for a while. I mean, it's not going to be part of this first wave of disposition. Andy Fastow is sitting across the table here, and he's got a whole priority list at least - as to where we are now. And there are a lot of other assets that we will be disposing of over the next> year, year and a half. And of course, somebody could come along and surprise us as to what they might be willing to pay for any of the assets that we don't have on that list, and we'll certainly change the priority list. But tight now, it looks like Electio in fact might be an asset that we'd like to keep operaling for qafte a while and see if we can build a meaningful wholesale and retail business around it inBrazil. Carl Kirst: Oh. fair enough. Two other questions, if I could. First for, you know, Mark or Greg, looking at the momentum continuing in wholesale, as we look at 2002, within the developing operation, i.e. Europe, the nascent commodities, the pulp, paper, steel, so forth. What do you think - I guess, housethe strongest nearterrn potential thatwe should be on the lookoutfor. Is it really European gas and power? Is it the increase in food and products? Just trying to figure out which part we should focus on the most. Greg Whalley: Well, I am, of course, looking for substantial increases in European gas and power. And we're hoping to see substantial growth there. I would also say that the other markets ar~ growing. Some of the most exciting new things that we have seen since some of the markets around for a liWe while have been the significant ramp-ups in our forest products area as well as our steel area. 4 ~ ENRON CORPORATION Moderator: Mark Koenig 1O-16-O1/9:OOa.ni. CT Confinnation #638240 Page 19 Thats not eying I'm not expecting substantial growth from metals and weather and so on. But those have been surprising in the speed with which those markets have been able to move to profitability. So I'm going to be watching those. Carl Kirst: Fair enough. And lastly, if I could, Ken, it was nice to see the reiteration of the '02 earnings targets of about $2.15 that, you know, was a pretty nice growth rate. Certainly the current broad market we're in is somewhat, somewhat ch~lIenging. I guess how comfortable do you feel with that number if indeed we have, you know, two quarters of recessionary activity? Just trying to gai~ge if, you know, what linkage we can with the broad markets and what you mink your growth rate might be if, you know, the, unfortunate happens and we do have, you know, a prolonged downturn? Kenneth Lay: Well, first of all, we wouldn't have put It back out there if we.weren't comfortable with it. And we did - Greg and Mark and I each, I think probably separately and together, been around and visited wit each at our majoro~eradng heads, and went through it in a lot of detail as to where they are and what they think they can do aver the next 15 months or so. And I think certainly the business based - of course, based on recent performance too. The third quarter, again, volatility wasn't all that great third quarter, North America, prices were down quite a bit third quarter versus last ye&. And as you can see, North America in particular had a very, very strong ~uarter again. But certainly we think the fundamental~ are such, and we think our business model is such that, even with some recessionary effects here near-term, we still can achieve those goals. And I think we're all kind of hoping that by mid next year, well be starting to see a little stronger economy too. Blat we've been pleasantly surprised. I mean, we came back on line; as some of you know, on the 12th - on September 12th. We worked - of course, we dosed down early on the 11th Operator: Sir, are you there? - .9.. V -. J I.,. - 4 ENRON CORPORATION Moderator: Mark Koenig ... 10-18-01/9:00 ad,, CT Confim,ation#038248 ,r.. i'age2o .4 Kenneth Lay: Hello? Operator: Yes, sir. Am you there? '.4 t. Kenneth Lay: Yeah. .4 .4 Operator: Yes. You were calling in reference to the Duke Energy call? .4 Kenneth Lay: No. Operator? a a Operator: Yes 4 Carl Kirst:l think we have a &ossed line. 4 'A .4 4. 4 Kenneth Lay: We have a crossed line i .4. here. This is the Enron third quarter call. .4-I- - 4 Male: Is the Enronoperator on? Operator: Yes, sir, I am on. Just one moment, we will isolate the incident. One moment, please. .4 4. Kenneth Lay: Now, if youd like us to talk abbut.Duke,we'll do that too. 4~~. .4 *' * .1' A I think you've helped me with some flavor, and I appreciate it. Best of luck. Carl Kirst: Well, Ken, .4-' .4, .4 .4 -4 7- .4 .4 V V 4 j,4 .4 * 4,j. * . P A F~~. 4. I mea~, we found our Kenneth Lay: Well, the only point I was going to make finishing that u6, coming back very quickly after September 111h Unidentified Male: Yes sir. Kenneth Lay: Ah, Next question. Operator: Thank you, gentlem~n. We'll now move on to Anatol Feygin with JP Morgan. Kenneth Lay: Anatol? Operator: One moment, please.. Kenneth Lay: Maybe he got on the Duke call. Anatol Feygin: Hello, oper'ator? S ENRON CORPORATION Moderator Mark Koenig 1O~18~O1I9:OOa.m. CT ConfIrmation #638246 Page 21 businesses A - A 1 4 Op&ator: Mr. Feygin, your line is now open. Please ~o ahead C. Anatol Feygin: Can you hear me, operator? AS I~ Kenneth Lay: Yes, we got you. I F Anatol Feygin: Oh, thank you. Just a quick question, if you could again run through some of the balance sheet and cash flow infom'iation that we'll run through in tern's of the contingent equity obligations and the reduction in IS - shareholder equity, and what that would mean on - in terms of the dilution and the stiareccunt, and then the Ft cash flow numbers ~dthout the mdrgin outflows, or net &tlicse outflows. A P Kenneth Lay: Sure. Now, just starting with the cash flow numbers, I mean, net of the margin,*was the swing in - - margin from last year to this year - I mean, ffweiustIdWdofIook,Iiettatoutrthisyear,wee~edto F 4 . A A F generate $3 billion of cash flow this year, about 1.4 billion of that will be in the fourth quart& because of the sell lement of these - of bur net price risk management asset, which means the .1 r F F, F' 4 4 4 - 4 A. ENRON CORPORATION Moderalor Mark Koenig 10-1641/9:00 n.m. CT Confirtnationt 838248 Page 22 first three quarters we have about 1.6 billion. But the big swing, of course, year to year werethese margin changes, where in fact we've had a net outflow of 2.6 billion this year because of margins, but we had a net inflow of 1.9 billion last year Anatol Feygin: Great. And in terms of - you menfloned the shareholderequity a~ount beinjreduced 1.2 billion. Kenneth Lay: That had to do witl~ this one financing vehicle which we liquidated as part of these write-offs and write-downs. And, but that also as part of that it removed us of an obligation to issue a significant number of Enmn shares, which would, of coUrse, be included in the recuning income diluted share count. But now we don't have to do that. So the two offset each other. And Rick, do you have anything to add to that? Rick Causey: No, that's correct. Anatol Feygin: OK. And just one unrelated cjuestion - following up on broadband, of course, we've seen over the last quart6r, and of the condnued weakness there obviously, basically no business being done there. And yesterday one of your competitors has come out and today again has come out saying that their feeling was that the market has bottomed: And now, with the increased demand for video conferencing and so on thatthere is a recovery underway. Are you seeing increased deal flow on these early stages of 04 on the broadband business? Kenneth Lay: We hopethey're right. But we're not seeing much indication of that yet. And primarily - mean, you still got a very battered industry, as you know. Md lust the absence of strong credit worthy counterparties is a very significant problem. Greg, do you hive any mole you can Greg Whalley: No, just that we're not seeing particulatly strong business growth th&e for a couple of reasons. One is there could be changes, with a: with the increase in the amount of video conferencing and so on. But we're not seeing substantially increased number of * - * - ENRON CORPORATION Moderatoc M&rk Koenig 1O-1S0119:OOa.m. CT - Confirmation #038240 * Page23 tra6~actions in the marketplace. And we're certainly not seeing any incr~ase in the number of 'I creditworthy counter parties to deal with in that marketplace. And both of those cause significant A. problems in business growth We are concerned about the outiock, although over the long run, one wauldexpect there would be a business there. Anatol Feygin: Is - you men~oned, Ken, that the bum rate by the first quarter would come down to mughty the 40 * * - & million number. What are the assumptions there in terms of revenue growth versus further G&A C cuts? A: Kenneth Lay: Its really both. And we - of course, we've already either redepioyed or laid off about 500 people And that, of course, was probably the severance cost included in these nonrecurring charges we took at the end of the third quarter. And we're still trying to balance that, Anatol, because we're - as I *~ indicated, I mean, we're write now locking at several different strategic options here, and as well as just kind of continuing to kind of build the business. But we're just trying to figure outwhicti of the options might. make the most sense tt our shareholders longer term. (. Anatol Feygin: Great. Thanks very much. t Operator: Let's now move on and take a question from Ron Barone with UBS Warburg. . - 4 Unidentified Voice: (Unintelligible) - - $ Kenneth Lay: Ron? Is his line open, operator? .(Echb) Operator: One moment, gentlemen; ENRON CORPORATION Moderator Mark Koenig 10-16-0119:00 an. CT Contn,atlon #836248 Page 24 Ron Barone: Can you hear me? Kenneth Lay: There you go. Ron Barone: OK. Good morning, Ken. Kenneth Lay: Good morning, Ron. Ron Barone: A couple of questions. Were there any peaker sales in the quarter? And secondly, can you give us a little bit more flavor on retail? I mean, it's doing very well. Maybe possibly some flavor on some of the contracts wiTh some of these high protile names, average length, nationwide, orspecific states, or regional, or anything you can do to shed some light on it would be appreciated. Kenneth Lay: First of all, there were no peaker plant sales during the quarter. And Wendy's, uh, Wal-Mart was initially just California. I don't know if that's been expanded yet or not. Greg, do you know? Greg Whalley: I don't know. I don't believe it has yet. Kenneth Lay: I don~think it has yet, but I think them's a good opportunity to expand it But I think initiallythat just covers A. California, Ron. Wendy's, I think, may cover a goad part of the country. Is that right, Mark? Mark Koenig: That's right. Kenneth Lay: And I expect the others do too. I think Wal-Mart might have been the exception on that list. But I'll say that probably the more exciting thing longer term is the progress the/re making with the smaller business customers, which is using our Erron direct model. But, I mean, we are signing up a lot of cistomers. And of