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EXHIBIT 99.C3
Preliminary & Confidential
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AZURIX
Presentation to the Special Committee of the Board of Directors
December 11, 2000
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TABLE OF CONTENTS
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1. SITUATION OVERVIEW
2. OVERVIEW OF AZURIX
3. STRATEGIC PROCESS
4. EVALUATION OF STRATEGIC OPTIONS
5. VALUATION
6. DRAFT FAIRNESS OPINION
7. APPENDIX
A. DISCOUNTED CASH FLOW ANALYSIS
B. COMPARABLE COMPANIES ANALYSIS
C. COMPARABLE TRANSACTIONS ANALYSIS
D. THAMES WATER TRANSACTION MULTIPLES
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SITUATION OVERVIEW
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Situation Overview
ASSIGNMENT
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o ON OCTOBER 27, ENRON CORP. ("ENRON") ANNOUNCED A PROPOSAL TO PROVIDE
FUNDING TO TAKE AZURIX CORP. ("AZURIX" OR THE "COMPANY") PRIVATE AT A
PRICE OF $7.00 PER SHARE IN CASH
o WASSERSTEIN PERELLA & CO., INC. (WP&CO.) AND SALOMON SMITH BARNEY INC.
(SSB) ARE SERVING AS FINANCIAL ADVISORS (THE "ADVISORS") TO THE SPECIAL
COMMITTEE OF THE BOARD OF DIRECTORS OF AZURIX (THE "SPECIAL COMMITTEE")
AND IN THAT CONNECTION HAVE BEEN ASKED TO RENDER FAIRNESS OPINIONS WITH
RESPECT TO THE PROPOSED TRANSACTION
o WP&Co. has been hired as the independent advisor to the Special
Committee
o SSB (PRIMARILY THROUGH ITS SCHRODERS' LONDON OFFICE) AND MERRILL LYNCH
HAVE ALREADY CONDUCTED A PROCESS TO IDENTIFY STRATEGIC PARTNERS FOR
AZURIX THAT BEGAN IN MARCH 2000
o The process generated initial interest from approximately ten, mostly
strategic, potential buyers and partners
o The highest indicative offer received during this process was an
indication of $7.00 per share from E.ON; this offer was later
withdrawn after E.ON completed substantial due diligence
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Situation Overview
OVERVIEW OF TERMS
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OVERVIEW OF GOING PRIVATE TRANSACTION
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Investor: Enron
Structure: Merge an indirect subsidiary of Enron
("Merger Sub") into Azurix, whereby Azurix
shall continue as the surviving corporation
and the separate corporate existence of
Merger Sub shall cease
Amount of Investment: We believe approximately $315-$335 million
(one third of 117.3 million shares of common
stock outstanding at a price we believe will
be between $8.00-$8.50 per share)
Type of Investment: Cash
Deal Protection Devices: None
Conversion of Shares: The exchange ratio of Azurix common shares
into the surviving corporation's common
shares shall be set at approximately 40
million to one (1), so that AWT's 67%
ownership in Azurix will be converted into 2
of the 3 common shares of the surviving
corporation; there will be no fractional
shares of surviving corporation, so public
shareholders will receive the Merger
Consideration in cash instead; the Merger
Consideration will be funded by Enron
through the Merger Sub. Enron, as sole
shareholder of Merger Sub, will, upon the
merger, obtain the third share of surviving
corporation
Board of Directors: Enron's right to appoint more than half of
the directors of Azurix is subject to the
continuing right of MWT to have the right to
direct AWT to elect or replace a percentage
of Azurix's directors equal to 50% minus the
percentage of outstanding voting stock held
by persons other than AWT, Enron and its
affiliates
Termination: The merger may be abandoned if the Company
Board or the Special Committee recommends a
superior proposal (a bona fide written
acquisition proposal that would provide
greater value to the Company's shareholders
than the cash price they are receiving in
the merger)
Majority of the Minority Approval: A majority of the publicly held shares cast
either for or against the merger must be
cast for the merger
Indenture: To be discussed
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Situation Overview
WP&CO. WORK PROCESS
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o NOVEMBER 9: WP&CO. MET WITH SENIOR MANAGEMENT OF AZURIX IN HOUSTON TO
DISCUSS THE COMPANY'S HISTORY, BUSINESS PERFORMANCE AND STRATEGY AS
WELL AS ITS EFFORTS TO DATE TO FIND A STRATEGIC PARTNER FOR THE
COMPANY
o NOVEMBER 13: WP&CO. MET WITH SENIOR MANAGEMENT OF WESSEX WATER IN
BATH, ENGLAND, TO REVIEW THE WESSEX BUSINESS AND THE FINANCIAL,
OPERATIONAL AND REGULATORY ISSUES FACING IT
o NOVEMBER 13: WP&CO. MET WITH SSB AND REVIEWED IN DETAIL THE PROCESS TO
IDENTIFY A STRATEGIC PARTNER CONDUCTED FOR AZURIX THAT BEGAN IN MARCH
2000
o SSB was the lead banker in the process; a follow-up discussion
with Merrill Lynch was not considered necessary
o NOVEMBER 20: WP&CO. MET WITH KEY PERSONNEL AT ENRON IN HOUSTON TO
DISCUSS ENRON'S PROPOSED STRUCTURE OF THE TRANSACTION AND TO REVIEW
ENRON'S DISCUSSIONS WITH PARTIES INTERESTED IN ACQUIRING ALL OR PART
OF AZURIX
o NOVEMBER 20: WP&CO. CONDUCTED DUE DILIGENCE AT AZURIX'S OFFICES IN
HOUSTON
o NOVEMBER 27: WP&CO. MET WITH SENIOR MANAGEMENT OF AZURIX BUENOS AIRES
IN ARGENTINA TO DISCUSS THE OPERATIONAL, FINANCIAL AND REGULATORY
ISSUES FACING THAT BUSINESS
o NOVEMBER 9 - NOVEMBER 30: WP&CO. HELD NUMEROUS TELEPHONIC DUE
DILIGENCE SESSIONS WITH THE MANAGEMENT OF ENRON, AZURIX AND SEVERAL OF
AZURIX'S SUBSIDIARIES
o DECEMBER 4: SPECIAL COMMITTEE MEETING
o DECEMBER 5: NEGOTIATING SESSION BETWEEN ENRON REPRESENTATIVES AND
SPECIAL COMMITTEE ADVISORS
o DECEMBER 6-11: CONTINUED NEGOTIATIONS
o DECEMBER 11: SPECIAL COMMITTEE MEETING
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Situation Overview
OVERVIEW OF ENRON'S PROPOSAL ($ millions except per share)
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o ON OCTOBER 27, 2000, ENRON OFFERED TO PROVIDE FUNDING TO TAKE AZURIX
PRIVATE AT A PRICE OF $7.00 PER SHARE, FOR TOTAL CONSIDERATION OF
APPROXIMATELY $275 MILLION IN CASH
o AFTER NEGOTIATION BETWEEN THE PARTIES AND THEIR ADVISORS, WE BELIEVE ENRON
WILL IMPROVE ITS PROPOSAL TO A PRICE BETWEEN $8.00 AND $8.50 PER SHARE, AN
INCREASE OF 14.3% TO 21.4%
o ENRON'S INITIAL $7.00 PER SHARE OFFER IMPLIES THE FOLLOWING MARKET
CAPITALIZATION, PREMIUM TO MARKET AND TRADING MULTIPLES:
IMPLIED MARKET CAPITALIZATION OF INITIAL OFFER
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INITIAL OFFER PRICE $ 7.00
Total Shares Outstanding 117.33
Total Options Outstanding 10.25
Average Strike Price of Options $ 13.79
EQUITY MARKET VALUE $ 821.3
Plus: Net Debt(1) 1,783.1
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ADJUSTED MARKET VALUE $2,604.4
SHARE PRICE PREMIUM COMPARISON TO INITIAL OFFER
ALL TIME
1 30 60 90 -------------------
SHARE PRICE PRIOR TO DAY DAYS DAYS DAYS HIGH LOW
------- ------- ------- ------- ------- -------
10/27/00 $ 3.56 $ 4.38 $ 8.25 $ 7.50 $ 23.88 $ 3.44
Premium @ $7.00 96.5% 60.0% (15.2%) (6.7%) (70.7%) 103.6%
Median Premiums Paid (>50%)(2) 24.5% 31.5% 28.2% 26.5% -- --
IMPLIED AZURIX STOCK PRICE $ 4.44 $ 5.75 $ 10.57 $ 9.49 -- --
IMPLIED TRANSACTION MULTIPLES OF INITIAL OFFER(3)
ADJUSTED MARKET VALUE AS A MULTIPLE OF MARKET VALUE AS A MULTIPLE OF
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SALES EBITDA EBIT NET INCOME BOOK VALUE
----- ------ ---- ---------- ----------
INITIAL OFFER PRICE: $7.00
LTM 3.4x 9.3x 16.7x 31.4x 0.5x
2000E 3.5x 10.1x 20.5x NM NA
2001E 3.2x 8.8x 16.4x NM NA
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(1) As of 9/30/00.
(2) Reflects transaction sizes of between $100MM and $3 billion since 1996 for
which the acquiror owned more than 50% of the target prior to the
transaction and purchased the remaining stake.
(3) Estimates based on management projections.
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Situation Overview
PRICE SENSITIVITY ANALYSIS ($MM)(1)
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Current Initial
Price Offer Price
PURCHASE PRICE PER SHARE $ 6.13 $ 7.00 $ 7.50 $ 7.75 $ 8.00 $ 8.25
Premium to Current Price(2) 0.0% 14.3% 22.4% 26.5% 30.6% 34.7%
Premium to Price One Day Prior to 10/27/00(2) 71.9% 96.5% 110.5% 117.5% 124.6% 131.6%
Common Shares Outstanding 117.33 117.33 117.33 117.33 117.33 117.33
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MV OF COMMON EQUITY $ 718.7 $ 821.3 $ 880.0 $ 909.3 $ 938.7 $ 968.0
Plus: Option Value(3) 0.0 0.0 0.0 0.0 0.0 0.0
EQUITY VALUE $ 718.7 $ 821.3 $ 880.0 $ 909.3 $ 938.7 $ 968.0
Plus: Net Debt 1,783.1 1,783.1 1,783.1 1,783.1 1,783.1 1,783.1
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ADJUSTED MARKET VALUE $ 2,501.8 $ 2,604.4 $ 2,663.1 $ 2,692.4 $ 2,721.8 $ 2,751.1
PURCHASE PRICE PER SHARE $ 8.50 $ 8.75 $ 9.00
Premium to Current Price(2) 38.8% 42.9% 46.9%
Premium to Price One Day Prior to 10/27/00(2) 138.6% 145.6% 152.6%
Common Shares Outstanding 117.33 117.33 117.33
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MV OF COMMON EQUITY $ 997.3 $ 1,026.7 $ 1,056.0
Plus: Option Value(3) 0.0 0.0 0.0
EQUITY VALUE $ 997.3 $ 1,026.7 $ 1,056.0
Plus: Net Debt 1,783.1 1,783.1 1,783.1
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ADJUSTED MARKET VALUE $ 2,780.4 $ 2,809.8 $ 2,839.1
SALES $ 766.8 3.3x 3.4x 3.5x 3.5x 3.5x 3.6x 3.6x 3.7x 3.7x
EBIT 155.8 16.1x 16.7x 17.1x 17.3x 17.5x 17.7x 17.8x 18.0x 18.2x
LTM EBITDA 281.1 8.9x 9.3x 9.5x 9.6x 9.7x 9.8x 9.9x 10.0x 10.1x
NI 26.1 27.5x 31.4x 33.7x 34.8x 35.9x 37.1x 38.2x 39.3x 40.4x
RAB(5) 1,800.0 1.08x 1.13x 1.17x 1.18x 1.20x 1.21x 1.23x 1.25x 1.26x
SALES $ 753.9 3.3x 3.5x 3.5x 3.6x 3.6x 3.6x 3.7x 3.7x 3.8x
EBIT 127.1 19.7x 20.5x 21.0x 21.2x 21.4x 21.6x 21.9x 22.1x 22.3x
2000E(4) EBITDA 258.7 9.7x 10.1x 10.3x 10.4x 10.5x 10.6x 10.7x 10.9x 11.0x
NI (0.4) NM NM NM NM NM NM NM NM NM
RAB(5) 1,948.2 0.99x 1.05x 1.08x 1.09x 1.11x 1.12x 1.14x 1.15x 1.17x
SALES $ 817.3 3.1x 3.2x 3.3x 3.3x 3.3x 3.4x 3.4x 3.4x 3.5x
2001E(4) EBIT 158.8 15.8x 16.4x 16.8x 17.0x 17.1x 17.3x 17.5x 17.7x 17.9x
EBITDA 295.9 8.5x 8.8x 9.0x 9.1x 9.2x 9.3x 9.4x 9.5x 9.6x
NI (5.6) NM NM NM NM NM NM NM NM NM
RAB(5) 2,129.6 0.91x 0.96x 0.98x 1.00x 1.01x 1.03x 1.04x 1.05x 1.07x
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(1) Calculates adjusted market value as multiples of sales, EBIT and EBITDA,
and equity value as a multiple of net income.
(2) Premium to current price based on closing price of $6.13 as of 12/8/00.
Premium to price one day prior to the initial offer date (10/27/00) based
on closing price of $3.56.
(3) Based on 10.25MM options outstanding and a weighted average strike price of
$13.79.
(4) Estimates are management projections.
(5) Assumes Enterprise Value of all non-Wessex assets is $566 million.
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Situation Overview
PROPOSED STRUCTURE
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[BEFORE PROPOSED ENRON TRANSACTION FLOW CHART]
[AFTER PROPOSED ENRON TRANSACTION FLOW CHART]
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(1) Enron's right to appoint more than half of the Directors of Azurix is
subject to the continuing right of MWT to have the right to direct AWT to
elect or replace a percentage of Azurix's directors equal to 50% minus the
percentage of outstanding voting stock held by persons other than AWT,
Enron and its affiliates.
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Situation Overview
SIGNIFICANT TRANSACTION ISSUES
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o PRICING
o A potential $8.00-$8.50 price range represents a 124.6%-138.6% premium
to Azurix's stock price one day prior to the announcement of Enron's
initial proposal of $7.00 per share on October 27, 2000
- In addition, a potential $8.00-$8.50 price range is well above
the Company's 6-month average trading price of $6.17
o A potential $8.00-$8.50 price range represents a $1.00-$1.50 per share
improvement in price compared to Enron's initial proposal of $7.00 per
share, or a 14.3%-21.4% increase
o Standard valuation analyses suggests a valuation range for Azurix of
$2.00-$9.00 per share
- A potential $8.00-$8.50 price falls near the high end of this
range
o A potential $8.00-$8.50 price range is approximately twice the level
of three of the four initial indications of interest for an
acquisition of Azurix which resulted from the marketing process
conducted by SSB and Merrill Lynch
o A potential $8.00-$8.50 price range is also above the $7.00 indicative
offer from E.ON for an acquisition of Azurix, which was
withdrawn after substantial due diligence
o In February 2000, McKinsey studied strategic alternatives
and valued Azurix's business at approximately $4.27 per share. A
potential $8.00-$8.50 price range represents a 87.4%-99.1% premium to
McKinsey's independent valuation
o A potential price range of $8.00-$8.50 is also above a $7.00 per share
price which Enron indicated would not be adequate to sell their shares
in Azurix
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Situation Overview
SIGNIFICANT TRANSACTION ISSUES (Cont'd)
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o TIMING
o Enron's proposal contemplates a one-step merger transaction between an
Enron acquisition entity and Azurix
- Due to MWT's continued post-transaction equity ownership of
Azurix through AWT, a short-form merger is not possible
- A full SEC review of the proxy statement and the schedule 13E-3
statement is expected and will likely last six weeks or more
- A shareholder meeting to approve the merger would be scheduled
approximately 30 days subsequent to the mailing date of the proxy
o The Azurix Senior Notes Indenture (the "Indenture") contains a debt
incurrence test which would restrict Azurix's ability to consummate a
merger transaction without restructuring existing debt, unrestricting
Azurix subsidiaries under the terms of the Indenture, or soliciting
consents from Senior Notes holders to waive the incurrence test
- For the proposed transaction to occur under the Indenture, Azurix must
be able to issue at least $1 of debt and still meet the Fixed Charge
Ratio (Consolidated EBITDA/Consolidated Fixed Charges) of 2:1 on an
LTM basis
- Azurix's Consolidated EBITDA for the year ended December 31, 2000, is
projected to decrease from the prior year and the Fixed Charge Ratio
is currently estimated to decline to 1.81x absent certain actions
under review
- Management is currently forecasting that Consolidated EBITDA will be
approximately $28 million less than needed to pass the debt incurrence
test as of December 31, 2000
- To avoid failing the debt incurrence test, Enron has proposed to
Azurix to convert up to $180 million of Azurix's revolving credit G&A
Line with Enron into 11% Azurix Preferred Stock; in addition, Azurix
is reviewing unrestricting one or more of its subsidiaries in order
pass the debt incurrence test
- The following page highlights the estimated Fixed Charge Ratio at
December 31, 2000 and March 31, 2001 and also highlights various
alternatives to increase the Fixed Charge Ratio above 2:1
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Situation Overview
SIGNIFICANT TRANSACTION ISSUES (Cont'd)
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STATUS QUO 12/31/00 3/31/01
Consolidated EBITDA $263.6 $244.3
Consolidated Fixed Charges 145.5 143.8
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FIXED CHARGE COVERAGE RATIO 1.81x 1.70x
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Required Fixed Charges to Reach 2:1 Ratio 131.8 122.1
Required Decrease in Fixed Charges to Reach 2:1 Ratio 13.7 21.6
Required Conversion of Principal at 7.6% to Reach 2:1 Ratio 180.7 284.7
Required Consolidated EBITDA to Reach 2:1 Ratio 291.1 287.6
Required Increase in EBITDA to Reach 2:1 Ratio 27.5 43.3
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CONVERT $180MM OF ENRON REVOLVER
Effect: Decreases Fixed Charges (13.5) (13.5)
NEW FIXED CHARGE COVERAGE RATIO 2.00x 1.88x
UNRESTRICT WATERDESK SUBSIDIARY
Effect: Increases Consolidated EBITDA 3.2 3.2
NEW FIXED CHARGE COVERAGE RATIO 1.83x 1.72x
UNRESTRICT AAFL SUBSIDIARY (CAYCO FINANCING SUBSIDIARY)
Effect: Increases Consolidated EBITDA 29.4 29.4
Effect: Increases Fixed Charges 5.4 5.4
NEW FIXED CHARGE COVERAGE RATIO 1.94x 1.83x
UNRESTRICT LURGI SUBSIDIARY
Effect: Increases Consolidated EBITDA 2.5 2.5
NEW FIXED CHARGE COVERAGE RATIO 1.83x 1.72x
CONVERT $180MM OF ENRON REVOLVER, UNRESTRICT WATERDESK, AAFL AND LURGI
Effect: Increases Consolidated EBITDA 35.0 35.0
Effect: Decreases Fixed Charges (8.1) (8.1)
NEW FIXED CHARGE COVERAGE RATIO 2.17x 2.06x
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Situation Overview
SIGNIFICANT TRANSACTION ISSUES (Cont'd)
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o RISK TO THE PUBLIC WITHOUT A TRANSACTION
o Azurix remaining public may entail significant risks for the public
shareholders
- Assuming no asset sales occur, Company financial forecasts
project no available liquidity by May 2002; the company must have
access to capital to execute its growth through acquisition
strategies
- Projected growth in the water services segment depends on the
acquisition and operational integration of targeted companies
- The privatizing water concession market is both slow and highly
competitive
- Projected improvement of financial results for Azurix Buenos
Aires is dependent on approval by the regulator of significant
tariff increases, improvement in the collection of accounts
receivable, and realization of water quality, customer growth and
asset expansion goals
- The Madera Water Bank project is contingent upon securing the
necessary environmental permits
o RISK TO ENRON WITHOUT A TRANSACTION
o Enron has strong incentives to consummate the merger
- The merger allows Enron to avoid taking a substantial future
write-down of its investment in Azurix (as much as $1.0 billion)
- Enron wants to remove Azurix from the scrutiny of the public
financial markets so that assets can be sold in a more managed
and orderly manner rather than in a fire sale
- Azurix's performance since the IPO tarnishes Enron's reputation
- Enron may be able to use Azurix's losses to optimize tax
efficiency (i.e., Latin America)
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OVERVIEW OF AZURIX
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Overview of Azurix
KEY MILESTONES
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[KEY MILESTONES FLOW CHART]
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Overview of Azurix
FORMATION OF AZURIX IN 1998
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o ENRON CREATED AZURIX IN 1998 TO CAPITALIZE ON OPPORTUNITIES FOR GROWTH IN
THE GLOBAL WATER INDUSTRY
o THE COMPANY BELIEVED THAT IT WAS STRATEGICALLY POSITIONED TO GAIN SHARE IN
A FRAGMENTED GLOBAL WATER INDUSTRY WHICH WAS PREDICTED TO EXPAND RAPIDLY
DUE TO PRIVATIZATION OF WATER ASSETS, PENT UP DEMAND FOR INFRASTRUCTURE
SPENDING AND STRICTER WATER QUALITY AND ENVIRONMENTAL STANDARDS
o THE STRATEGIC RATIONALE WAS TO TRANSFER ENRON SKILLS TO AZURIX TO PUT THE
NEW COMPANY IN A UNIQUE POSITION TO CREATE VALUE
o Transaction identification and evaluation
o Experience in privatizing and deregulating markets
o Development and management of international infrastructure projects
o Expertise in capital markets
o IN OCTOBER 1998, AZURIX ACQUIRED WESSEX WATER LTD. FOR $2.4 BILLION
o Wessex is the Company's largest acquisition to date and its largest
asset
o Azurix paid 1.5x-1.6x Regulatory Asset Base ("RAB") for Wessex - a
multiple that was at the high end of the historical valuation range
for the acquisition of U.K. water companies
o Wessex was expected to provide a base off of which to build a global
water business
o IN DECEMBER 1998, ENRON CONTRIBUTED AZURIX TO AWT
o Simultaneously, MWT acquired a 50% voting interest in AWT for $1.149
billion
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Overview of Azurix
EXPANSION OF AZURIX IN 1999
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o IN JUNE 1999, AZURIX COMPLETED ITS INITIAL PUBLIC OFFERING OF 36.6 MILLION
SHARES OF COMMON STOCK AT $19.00 PER SHARE