course, some of those cornmerci~l customers are pretty I ENRON CORPORATION Moderator Mark Koenig iO-16-0119:OO an. CT Confirmation# 638248 Page 25 goad size. But the - had more standardized contracts. we're tIe to, in fact scale this up much quicker And its a very profitable model. So we'll keep you ad~sed of that. Now, well keep doing the lame customers and the energy outsaurting and all of the other things. put they now added on a whole new leg of growth through the small customer category. Ron Barone: One of the - could you justtakea guess at average length oraveragetemi of the contracts? (Echo) Kenneth Lay: Well, again, the -well now,thesmallercustom~rsaretypicallythiee-totive-yearcontract~. But the bigger ones, the outsourcing contracts are typically eight- to 1 0-year contracts. And we do have at least one or Mo thats extended up to 15 years. Ron Barone: OK. Thank you. Operator: Moving on, we'll take a question from Scott Soler with Morgan Stanley. Scott Soler: Good morning. I've got two questions - two sets of questions. First, on the retail bCisiness - and exa.jse me, because I'm a neophyte to the company. But when I look at retail and say that in terms you're not going to be disclosing the dollar size of new contracts, when you guys look at the size of the retail market, the growth. rate that you're assuming in revenue in the margin assumptions, could you kind of give me some color on that first? Kenneth Lay: We'll it's an enotmous market.Of course, the retail market overall or - ~ven the retail market for commemial and industrial would be a lot lamerthan the U.S. wholesale natural gas electricity markets. And let me also say thus far we've been going after primarily the power 4, ENRON CORPORATION Moderator Mart Koenig 10-16-0119:00 am. CT Confirmation# 836246 Pa~e28 business for these customers, but increasingly we're now adding on the gas business, which we think could be - will be squally profitable, maybe in some cases more profitable. But this is an enormous ma*et and as I said in my comments, we're the only company thus far that has put in place the infrastnjcture to address a customer's needs on a total nationwide basis, and of course, increasingly even U.S. or North America and Europe basis. And that's primarily for the larger customers. Again, speaking of the Wal-Marts or custome?s of that type. And we do have several of the - ((inaudible)) both Europe and U.S. We have both our U.S. and our: European facilities. But of course, as you move down to the smaller customers, you had a big mar*et, but you pick them up, obviously, in much smaller bunches. And most of those are not energy outsourcing. Most of those initially are just strictly commodity. But then, of course~ you up sale over time for other energy services. But they are doing a tremendous job of providing the volume of customers and the revenue that they need to keep growing this business at very strong growth rates. Now, you ask how you're going to model this. I mean, it's hard to know because thus far it's been done quarter on quarter just about every quarter, whether it be revenue, whether it be isrr, or any other mettic weVe used. But I think we will see ft grvwing at a very rapidrateforatleastthenextthreeorfourorfive years. Greg Whalley: Yeah, and there's also still significant growth available in both facilities management and demand side management to manage consumption of electilcity on the demand side, management side. We're seeing substantial busines~ there, Scott Soler: OK. Now, my second question is regarding your wholesale business. I guess two questions. First off, there was a $88 million negative swing in equity earnings in wholesale. And I don't know if you had touched on that or not. If I could get an answer to that. And then secondly, are you - .~ I -4 4 ENRON CORPORATION Moderator Mark Koenig - . - . 10-18-0119:00 am: CT ~, i.... - ConfirmatIon #638248 £ Page27 guys going to provideasdiedule of wholesaleAmerica and Eurdpe, not just forthis quarterybutfor, you know, 2000 and 2001. Will that be available on the Internet? Mark Koenig: Scott, Vs Mark. Yes, we will have, as early as this afternoon for you, some back data on the segments backed by quarter trough the year 2000 and annually for '99. Ithink we'll have that on the stats on the web and at the meetings. (Conversation in background) ¼ Rick Causey: On the equity earnings,- this is Rick Causey - the swing is really a change in performance of our merchant portfolio, of some positive results in the prior period and some .slighfly negative results this current*~. period. -V 4 t - Scott Soler: OK. Thank you. p 4- '-I 4.. Kenneth Lay: thank you. And operator, I think du~ to the time, we probably ought to go and wrap this up. r *3 - - Operator: Thank you, gentlemen. OK. I'll go ahead and turn the canferer~ce back over to' Mr. Lay. S 4. . . -t .t, V Kenneth Lay: Well - and again, we had a strong quarter in our recurring businesses. The fundamentals in the business are very strong. We're optimistic abdut' obviously, fourth quarter and all of next year. And we h~ve cleaned up some items here which we-thought both clouded the performance of our core operations and kind of distracted from it. And ho~efuBy, by doing this, we'll get a little bit sharper focus on the company's true strengths in themonths and quarters to comes We appredate you giving us this I time this morning. --tb' V-V -~ * V. -4- Operator: And that does conclude today's Conference call. We thank you all icr your participMion. Have a good day. END - t V