o Azurix sold 17.1 million shares and AWT sold 21.5 million shares of
Azurix common stock (including an over-allotment)
o Since the IPO, Enron and MWT has each continued to own a 50% voting
interest in AWT, which owns approximately 67% of the Company's common
stock
o AFTER THE IPO, AZURIX USED THE PROCEEDS TO IMPLEMENT A GROWTH STRATEGY
FOCUSED ON ACQUISITIONS OF WATER AND WASTEWATER COMPANIES AND WATER
SERVICES COMPANIES
o IN JULY 1999, THE COMPANY ACQUIRED A 30-YEAR WATER AND WASTEWATER
CONCESSION IN THE PROVINCE OF BUENOS AIRES, ARGENTINA, FOR $438.6 MILLION
o As part of the concession contract, Azurix must meet water quality,
service, and infrastructure expansion goals which will require
significant capital expenditures
o The Buenos Aires concession, the company's second largest asset, has
faced numerous problems since the acquisition including incomplete
customer accounts, difficulties in accounts receivable collection,
water quality issues and disputes over tariffs
o DURING THE COURSE OF 1999, AZURIX ALSO MADE SEVERAL OTHER SMALLER
ACQUISITIONS, INCLUDING:
o A long-term water and wastewater concession in Cancun, Mexico for $14
million
o Azurix North America, a water and wastewater services company with
operations in 9 U.S. states and in Canada, for $118 million
o A 49% interest in Industrias del Agua, S.A. de C.V. (IASA), which
participates in water and wastewater projects and service provision in
Mexico, for $23 million
o Azurix Brazil RDM, a services company that provides water drilling,
water supply, and water and wastewater treatment services in Brazil,
for $57 million
o Lurgi Bamag, an international water and wastewater engineering
services company, for $31 million
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Overview of Azurix
EXPANSION OF AZURIX IN 1999 (Cont'd)
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o BY THE END OF 1999, AZURIX'S STRATEGY OF GROWTH THROUGH ACQUISITIONS BEGAN
TO SLOW
o The Company faced disappointing results in Buenos Aires, a 12% tariff
reduction at Wessex Water, and a declining stock price
o Opportunities to acquire concessions through privatizations developed
more slowly than expected
o For the major water concessions that did come available, larger
international water companies such as Vivendi and Suez Lyonnaise
outbid Azurix
- Azurix was at a disadvantage in bidding for large concessions
because its cost of capital was significantly higher than
competitors such as Vivendi and Suez Lyonnaise (approximately
9%-10% for Azurix vs. 6%-7% for competitors)
o AS A RESULT OF THESE DEVELOPMENTS, AZURIX DECIDED TO SCALE BACK ITS GROWTH
PROGRAM SIGNIFICANTLY IN THE FOURTH QUARTER OF 1999
o After announcing its intentions to Wall Street on an earnings call,
the Company's stock price began to suffer dramatically
o THE COMPANY TOOK A $35 MILLION RESTRUCTURING CHARGE AS IT REORIENTED THE
BUSINESS STRATEGY GOING FORWARD
o Corporate and Azurix Services staff was reduced from 270 to 170 people
o Several offices were closed or reduced
o Global activities in areas such as Asia, Africa and South America were
scaled back
o THE NEW STRATEGY FOCUSED ON OPTIMIZATION OF THE COMPANY'S EXISTING ASSET
BASE THROUGH OPERATIONAL IMPROVEMENTS AND ON SMALLER, SYNERGISTIC GROWTH
OPPORTUNITIES WITH QUICK PAYBACKS
o Service focus rather than capital intensive concession focus
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Overview of Azurix
LIQUIDITY ISSUES
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o IN FEBRUARY 2000, AZURIX ISSUED U.S. DOLLAR AND U.K. POUND STERLING NOTES
WITH A U.S. DOLLAR EQUIVALENT FACE VALUE OF $599.8 MILLION
o The senior notes consisted of $240 million and 100 million due in 2007
at an interest rate of 10 3/8% and $200 million due in 2010 at 10 3/4%
o Net proceeds were $583.1 million, of which $150.0 million was used to
pay down the Company's revolving credit facility, $386.0 million to
pay down the Azurix Europe Ltd. ("AEL") revolving credit facility,
$18.1 million to pay down amounts outstanding under the credit
agreement with Enron, and $11.5 million to pay accrued interest on the
three credit facilities
o The remaining proceeds were available for general corporate purposes
o THE COMPANY IS EXPECTED TO REMAIN CAPITAL CONSTRAINED DURING THE FINANCIAL
FORECAST PERIOD DUE TO HIGH LEVERAGE, PROJECTED NEGATIVE CASH FLOW, AND A
LOW COMMON STOCK PRICE
o The Company will utilize two primary sources of available capital in
order to fund its negative cashflow requirements:
- $180 million credit line from Enron ("Enron Line") for general
and administrative expenses (domestic)
- $640 million (L.425 million) AEL revolving credit facility
consisting of two tranches: The first tranche ($280 million)
relates to prior acquisition financing (original Wessex
acquisition) while the second tranche ($360 million) is a
revolving line which can be used to fund growth within the entire
Azurix organization (European and non-European operations)
o Due to the capital intensive nature of Azurix's operations, the
Company is projected to be cash flow negative for the Company's
financial forecast period
o Based on these forecasts, and barring asset sales by Azurix, the
Company would not have sufficient free cash flow or borrowing capacity
to repay the Enron Line in December 2001; Enron would need to renew or
restructure the Enron Line
o Azurix management is optimistic that the AEL revolver could be
refinanced in May 2002 but insufficient borrowing capacity would
remain to fund forecasted negative cash flow
[WASSERSTEIN PERELLA & CO LOGO]
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20
Overview of Azurix
AZURIX MANAGEMENT'S ANALYSIS OF NEAR-TERM LIQUIDITY(1)
================================================================================
[LIQUIDITY CHART]
- ----------
(1) Excludes Wessex Water Services because Wessex is self-financing entity which
does not affect the overall cash needs of Azurix.
Source: Azurix's 2001 Budget review, December 6, 2000.
[WASSERSTEIN PERELLA & CO LOGO]
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21
Overview of Azurix
SUMMARY OF OUTSTANDING DEBT (in millions)
================================================================================
As of September 30, 2000
FIXED/
ISSUER DESCRIPTION AMOUNT MATURITY RATE FLOAT
- -------------------------- -------------------------------- ------- -------- ------ -----
Azurix Corp. $180 MM Enron G&A Line $ 111 12/15/01 7.65% Float
Azurix Corp. Sr. Notes due 2007 L.100.0 148 02/15/07 10.38% Fixed
Azurix Corp. Sr. Notes due 2007 240 02/15/07 10.38% Fixed
Azurix Corp. Sr. Notes due 2010 200 02/15/10 10.75% Fixed
Azurix Corp. $25 MM Atlantic Water Trust line 12 06/10/09 0.00%
Azurix Corp. Leases 1 01/15/10 8.50% Fixed
-------
$ 712
Azurix Europe Ltd. Loan Notes L.59.3 $ 88 09/30/05 6.47% Float
Azurix Europe Ltd. Marlin Notes L.73.0 108 12/15/01 6.25% Fixed
Azurix Europe Ltd. Revolving Credit Facility -
acquisition debt refinance L.64.0 95 05/10/02 6.85% Float
Azurix Europe Ltd. Revolving Credit Facility -
intercompany loans 118 05/10/02 7.49% Float
-------
$ 409
Wessex Water Services Ltd. EIB loan #1 L.30.0 $ 44 10/01/01 6.04% Fixed
Wessex Water Services Ltd. EIB loan #2 L.6.5 10 06/15/02 5.16% Fixed
Wessex Water Services Ltd. Capital lease L.38.0 56 09/30/02 7.33% Fixed
Wessex Water Services Ltd. Other long-term debt bond L.296.9 439 03/30/09 6.04% Fixed
Wessex Water Services Ltd. Committed bank facilities L.36.0 53 04/01/02 6.35% Float
Wessex Water Services Ltd. Short term borrowing L.11.7 17 No fixed 6.38% Float
date
Wessex Water Services Ltd. EIB loan #3 L.78.4 116 12/07/05 6.08% Float
Wessex Water Services Ltd. EIB loan #4 L.21.6 32 12/15/09 6.11% Float
-------
$ 767
Azurix Ecopreneur Purchase Agreement $ 2 03/13/03 17.00% Fixed
Azurix Buenos Aires Credit Facility and Leases 2 03/01/10 14.76% Fixed
Azurix North America Credit Facilities and Leases 8 Various 9.21% Fixed
Azurix North America Construction loan 11 11/22/10 23.10% Float
--------------------
Total $ 1,911 7.72% Average
Less Cash 129 66% Fixed
------- --------------------
Total Net Debt $ 1,782
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22
Overview of Azurix
AZURIX FINANCIAL SUMMARY ($ millions)
================================================================================
- -------------------------------------------------------------------------------------------
1998 1999 LTM ESTIMATE ESTIMATE
FY 12/31 12/31/98 12/31/99 9/30/00 FY 00 FY 01
- -------------------------------------------------------------------------------------------
TOTAL REVENUES 119.7 618.0 766.8 753.9 817.3
Operations & Maintenance 31.6 224.7 354.5 358.9 408.8
General & Administrative 20.3 117.8 137.1 142.4 116.0
Depreciation & Amortization 22.2 104.8 125.3 131.6 137.1
Equity in gain/(loss) of affiliates (0.8) 2.0 5.9 6.1 3.3
-------- -------- -------- -------- --------
EBIT 44.8 172.7 155.8 127.1 158.8
Interest Expense 15.1 73.6 111.9 120.9 151.9
Other Expense 1.2 0.0 (2.5) (0.2) 0.2
-------- -------- -------- -------- --------
EBT 28.5 99.1 46.4 6.4 6.7
Minority Interest 0.0 (1.1) (2.2) (1.9) (0.6)
Income Tax Exp 18.3 35.2 22.5 8.7 12.9
-------- -------- -------- -------- --------
NET INCOME 10.2 65.0 26.1 (0.4) (5.6)
EPS $ 0.10 $ 0.59 $ 0.24 $ (0.00) $ (0.05)
- -------------------------------------------------------------------------------------------
EBIT $ 44.8 $ 172.7 $ 155.8 $ 127.1 $ 158.8
Plus: Dep. & Amort 22.2 104.8 125.3 131.6 137.1
-------- -------- -------- -------- --------
EBITDA 67.0 277.5 281.1 258.7 295.9
Less: Capital Exp 63.2 287.3 306.5 350.0 328.0
-------- -------- -------- -------- --------
FREE CASH FLOW 3.8 (9.8) (25.4) (91.3) (32.1)
- -----------------------------------------------------------------------------------------------
MARGINS
- -----------------------------------------------------------------------------------------------
Sales Growth -- 416.3% 35.5% 22.0% 8.4%
Operations & Maintenance 26.4% 36.4% 46.2% 47.6% 50.0%
General & Administrative 17.0% 19.1% 17.9% 18.9% 14.2%
EBITDA 56.0% 44.9% 36.7% 34.3% 36.2%
EBIT 37.4% 27.9% 20.3% 16.9% 19.4%
Net Income 8.5% 10.5% 3.4% NM NM
- -----------------------------------------------------------------------------------------------
RATIOS
- -----------------------------------------------------------------------------------------------
Book Value $1,645.5 $1,941.8 $1,810.5 $1,798.9 $1,798.4
Ret. on Book Equity (ROE) 0.6% 3.3% 1.4% (0.0)% (0.3)%
Total Book Assets 3,358.3 4,850.4 4,495.4 4,652.9 4,743.9
Ret. on Book Assets (ROA) 0.6% 2.3% 2.1% 1.6% 1.8%
- --------------------------------------------------------------------------------
MARKET CAPITALIZATION
- --------------------------------------------------------------------------------
AZURIX SHARE PRICE 12/8/00 $6.13
52-Week High/Low: $11.06/$3.38
Shares Outstanding (MM) 117.33
EQUITY MARKET VALUE $718.7
Options Outstanding (MM) 10.25
Average Strike Price $ 13.79
--------
FULLY DILUTED EQUITY MARKET VALUE $718.7
Plus: Debt(1) $1,910.5
Plus: Minority Interest 6.3
Less: Cash & Equivalents 133.7
Net Debt 1,783.1
--------
ADJUSTED MARKET VALUE $2,501.8
- --------------------------------------------------------------------------------
MARKET TRADING MULTIPLES
- --------------------------------------------------------------------------------
Adjusted Market Value as Market Value as
a multiple of: a multiple of:
Book
Net Sales EBITDA EBIT FCF Net Income Value
--------- ------ ---- --- ---------- -----
LTM 3.3X 8.9X 16.1X NM 27.5X 0.4X
2000E 3.3X 9.7X 19.7X NM NM 0.4X
2001E 3.1X 8.5X 15.8X NM NM 0.4X
- --------------------------------------------------------------------------------
LTM CAPITALIZATION AND CREDIT RATIOS
- --------------------------------------------------------------------------------
DEBT COVERAGE
EBITDA/Int. EBIT/Int. NOCF/Int. Debt/EBITDA
2.5x 1.4x NM 6.8x
- --------------------------------------------------------------------------------
CAPITALIZATION
BOOK RATIOS MARKET RATIOS
D/E D/(D+E) D/E D/(D+E)
--- ------- --- -------
105.5% 51.3% 265.8% 72.7%
- ----------
FOOTNOTES
- ----------
Note: 2000E and 2001E are based on management estimates
(1) Book value of debt assumed to approximate market value. As of latest 10-Q
(9/30/00).
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23
Overview of Azurix
AZURIX STOCK PRICE & VOLUME HISTORY SINCE IPO
================================================================================
[CHART]
DAILY FROM JUNE 10, 1999 TO OCTOBER 29, 2000
___________ Volume ____________ Close
[1] 6/9/99: IPO of 36.6 MM shares priced at $19 per share
[2] 11/4/99: Stock falls after company lowers 4Q earnings estimate to $0.09 to
$0.11 from $0.17 a share
[3] 2/1/00: S&P gives company's debt a BB+ rating
[4] 7/6/00: DLJ, Merrill Lynch, Deutsche Bank, PaineWebber, and CSFB rate the
stock a buy
[5] 8/8/00: 2Q EPS dropped to $0.05 from $0.19 per share the year earlier,
excluding non-recurring charges
[6] 8/25/00: Rebecca Mark quits, John Garrison named as replacement
[7] 10/19/00: Class action lawsuit filed against Azurix
[8] 10/27/00: Enron's $7 per share buyout offer causes the stock price to rise
84%
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24
Overview of Azurix
DISTRIBUTION OF VOLUME AT VARIOUS PRICES
================================================================================
SINCE IPO (6/10/99)
[CHART]
LAST 12 MONTHS
[CHART]
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25
Overview of Azurix
OVERVIEW OF DIVESTITURE SCENARIO ($MM)
================================================================================
PROPOSED ASSET DIVESTITURES (1)
------------------------------------------------------------------------------------------------
NORTH MADERA
AMERICA BRAZIL IASA LURGI CANCUN MENDOZA RDM WATER BANK TOTAL
------- ------ ----- ----- ------ ------- ---- ---------- ------
PROCEEDS: $140.0 $50.0 $50.0 $0.0 $40.0 $15.0 $0.0 $31.5 $326.5
PRO FORMA FINANCIAL RESULTS - AFTER ASSET
DIVESTITURES 2001E 2002E 2003E 2004E 2005E
---------- ---------- ---------- ---------- ----------
SALES $ 665.4 $ 542.7 $ 616.4 $ 694.9 $ 759.2
EBITDA 273.4 283.3 327.4 375.7 416.0
D&A 127.9 130.3 143.9 155.8 164.6
---------- ---------- ---------- ---------- ----------
EBIT 145.5 153.0 183.6 219.9 251.4
Interest and Other 138.7 135.9 143.8 159.6 174.7
---------- ---------- ---------- ---------- ----------
Pre-Tax Income 6.8 17.1 39.8 60.3 76.7
Taxes 12.0 19.2 27.9 35.5 41.7
---------- ---------- ---------- ---------- ----------
NET INCOME (5.2) (2.1) 11.9 24.7 35.0
EPS (0.04) (0.03) $ 0.10 $ 0.21 $ 0.30
PRO FORMA DEBT & LIQUIDITY SUMMARY - AFTER ASSET
DIVESTITURES (2)
AEL Revolver (non-acquisition related) 28.9 150.9 244.0 334.4 380.8
Enron Line 110.1 110.1 110.1 110.1 110.1
Corporate Bonds 585.0 585.0 585.0 585.0 585.0
Wessex 1,081.4 1,166.4 1,266.3 1,338.0 1,338.0
Other 16.0 16.0 16.0 16.0 16.0
---------- ---------- ---------- ---------- ----------
TOTAL DEBT 1,821.4 2,028.4 2,221.4 2,383.5 2,429.9
Debt / EBITDA 6.7x 7.2x 6.8x 6.3x 5.8x
DISCOUNTED CASH FLOW VALUATION SUMMARY
EBITDA TERMINAL MULTIPLES
6.0X 7.0X 8.0X
---- ----- -----
7.0% NM $0.83 $3.36
DISCOUNT RATES 8.0% NM $0.04 $2.46
9.0% NM NM $1.61
- --------------------------
(1) Assumes all asset sales occur at the end of the 2nd Quarter of 2001.
Assumes Lurgi and RDM operations are shut down. Assumes all sales occur
tax-free
(2) Assumes asset sale proceeds repay AEL Revolver first, and then the Enron
Line. Based on the above divestiture analysis, Azurix would still need
Enron to role its G&A Line
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26
Overview of Azurix
PROJECTED SHARE VALUE BASED ON DIVESTITURE SCENARIO (1)
- --------------------------------------------------------------------------------
BASED ON ASSUMED RAB MULTIPLES OF 1.1X AND 1.2X, AZURIX'S STOCK PRICE ON A
DISCOUNTED BASIS IS UNLIKELY TO DELIVER MORE THAN $7.00 OF VALUE TO SHAREHOLDERS
- --------------------------------------------------------------------------------
[CHART]
2001 2002 2003 2004 2005
-------- -------- -------- -------- --------
Share Price w/Wessex @ 1.1x RAB $ 5.02 $ 6.02 $ 7.22 $ 8.63 $ 10.90
Share Price w/Wessex @ 1.2x RAB $ 6.83 $ 8.01 $ 9.41 $ 11.01 $ 13.43
Discounted Share Price (Wessex @ 1.1x RAB)(2) $ 4.36 $ 4.55 $ 4.75 $ 4.94 $ 5.42
Discounted Share Price (Wessex @ 1.2x RAB)(2) $ 5.94 $ 6.06 $ 6.19 $ 6.29 $ 6.67
- ---------------
(1) Assumes Azurix Buenos Aires is valued at 6.0x EBITDA in both scenarios for
valuation purposes
(2) Discounted at an equity rate of 15%
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27
================================================================================
STRATEGIC PROCESS
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28
Strategic Process
STRATEGIC PROCESS IN 2000
================================================================================
o AZURIX WAS INITIALLY CONTACTED BY E.ON AT THE END OF 1999 ABOUT A
POSSIBLE SALE AND DISCUSSIONS WERE HELD IN JANUARY 2000
o Discussions then broke off for several months as E.ON completed
a merger and a review of its water strategy
o IN FEBRUARY 2000, McKINSEY STUDIED STRATEGIC ALTERNATIVES AND
VALUED AZURIX'S BUSINESS
o The study placed a discounted cash flow valuation of approximately
$500 million, or $4.27 per share, on all of Azurix
o AS A RESULT OF THE FOLLOWING KEY FACTORS, AZURIX MANAGEMENT MADE A
RECOMMENDATION TO THE BOARD OF DIRECTORS TO SEEK AN ACQUIRER OR STRATEGIC
INVESTOR:
o Highly leveraged balance sheet
o Insufficient liquidity to fund projected negative cash flow through
2002
o Depressed stock price
o Difficulty in pursuing concessions and acquisitions with limited
access to capital
o IN EARLY MARCH, THE BOARD OF DIRECTORS OF AZURIX AUTHORIZED IMPLEMENTATION
OF A TARGETED SEARCH FOR STRATEGIC PARTNERS OR ACQUIRORS
o IN MARCH 2000, AZURIX ENGAGED SSB (THROUGH SSB'S PREDECESSOR, SCHRODERS)
AND MERRILL LYNCH AS ADVISORS TO EXPLORE STRATEGIC OPTIONS FOR THE COMPANY
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29
Strategic Process
STRATEGIC PROCESS IN 2000 (Cont'd)
================================================================================
o SSB AND MERRILL LYNCH CONSIDERED A BROAD RANGE OF POTENTIALLY INTERESTED
PARTIES:
TIER ONE TIER TWO TIER THREE
----------------------- ---------------------- ------------------------
ACEA (Rome) Anglian Water Cheung Kong Int. (CKI)
AEM Milano British Energy Duke
American Water Works Edison International Gpu
DQE EdP International Water
NUON EnBW/EdF Mid-American/Berkshire
RWE Endesa
Thames Water Iberdrola
Union Electrica Fenosa Kelda Group
Vivendi Saur (Bouygues)
Scottish LSO Energy
Scottish Power
Severn Trent
Singapore Power
Suez Lyonnaise
United Utilities
Veba (E.ON)
o SIX COMPANIES JUDGED LIKELY TO BE APPROPRIATE AND STRATEGIC PARTNERS AND/OR
ACQUIRORS FOR AZURIX WERE CONTACTED:
o CKI (Hong Kong infrastructure company with desire to pursue water)
o ENEL (Italian electric utility pursuing multi-utility strategy)
o RWE (German electric utility pursuing multi-utility strategy)
o Transco (U.K. LDC with interest in water business)
o Tyco (Acquisitive US-based conglomerate with water business)
o Veba/E.ON (German electric utility pursuing multi-utility strategy)
o THREE PARTIES (ENEL, E.ON and CKI) SIGNED CONFIDENTIALITY AGREEMENTS AND
RECEIVED MANAGEMENT PRESENTATIONS
o Azurix did not receive any written bids during this stage of the
process
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30
Strategic Process
STRATEGIC PROCESS IN 2000 (Cont'd)
================================================================================
o ON AUGUST 25, AZURIX RECEIVED A LETTER FROM E.ON CONTAINING AN
INDICATIVE CASH OFFER OF $7.00 PER SHARE, SUBJECT TO DUE DILIGENCE, AND
REQUESTING AN 8-WEEK EXCLUSIVITY PERIOD
o Enron responded by letter on September 13 on behalf of Azurix with a
detailed 4-week due diligence schedule
o In that letter, Enron also expressed concern over the indicated offer
price of $7.00 per share
o ALSO ON AUGUST 25, REBECCA MARK RESIGNED FROM THE COMPANY AS CEO
o Based on the number of articles and press releases discussing Mark's
departure and the uncertain future of Azurix, several additional
parties emerged and expressed limited interest in the Company
o THE FOLLOWING COMPANIES APPROACHED ENRON FOLLOWING MARK'S DEPARTURE IN
AUGUST
o Vivendi North America met with Enron and Azurix representatives on
August 19 and made an oral indication of $4.00 per share, but withdrew
in late September due to concerns about the Company's high leverage
o NUON approached the company in late September but quickly backed
away, citing Azurix's high leverage and the size of a deal
o Other contacts were made with Suez Lyonnaise, Nomura and Amey; both
Suez Lyonnaise and Nomura gave oral indications of interest at or
below Azurix's market price at the time, which was approximately
$4.00 per share
o ON OCTOBER 13, ENEL SENT A LETTER TO AZURIX STATING ITS INTEREST IN JUST
WESSEX WATER LTD. AND LURGI BAMAG WITH AN INDICATION THAT IT WOULD BE IN
A POSITION TO MAKE A PRELIMINARY OFFER BY THE END OF OCTOBER
o No further correspondence has occurred
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Strategic Process
STRATEGIC PROCESS IN 2000 (Cont'd)
================================================================================
o BY THE MIDDLE OF OCTOBER, E.ON HAD PERFORMED EXTENSIVE DUE DILIGENCE
ON AZURIX BOTH IN THE U.S. AND ABROAD
o After completing their due diligence, E.ON failed to respond to
either Enron or Azurix by the October 16 deadline which was
established in the initial due diligence schedule
o E.ON informed Enron orally on October 25 that it would not
pursue a deal with Azurix
o E.ON cited the following reasons for abandoning its offer:
-- History of company and its stock price
-- Complicated debt structure
-- Negative cash flow
-- Recently filed IPO litigation
o ON OCTOBER 27, ENRON SENT A LETTER TO AZURIX STATING ITS OFFER TO PROVIDE
FUNDING TO THE COMPANY TO TAKE ITSELF PRIVATE
o The Enron letter and Azurix's related press release were filed with
the Securities and Exchange Commission as exhibits in a Form 8-K:
accordingly, the possibility of a sale to Azurix has been publicly
known for over a month
o The Company's Board of Directors formed a Special Committee to
consider the proposal
o In early November, the Special Committee hired WP&Co. and SSB as
financial advisors to render opinions as to the fairness of the
proposal
o A CLASS ACTION LAWSUIT ON BEHALF OF AZURIX'S PUBLIC SHAREHOLDERS WAS FILED
ON OCTOBER 27 AGAINST THE COMPANY, THE MEMBERS OF THE BOARD, AND ENRON FOR
THE PURPOSE OF ENJOINING THE PROPOSED TRANSACTION
o Several similar actions have subsequently been filed
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32
Strategic Process
STRATEGIC PROCESS IN 2000 (Cont'd)
================================================================================
o ON NOVEMBER 16, CANDOVER, A U.K.-BASED PRIVATE INVESTMENT FIRM, SENT A
LETTER TO AZURIX EXPRESSING ITS INTEREST IN WESSEX WATER AND GIVING AN
INDICATIVE VALUATION OF 95% OF RAB
o On November 30, Candover was contacted by SSB and WP&Co. to discuss
its expression of interest
o SSB and WP&Co. indicated that the indicative valuation was low
relative to the value implied for Wessex by the Enron funded buyout
price of $7.00 per share for Azurix and the strategic premiums paid
for other U.K. water companies
o Candover indicated it could not pay a strategic premium for Wessex
o ROTHSCHILD (E.ON'S ADVISOR) CONTACTED SSB AND WP&CO. DURING THE WEEK
OF NOVEMBER 20 ON BEHALF OF E.ON
o The contact did not result in any renewed expression of interest
o On December 1, WP&Co. spoke with a representative of Rothschild:
- To confirm Enron's version of events relating to E.ON's
withdrawal from the Azurix sale process
- To confirm that E.ON would not provide a revised expression
of interest with respect to a possible acquisition of Azurix
- WP&Co. also requested through Rothschild to speak directly with
E.ON to inquire about E.ON's interest in acquiring pieces of
Azurix and possible valuation levels for such pieces
o On December 4, the Rothschild representative called back and said:
- E.ON would not provide a revised expression of interest
- E.ON might (though there was no assurance) seek to purchase
assets following the consummation of the Enron proposal, however
the Rothschild representative was emphatic that E.ON's
valuation of individual assets would not imply a price for the
entire Azurix business of greater than $7.00 per share
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33
================================================================================
EVALUATION OF STRATEGIC
OPTIONS
[WASSERSTEIN PERELLA & CO LOGO]
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34
Evaluation of Strategic Options
POSSIBLE STRATEGIC OPTIONS FOR THE SPECIAL COMMITTEE
================================================================================
-------------------------------------
POTENTIAL SPECIAL COMMITTEE RESPONSES
TO THE PROPOSAL FROM ENRON
-------------------------------------
DECLINE TO
RECOMMEND AN OFFER
o May be best option if either shareholder value is maximized by pursuing the
existing business plan or the proposal is not fair and cannot be improved
to a fair level
o Potentially prevents a loss of shareholder value
o Enron may still be able to pursue its offer leaving the public the ability
to decide
ACCEPT A POTENTIAL
$8.00-$8.50 PROPOSAL
o Gives shareholders immediate liquidity
o Removes Azurix common stock from Wall Street's scrutiny, freeing management
to realize its strategic plan
o Probably the easiest transaction to complete
o A potential price range of $8.00-$8.50 reflects an improvement from Enron's
initial offer of $7.00
o However, precludes public shareholders from any potential benefit of a
turnaround in Azurix's financial results
NEGOTIATE TO IMPROVE THE PRICE
AND/OR OTHER TERMS OF A
POTENTIAL $8.00-$8.50 PROPOSAL
o Increases shareholder value and gives shareholders immediate liquidity
o However, Enron is unlikely to further improve its offer above a potential
$8.00-$8.50 price range
o Same benefits as accepting the proposal plus greater value for shareholders
RECOMMEND OTHER BOARD
ACTION TO MAXIMIZE
SHAREHOLDER VALUE
o Explore a sale of Azurix to a third party other than Enron
-- Enron senior management has indicated that Enron would not sell at
$7.00
-- May be difficult given approaches that have already been made
o Requires determination of available alternatives and the consequences of
each
-- Pursuit of Company's existing business plan
-- Share repurchase
-- Asset sales
-- Acquisitions
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35
Evaluation of Strategic Options
DECLINE TO RECOMMEND AN OFFER
================================================================================
PROS
- --------------------------------------------------------------------------------
o ALLOWS COMPANY TO PURSUE ITS EXISTING BUSINESS PLAN
o North American services business still in early stage of development
o Madera Water Bank and the rest of the RDM business have upside
potential
o POTENTIALLY PREVENTS A LOSS OF SHAREHOLDER VALUE
o AFFORDS COMPANY OPPORTUNITY TO IMPLEMENT TURN-AROUND STRATEGY AT BUENOS
AIRES AND RECOUP VALUE THERE
CONS
- --------------------------------------------------------------------------------
o EXISTING BUSINESS PLAN DOES NOT PROJECT A QUICK IMPROVEMENT IN
PROFITABILITY
o THE COMPANY MAY FACE SERIOUS LIQUIDITY ISSUES WITHIN 12 TO 18 MONTHS AS A
STAND-ALONE ENTITY
o SHARE PRICE LIKELY TO DROP IN NEAR-TERM IF THE BOARD DECLINES TO RECOMMEND
AN OFFER
o AS A SMALL, CAPITAL-CONSTRAINED COMPANY, AZURIX IS AT A COMPETITIVE
DISADVANTAGE IN THE GLOBAL WATER INDUSTRY
o MAY BE DIFFICULT TO REALIZE MORE THAN $8.00-$8.50 PER SHARE OF VALUE FROM
AZURIX IN THE FUTURE
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36
Evaluation of Strategic Options
ACCEPT A POTENTIAL $8.00-$8.50 PROPOSAL
================================================================================
PROS
- --------------------------------------------------------------------------------
o GIVES SHAREHOLDERS IMMEDIATE LIQUIDITY
o PROBABLY THE EASIEST TRANSACTION TO COMPLETE
o E.ON'S INDICATIVE OFFER OF $7.00 PER SHARE (WHICH WAS LATER WITHDRAWN
SUBSEQUENT TO DUE DILIGENCE) HAS BEEN THE ONLY OFFER COMPARABLE TO ENRON'S
POTENTIAL PROPOSAL
o A POTENTIAL PRICE RANGE OF $8.00-$8.50 REPRESENTS APPROXIMATELY A 124%-138%
PREMIUM OVER AZURIX'S PRICE AT THE TIME OF ENRON'S INITIAL OFFER
o A POTENTIAL $8.00-$8.50 PRICE RANGE ALREADY REPRESENTS A SIGNIFICANT
IMPROVEMENT FROM ENRON'S INITIAL OFFER OF $7.00
o BECAUSE OF THE MAJORITY OF THE MINORITY PROVISION, PUBLIC SHAREHOLDERS HAVE
THE ABILITY TO CHOOSE WHETHER OR NOT TO ACCEPT THE PROPOSAL
CONS
- --------------------------------------------------------------------------------
o PRECLUDES PUBLIC SHAREHOLDERS FROM ANY POTENTIAL BENEFIT OF A TURNAROUND IN
AZURIX'S FINANCIAL RESULTS
o SHAREHOLDERS WHO PURCHASED THEIR SHARES ABOVE A POTENTIAL $8.00-$8.50 PRICE
RANGE MAY BE DISSATISFIED WITH THE OUTCOME
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37
Evaluation of Strategic Options
NEGOTIATE TO IMPROVE THE PRICE AND/OR OTHER TERMS OF A POTENTIAL $8.00-$8.50
PROPOSAL
================================================================================
PROS
- --------------------------------------------------------------------------------
o INCREASES SHAREHOLDER VALUE AND GIVES SHAREHOLDERS LIQUIDITY
o SIMILAR BENEFITS AS ACCEPTING THE CURRENT PROPOSAL
o SUPPORT OF THE ENRON OFFER BY THE SPECIAL COMMITTEE SHOULD BE IMPORTANT TO
ENRON
CONS
- --------------------------------------------------------------------------------
o A POTENTIAL $8.00-$8.50 PRICE RANGE ALREADY REPRESENTS A SIGNIFICANT
IMPROVEMENT FROM ENRON'S INITIAL OFFER
o RUNS THE RISK OF HAVING ENRON WITHDRAW ITS OFFER
o IF ENRON AND THE SPECIAL COMMITTEE ARE UNABLE TO REACH AGREEMENT AND THE
PROPOSAL IS WITHDRAWN, AZURIX'S STOCK PRICE WILL LIKELY SUFFER IN THE
SHORT-TERM
o PROLONGING THE TRANSACTION PROCESS BY NEGOTIATING MAY COMPLICATE AZURIX'S
ABILITY TO CONSUMMATE A MERGER TRANSACTION, WITH ANY PARTY, WITHOUT
RESTRUCTURING EXISTING DEBT, UNRESTRICTING CERTAIN SUBSIDIARIES, OR
SOLICITING CONSENTS FROM SENIOR NOTES HOLDERS TO WAIVE THE ISSUANCE TEST
o Absent certain actions under review, the EBITDA to interest coverage
ratio is projected to fall below 2:1 for the four quarters ending
December 31, 2000, and to decline further for the four quarters ending
March 31, 2001
o However, Enron is prepared to provide a certain level of commitment to
equitize existing loans between Enron and Azurix to meet the
incurrence test
o If the merger approval date is delayed beyond March 31, 2001, the
additional debt restructuring required to meet the incurrence test may
be unattractive to Enron
[WASSERSTEIN PERELLA & CO LOGO]
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38
Evaluation of Strategic Options
RECOMMEND OTHER BOARD ACTION TO MAXIMIZE SHAREHOLDER VALUE
================================================================================
PROS
- --------------------------------------------------------------------------------
o COULD MAXIMIZE SHAREHOLDER VALUE
o PROCEEDS FROM ASSET SALES MAY GIVE AZURIX THE CASH AND TIME IT NEEDS TO
SUCCESSFULLY IMPLEMENT ITS TURNAROUND STRATEGY
o VALUE OF AZURIX TO A STRATEGIC BUYER IN THE WATER INDUSTRY MAY BE GREATER
THAN TO ENRON
o THE COMPANY HAS RECENTLY RECEIVED INDICATIONS OF INTEREST IN CERTAIN ASSETS
FROM POTENTIAL BUYERS
CONS
- --------------------------------------------------------------------------------
o AZURIX HAS ALREADY TRIED THIS APPROACH IN 2000 AND DID NOT RECEIVE ANY
OFFERS SUPERIOR TO ENRON'S PROPOSAL
o ASSET SALES MAY WEAKEN AZURIX'S REMAINING BUSINESS AND ONLY TEMPORARILY
DELAY ITS LIQUIDITY ISSUES
o THE COMPANY AND ITS FINANCIAL ADVISORS HAVE ALREADY APPROACHED A BROAD
RANGE OF POTENTIAL BUYERS THIS YEAR SO IT WILL BE DIFFICULT TO GENERATE
INTEREST NOW
o AZURIX DOES NOT PROJECT SUCH A RAPID TURNAROUND THAT IT COULD REALIZE
HIGHER VALUES FOR ASSET SALES IN THE NEAR TERM
o ENRON CAN EFFECTIVELY BLOCK ANY TRANSACTION IT DOES NOT SUPPORT
[WASSERSTEIN PERELLA & CO LOGO]
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================================================================================
VALUATION
[WASSERSTEIN PERELLA & CO LOGO]
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Valuation
VALUATION SUMMARY ($ millions, except per share data)
================================================================================
ENTERPRISE / PER SHARE IMPLIED MULTIPLES
VALUATION METHODOLOGY VALUATION RANGE OF AZURIX'S LTM FINANCIALS
- --------------------------------- ------------------------------- --------------------------------------------------
DISCOUNTED CASH FLOW $1,971 -- $2,666 NET SALES 2.6x -- 3.5x
Value per Share $1.60 -- $7.52 EBITDA 7.3x -- 9.9x
EBIT 13.6x -- 18.4x
NET INCOME 108.3x -- 146.5x
DISCOUNTED CASH FLOW WITH
THAMES WATER ACQUISITION PREMIUM
& REDUCED CORPORATE OVERHEAD $2,547 $2,842 NET SALES 2.8x -- 3.5x
Value per Share $6.51 -- $9.02 EBITDA 8.0x -- 9.9x
EBIT 15.0x -- 18.5x
NET INCOME 118.8x -- 147.2x
COMPARABLE COMPANIES(1) $1,838 -- $2,463 NET SALES 2.4x -- 3.2x
Value per Share $0.47 -- $5.79 EBITDA 6.8x -- 9.1x
EBIT 12.7x -- 17.0x
NET INCOME 101.0x -- 135.3x
COMPARABLE TRANSACTIONS $2,163 -- $2,679 NET SALES 2.8x -- 3.5x
Value per Share $3.23 -- $7.64 EBITDA 8.0x -- 9.9x
EBIT 15.0x -- 18.5x
NET INCOME 118.8x -- 147.2x
- ----------
(1) This analysis is based on market trading multiples and does not
necessarily reflect control premiums that may be available in
acquisitions of comparable companies. As such, this analysis should not
be understood to reflect a reference range of values for assessing the
fairness of an acquisition of Azurix.
[WASSERSTEIN PERELLA & CO LOGO]
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Valuation
SUMMARY OF DISCOUNTED CASH FLOW VALUATION ($ millions, except per share data)
================================================================================
CURRENT VALUATION RANGE ORIGINAL
------------------------------------------- ACQUISITION
LOW MID HIGH COST
--------- --------- --------- -----------
AZURIX ENTITY
Wessex (Azurix Europe) $ 1,700.0 $ 1,800.0 $ 2,100.0 $ 2,543.0
Buenos Aires 55.0 75.0 100.0 439.0
North America 165.0 195.0 225.0 145.0
Brazil 25.0 50.0 75.0 57.0
IASA (Mexico) 45.0 50.0 55.0 23.0
Lurgi 5.0 7.5 10.0 31.0
Cancun 35.0 40.0 45.0 33.0
Mendoza 14.0 15.0 16.0 72.0
RDM 20.0 22.5 25.0 32.0
Corporate (125.0) (125.0) (125.0) (125.0)
Madera Water Bank 31.5 120.0 140.0 31.5
--------- --------- --------- ---------
TOTAL ENTERPRISE VALUE $ 1,970.5 $ 2,250.0 $ 2,666.0 $ 3,281.5
Less: Net Debt as of 9/30/00 1,783.1 1,783.1 1,783.1 1,783.1
--------- --------- --------- ---------
TOTAL EQUITY VALUE $ 187.4 $ 466.9 $ 882.9 $ 1,498.4
IMPLIED PRICE PER SHARE (1) $ 1.60 $ 3.98 $ 7.52 $ 12.77
(1) Based on 117.3 million shares outstanding and 10.3 million options
outstanding with a weighted average strike price of $13.79
[WASSERSTEIN PERELLA & CO LOGO]
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Valuation
KEY ASSUMPTIONS
================================================================================
AZURIX ENTITY DISCOUNT RATE TERMINAL MULTIPLE (1) RATIONALE
- ---------------------- -------------------- --------------------- -----------------------------------------------------------
Wessex (Azurix Europe) 6.5% -- 7.5% 6.0x -- 8.0x Based on after-tax ROA established by OFWAT and corporate
bonds. Standard terminal multiples chosen based on
comparable acquisitions
Buenos Aires(1) 15.0% -- 17.0% NM -- NM Based on Argentina's high sovereign risk premium,
significant regulatory risk and business uncertainty
North America 10.0% -- 12.0% 6.0x -- 8.0x Based on speculative nature of high growth, acquisitive
business strategy in North America. Standard EBITDA
terminal multiples
Brazil 15.0% -- 17.0% 4.0x -- 6.0x Based on Brazil's high sovereign risk premium and
speculative drilling operations. Lower terminal multiple
due to contractual obligations in Brazil
IASA (Mexico) 12.0% -- 14.0% NM -- NM Based on Mexico's moderate sovereign risk. Discount rate
also incorporates significant contract renewal risk in key
Mexico City business
Lurgi 12.0% -- 14.0% 4.0x -- 6.0x Based on exposure to emerging markets and construction
contract risk. Lower multiples because of slim margins in
this sector
Cancun 11.0% -- 13.0% NM -- NM Similar to IASA (Mexico), except for lower business risk
due to customer base and longer concession period
Mendoza 14.0% -- 16.0% 5.0x -- 6.0x Lower than Buenos Aires due to lower business and
regulatory uncertainty. Lower terminal multiples because
of poor operating history and minority position
RDM 12.0% -- 14.0% 5.0x -- 7.0x Higher discount rates and lower multiples than North
America because of very speculative business plan with no
operating history
Corporate 8.0% -- 10.0% NM -- NM Reflects Azurix's overall cost of capital based on
asset portfolio
- ----------------
(1) For Buenos Aires, IASA, and Cancun, terminal multiples were not used
because the cash flows were projected for the entire length of the
concession. Therefore, terminal values were not used in determining the
For Corporate, a perpetuity growth rate was used to project a terminal
appropriate value of each respective value operation.
[WASSERSTEIN PERELLA & CO LOGO]
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43
Valuation
SUMMARY OF DCF WITH THAMES WATER ACQUISITION PREMIUM AND REDUCED CORPORATE
OVERHEAD ($MM, EXCEPT PER SHARE)
================================================================================
WESSEX @ 1.22X RAB WESSEX @ 1.22X RAB WESSEX @ 1.22X RAB
$2 MM POST - '01 CORP. G&A $2 MM POST - '01 CORP. G&A $2 MM POST - '01 CORP. G&A
OTHER ASSETS: LOW DCF VALUE OTHER ASSETS: MID DCF VALUE OTHER ASSETS: HIGH DCF VALUE
--------------------------- --------------------------- ----------------------------
WESSEX
RAB $ 1,800.0 $ 1,800.0 $ 1,800.0
RAB Multiple (1) 1.22x 1.22x 1.22x
--------- --------- ---------
WESSEX ENTERPRISE VALUE $ 2,196.0 $ 2,196.0 $ 2,196.0
OTHER AZURIX ASSETS
Buenos Aires 55.0 75.0 100.0
North America 165.0 195.0 225.0
Brazil 25.0 50.0 75.0
IASA (Mexico) 45.0 50.0 55.0
Lurgi 5.0 7.5 10.0
Cancun 35.0 40.0 45.0
Mendoza 14.0 15.0 16.0
RDM 20.0 22.5 25.0
Corporate (2) (45.0) (45.0) (45.0)
Madera Water Bank 31.5 120.0 140.0
--------- --------- ---------
ENTERPRISE VALUE OF OTHER $ 350.5 $ 530.0 $ 646.0
AXURIX ASSETS
TOTAL ENTERPRISE VALUE $ 2,546.5 $ 2,726.0 $ 2,842.0
Less: Net Debt as of 9/30/00 1,783.1 1,783.1 1,783.1
--------- --------- ---------
TOTAL EQUITY VALUE $ 763.4 $ 942.9 $ 1,058.9
IMPLIED PRICE PER SHARE $ 6.51 $ 8.04 $ 9.02
- -------------
(1) 1.22x RAB Multiple based on Thames Water transaction
(2) Based on approximately $2 million of corporate overhead from 2002-2005
[WASSERSTEIN PERELLA & CO LOGO]
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Valuation
COMPARABLE COMPANIES VALUATION SUMMARY (in millions, except per share data)
================================================================================
WESSEX FINANCIALS MEAN - MEDIAN MULTIPLES RANGE
- ------------------------------------- ---------------------------- ------------------------------------------
RAB (ESTIMATED)
03/31/2000 L. 1,200.0 0.90x -- 0.94x L. 1,085 -- L. 1,131
EBITDA
2000 FY (1) L. 173.2 6.6x -- 6.6x L. 1,138 -- L. 1,151
2001 FY L. 175.4 7.2x -- 7.2x L. 1,256 -- L. 1,265
2002 FY L. 172.3 6.8x -- 7.1x L. 1,169 -- L. 1,217
EBIT
2000 FY L. 126.2 9.5x -- 9.5x L. 1,198 -- L. 1,199
2001 FY L. 117.5 11.4x -- 11.3x L. 1,345 -- L. 1,323
2002 FY L. 108.5 10.8x -- 11.1x L. 1,169 -- L. 1,205
NET INCOME
2000 FY L. 105.3 7.6x -- 7.9x L. 805 -- L. 830
2001 FY L. 84.0 11.4x -- 11.7x L. 960 -- L. 986
2002 FY L. 68.6 11.3x -- 11.8x L. 777 -- L. 812
SUMMARY ENTERPRISE VALUE REFERENCE RANGE FOR WESSEX L. 1,100.0 -- L. 1,325.0
SUMMARY ENTERPRISE VALUE REFERENCE RANGE FOR WESSEX IN DOLLARS AT $1.44/L.1.00 $ 1,588 -- $ 1,913
PLUS: ESTIMATED VALUE RANGE FOR AZURIX'S NON-WESSEX BUSINESSES $ 250 -- $ 550
-------- --------
SUMMARY TOTAL AZURIX ENTERPRISE VALUE $ 1,838 -- $ 2,463
LESS: NET DEBT $ 1,783 -- $ 1,783
-------- --------
EQUITY VALUE REFERENCE RANGE $ 55 -- $ 679
SHARES OUTSTANDING (MILLIONS)(2) 117.3 -- 117.3
-------- --------
IMPLIED VALUE PER SHARE $ 0.47 -- $ 5.79
- ----------------
(1) Fiscal Year ends March 31 (i.e., FY 2000 ended 03/31/00).
(2) Includes options under the treasury method.
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Valuation
COMPARABLE TRANSACTIONS VALUATION SUMMARY (in millions, except per share data)
================================================================================
WESSEX FINANCIALS MEAN - MEDIAN MULTIPLES RANGE
- ------------------------------------- ------------------------------- --------------------------------------
EBITDA
LFY L. 173.2 8.5x -- 8.4x L. 1,477 -- L. 1,451
EBIT
LFY L. 126.2 10.5x -- 10.3x L. 1,328 -- L. 1,305
NET INCOME
LFY L. 105.3 9.9x -- 10.5x L. 1,041 -- L. 1,107
SUMMARY ENTERPRISE VALUE REFERENCE RANGE FOR WESSEX L. 1,325 -- L. 1,475
SUMMARY ENTERPRISE VALUE REFERENCE RANGE FOR WESSEX IN DOLLARS AT $1.44/L.1.00 $1,913 -- $2,129
PLUS: ESTIMATED VALUE RANGE FOR AZURIX'S NON-WESSEX BUSINESSES $ 250 -- $ 550
------ ------
SUMMARY TOTAL AZURIX ENTERPRISE VALUE $2,163 -- $2,679
LESS: NET DEBT $1,783 -- $1,783
------ ------
EQUITY VALUE REFERENCE RANGE $ 379 -- $ 896
SHARES OUTSTANDING (MILLIONS)(1) 117.3 -- 117.3
------ ------
IMPLIED VALUE PER SHARE $ 3.23 -- $ 7.64
- ----------
(1) Includes options under the treasury method.
[WASSERSTEIN PERELLA & CO LOGO]
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Valuation
EXCHANGE RATE SENSITIVITY (in millions, except per share data)
================================================================================
ENTERPRISE/PER SHARE ENTERPRISE/PER SHARE ENTERPRISE/PER SHARE
VALUATION RANGE AT VALUATION RANGE AT VALUATION RANGE AT
VALUATION METHODOLOGY BASE L./$ EXCHANGE RATE +5% $/L. EXCHANGE RATE -5% $/L. EXCHANGE RATE
- -------------------------------- --------------------------- --------------------------- ----------------------------
DISCOUNTED CASH FLOW(1) $ 1,971 - $ 2,666 $ 2,041 - $ 2,751 $ 1,901 - $ 2,581
Value per Share $ 1.60 - $ 7.52 $ 2.19 - $ 8.25 $ 1.00 - $ 6.80
DISCOUNTED CASH FLOW WITH
THAMES WATER ACQUISITION PREMIUM
& REDUCED CORPORATE OVERHEAD(2) $ 2,547 - $ 2,842 $ 2,656 - $ 2,952 $ 2,437 - $ 2,732
Value per Share $ 6.51 - $ 9.02 $ 7.44 - $ 9.96 $ 5.57 - $ 8.09
COMPARABLE COMPANIES(2)(3) $ 1,838 - $ 2,463 $ 1,917 - $ 2,558 $ 1,758 - $ 2,367
Value per Share $ 0.47 - $ 5.79 $ 1.14 - $ 6.61 ($ 0.21) - $ 4.98
COMPARABLE TRANSACTIONS(2) $ 2,163 - $ 2,679 $ 2,258 - $ 2,785 $ 2,067 - $ 2,573
Value per Share $ 3.23 - $ 7.64 $ 4.05 - $ 8.54 $ 2.42 - $ 6.73
- ----------
(1) Base $/L. exchange rate assumes Enron's forecasts of forward rates and
+5% and -5% cases assume differentials from each annual forward rate.
(2) Base $/L. exchange rate assumes December 7, 2000 rate of $1.44/L1.00,
+5% case assumes rate of $1.52/L1.00 and -5% case assumes rate of
$1.37/L.1.00.
(3) This analysis is based on market trading multiples and does not
necessarily reflect control premiums that may be available in
acquisitions of the comparable companies. As such this analysis should
not be understood to reflect a reference range of values for assessing
the fairness of an acquisition of Azurix.
[WASSERSTEIN PERELLA & CO LOGO]
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47
================================================================================
DRAFT FAIRNESS OPINION
[WASSERSTEIN PERELLA & CO LOGO]
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48
PWRW&G DRAFT 12/8/00 5:30P.M.-WP
PRIVILEGED AND CONFIDENTIAL
DRAFT TO BE CIRCULATED FOR
COMMENTS SOLELY AS TO FORM.
BASED ON 12/07/00 DRAFT OF
MERGER AGREEMENT [ASSUMES
MERGER IS SIGNED]
December __, 2000
Special Committee of the Board of Directors
Azurix Corp.
333 Clay Street
Suite 1000
Houston, TX 77002
Members of the Special Committee:
You have asked us to advise you with respect to the fairness, from a
financial point of view, to the stockholders of Azurix Corp., a Delaware
corporation (the "Company"), other than Atlantic Water Trust, a Delaware
business trust ("AWT"), and its affiliates (such stockholders other than AWT and
its affiliates, the "Public Stockholders"), of the Merger Consideration (as
defined below) provided for pursuant to the terms of the Agreement and Plan of
Merger, dated as of December __, 2000 (the "Merger Agreement"), by and among the
Company, Enron Corp., an Oregon corporation ("Parent"), and Blue Water Corp., an
indirect subsidiary of Parent ("Sub"). We note that Parent owns a 50% voting
interest in AWT, which, in turn, owns approximately 67% of the outstanding
shares of the common stock, par value $0.01 per share, of the Company (the
"Common Stock"), and the Public Stockholders own approximately 33% of the
outstanding Common Stock.
The Merger Agreement will provide for, among other things, a merger
of Sub with and into the Company (the "Merger"), which will be the surviving
corporation. In the Merger, each outstanding share of common stock, par value
$1.00 per share, of the Sub will be converted into one share of common stock,
par value $0.01 per share, of the surviving corporation, and each outstanding
share of Common Stock (other than any such shares held in the treasury of the
Company or owned by Parent, Sub or their respective subsidiaries (other than
AWT)) will be converted into 1/39,268,266 of a share of the surviving
corporation (the "Exchange Ratio"), with cash being paid with respect to any
shares of Common Stock that would result in a fractional interest in the
surviving corporation. It is anticipated that all of the Public Stockholders
will receive such cash
49
Special Committee of the Board of Directors
December , 2000
Page 2
payment for all of their shares of Common Stock held immediately prior to the
effective time of the Merger at the rate of [$_______] per share of Common
Stock. We note that as a result of the Exchange Ratio, AWT will obtain two whole
shares of the surviving corporation. The Merger Agreement also provides that a
condition to the consummation of the Merger is that a majority of the shares of
the Common Stock cast either for or against the adoption of the Merger Agreement
(excluding shares of Common Stock owned by Parent, Sub, AWT or their respective
subsidiaries) must be cast for the adoption of the Merger Agreement. The terms
and conditions of the Merger are set forth in more detail in the Merger
Agreement.
In connection with rendering our opinion, we have reviewed the
Merger Agreement and the Support Agreement, each dated as of December ___, 2000,
by and between the Company and AWT. We have also reviewed and analyzed certain
publicly available business and financial information relating to the Company
for recent years and interim periods to date, as well as certain internal
financial and operating information, including financial forecasts, analyses and
projections prepared by or on behalf of the Company and provided to us for
purposes of our analysis, and we have met with management of the Company and
certain of its subsidiaries to review and discuss such information and, among
other matters, each of the Company's and its subsidiaries' business, operations,
assets, financial condition, including its liquidity and capital needs, and
future prospects, as well as the regulatory climate in which the Company's
subsidiaries operate.
We have reviewed and considered certain financial and stock market
data relating to the Company, and we have compared that data with similar data
for certain other companies, the securities of which are publicly traded, that
we believe may be relevant or comparable in certain respects to the Company or
one or more of its businesses or assets, and we have reviewed and considered the
financial terms of certain recent acquisitions and business combination
transactions in the water utility industry specifically that we believe to be
reasonably comparable to the Merger or otherwise relevant to our inquiry. We
have also performed such other financial studies, analyses, and investigations
and reviewed such other information as we considered appropriate for purposes of
this opinion.
In our review and analysis and in formulating our opinion, we have
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to or discussed with us or publicly available,
and we have not assumed any responsibility for independent verification of any
of such information. We have also assumed and relied upon the reasonableness and
accuracy of the financial projections, forecasts and analyses provided to us,
and we have assumed that such projections, forecasts and analyses were
reasonably prepared in good faith and on bases reflecting the best currently
available judgments and estimates of the Company's management. We express no
opinion with respect to such projections, forecasts and analyses or the
assumptions upon which they are based. In addition, we have not reviewed any of
the books and records of the Company, or assumed any responsibility for
50
Special Committee of the Board of Directors
December , 2000
Page 3
conducting a physical inspection of the properties or facilities of the Company,
or for making or obtaining an independent valuation or appraisal of the assets
or liabilities of the Company. We have assumed that the transactions described
in the Merger Agreement will be consummated without waiver or modification of
any of the material terms or conditions contained therein by any party thereto.
Our opinion is necessarily based on economic and market conditions and other
circumstances as they exist and can be evaluated by us as of the date hereof.
It should be noted that in the context of our engagement by the
Special Committee, we were not authorized to, and did not solicit, third party
indications of interest in acquiring all or any part of the Company and we were
not authorized to investigate any alternative transactions that may be available
to the Company. You have advised us, and we have relied on your advice, that J.
Henry Schroder and Co., a predecessor to Salomon Smith Barney Inc., and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, advisors to the Company, solicited
indications of interest from potential acquirors of, or merger partners for, the
Company, as well as responded to certain other potentially interested parties
for the Company or certain of its significant assets.
In the ordinary course of our business, we may actively trade the
debt and equity securities of the Company and Parent for our own account and for
the accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
We are acting as financial advisor to the Special Committee in
connection with the proposed Merger and will receive a fee for our services,
(including rendering this opinion), a significant portion of which is contingent
upon the consummation of the Merger. We previously advised the Special Committee
of an engagement in 1996 to provide financial advice to an affiliate of Enron
with respect to a possible acquisition of another corporation and we received
fees for those services.
Our opinion addresses only the fairness from a financial point of
view to the Public Stockholders of the Merger Consideration provided for
pursuant to the Merger Agreement, and we do not express any views on any other
term of the Merger. Specifically, our opinion does not address the Company's
underlying business decision to effect the transactions contemplated by the
Merger Agreement. In addition, our opinion does not address the solvency of the
Company following consummation of the Merger or at any time.
It is understood that this letter is for the benefit and use of the
Special Committee in its consideration of the Merger and, except for inclusion
in its entirety in the Schedule 13E-3 statement or proxy statement required to
be circulated to stockholders of the Company relating to the Merger, may not be
quoted, referred to or reproduced at any time or in any manner without our prior
written consent. This opinion does not constitute a recommendation to any
stockholder or as to how such holder should vote with respect to the Merger, and
should not be relied upon by any stockholder as such.
51
Special Committee of the Board of Directors
December , 2000
Page 4
Based upon and subject to the foregoing, including the various
assumptions and limitations set forth herein, it is our opinion that as of the
date hereof the Merger Consideration provided for pursuant to the Merger
Agreement is fair to the Public Stockholders from a financial point of view.
Very truly yours,
WASSERSTEIN PERELLA & CO., INC.
52
================================================================================
APPENDIX
[WASSERSTEIN PERELLA & CO LOGO]
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53
================================================================================
DISCOUNTED CASH
FLOW ANALYSIS
[WASSERSTEIN PERELLA & CO LOGO]
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Discounted Cash Flow Analysis
AZURIX CONSOLIDATED INCOME STATEMENT ($MM)
================================================================================
-----------------------------------------------------------------------------
ACTUAL ESTIMATES (1)
=============================================================================
1999 2000E 2001E 2002E 2003E 2004E 2005E
-----------------------------------------------------------------------------
OPERATING REVENUE $618.0 $753.9 $817.3 $913.8 $1,079.1 $1,254.2 $1,421.1
Growth % 8.4% 11.8% 18.1% 16.2% 13.3%
Operating & Maintenance Expense 224.7 358.9 408.8 446.5 532.1 619.4 704.7
G&A Expense 117.8 142.4 116.0 116.1 130.6 145.7 161.1
Equity in gain/(loss) of Unconsolidated 2.0 6.1 3.3 4.3 3.9 4.5 5.1
------ ------ ------ ------ -------- -------- --------
Affiliates
EBITDA 277.5 258.7 295.9 355.4 420.2 493.7 560.4
Margin % 44.9% 34.3% 36.2% 38.9% 38.9% 39.4% 39.4%
Goodwill & Concession Rights Amortization 37.0 38.2 39.0 42.5 44.8 46.7 48.4
Expense
Depreciation & Other Amortization Expense 67.8 93.4 98.1 111.9 128.2 143.6 155.3
------ ------ ------ ------ -------- -------- --------
Total depreciation & amortization 104.8 131.6 137.1 154.4 173.0 190.4 203.6
Equity in gain/(loss) of Consolidated Affiliates 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ -------- -------- --------
EBIT 172.7 127.1 158.8 201.1 247.2 303.4 356.7
Margin % 27.9% 16.9% 19.4% 22.0% 22.9% 24.2% 25.1%
Interest Income (20.0) (49.3) (27.1) (27.5) (31.9) (36.6) (39.7)
Interest Expense 96.6 174.1 187.0 199.2 218.7 236.8 250.7
Less: Capitalized Interest (3.0) (3.9) (8.0) (9.9) (9.9) (10.2) (8.7)
------ ------ ------ ------ -------- -------- --------
Net Interest (Income)/Expense 73.6 120.9 151.9 161.8 176.8 190.0 202.2
Minority Interest (1.1) (1.9) (0.6) (0.7) (0.0) 0.3 0.9
Other Income 0.0 (0.2) 0.2 0.3 (3.7) (4.3) (3.4)
------ ------ ------ ------ -------- -------- --------
Profit Before Tax 100.2 8.3 7.4 38.9 74.1 117.3 157.1
Income tax expense, current 29.0 11.5 12.2 38.3 56.3 68.0 81.0
Income tax expense, deferred 6.2 (2.8) 0.7 (13.4) (17.4) (13.2) (10.6)
------ ------ ------ ------ -------- -------- --------
Total Income Tax Expense 35.2 8.7 12.9 24.9 38.9 54.8 70.3
NET INCOME 65.0 (0.4) (5.6) 14.0 35.2 62.5 86.7
Shares Outstanding 109.7 117.4 117.4 117.4 117.4 117.4 117.4
EPS $ 0.59 (0.00) (0.05) $ 0.12 $ 0.30 $ 0.53 $ 0.74
- -------------
(1) Estimates based on management projections
[WASSERSTEIN PERELLA & CO LOGO]
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Discounted Cash Flow Analysis
AZURIX CONSOLIDATED BALANCE SHEET AND CASH FLOW STATEMENT ($MM)
================================================================================
------------------------------------------------------------------------
ACTUAL ESTIMATES
------------------------------------------------------------------------
1999 2000E 2001E 2002E 2003E 2004E 2005E
------- ------- ------- ------- ------- ------- -------
ASSETS
Cash & Equivalents 29.7 33.5 54.6 66.2 98.6 189.1
Restricted Cash 92.9 92.9 92.9 92.9 92.9 92.9
Other Assets 4,530.4 4,818.9 5,099.3 5,363.8 5,603.9 5,590.2
TOTAL ASSETS 4,652.9 4,945.3 5,246.9 5,522.9 5,795.4 5,872.1
LIABILITIES & STOCKHOLDERS EQUITY
Intercompany Debt 120.0 180.0 180.0 180.0 180.0 180.0
Debt 1,793.5 1,987.6 2,180.7 2,336.9 2,454.5 2,498.3
Other Liabilities 934.0 934.0 934.0 934.0 934.0 934.0
------- ------- ------- ------- ------- -------
TOTAL LIABILITIES 2,847.5 3,101.6 3,294.7 3,450.9 3,568.5 3,612.3
Minority Interest 6.5 5.9 5.3 5.2 5.6 6.4
Stockholders' Equity 1,812.4 1,794.2 1,813.8 1,802.8 1,772.3 1,717.5
Retained Earnings 221.7 278.8 368.4 499.1 684.3 771.1
Cumulative Foreign Currency Translation Adj (235.2) (235.2) (235.2) (235.2) (235.2) (235.2)
------- ------- ------- ------- ------- -------
TOTAL STOCKHOLDERS' EQUITY 1,798.9 1,837.8 1,946.9 2,066.7 2,221.4 2,253.3
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 4,652.9 4,945.3 5,246.9 5,522.9 5,795.4 5,872.1
OPERATING ACTIVITIES
Net Income 57.1 89.6 130.8 185.2 86.7
Reconciling Items 38.4 59.8 53.9 48.9 190.0
------- ------- ------- ------- -------
TOTAL OPERATING CASH FLOW 95.5 149.4 184.6 234.1 276.8
INVESTING ACTIVITIES
Capital Expenditures (328.0) (373.5) (393.9) (391.4) (302.4)
Acquisition Costs (20.0) (20.0) (20.0) (20.0) (20.0)
Cash to Affiliate (88.3) (58.6) (23.6) (9.3) (4.0)
------- ------- ------- ------- -------
TOTAL INVESTING CASH FLOW (436.3) (452.1) (437.4) (420.7) (326.4)
FINANCING ACTIVITIES
Change in Debt - Total Affiliates 108.8 85.9 56.3 45.9 43.9
Change in Debt - Public 100.9 85.0 99.9 71.7 0.0
Dividends 0.0 0.0 0.0 0.0 0.0
Contribution from Parent 135.0 153.0 108.1 101.5 96.2
Equity Financing 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- -------
TOTAL FINANCING CASH FLOW 344.6 323.9 264.3 219.1 140.1
Change in Cash - Increase/(Decrease) 3.8 21.1 11.5 32.5 90.4
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Discounted Cash Flow Analysis
CONSOLIDATED DEBT DETAIL
================================================================================
-----------------------------------------------------------------
ESTIMATES
-----------------------------------------------------------------
2000E 2001E 2002E 2003E 2004E 2005E
-----------------------------------------------------------------
Corporate (USD)
Enron Revolver (1) 120.0 180.0 180.0 180.0 180.0 180.0
Corporate Bond Issue 240.0 240.0 240.0 240.0 240.0 240.0
Corporate Bond Issue 200.0 200.0 200.0 200.0 200.0 200.0
Corporate Bond Issue (Sterling Tranche Translated to USD) 145.0 145.0 145.0 145.0 145.0 145.0
AEL Revolver - Acquisition Related (2) 135.0 288.2 396.3 452.6 498.5 542.4
Misc. Corporate Debt 13.0 13.0 13.0 13.0 13.0 13.0
SUBTOTAL $ 853.0 $1,066.2 $1,174.3 $1,230.6 $1,276.5 $1,320.4
AEL (Sterling)
AEL Revolver - Non-Acquisition Related (2) 59.0 59.0 58.0 59.0 59.0 59.0
Bristol Water Trust Loan 73.0 73.0 73.0 73.0 73.0 73.0
AEL Loan Notes 59.3 59.3 59.3 59.3 59.3 59.3
Wessex Committed Facility 36.0 36.0 36.0 36.0 36.0 36.0
Wessex Uncommitted Facility 8.2 36.4 96.0 163.9 213.3 213.3
Wessex Finance Lease 45.6 45.6 45.6 45.6 45.6 45.6
Wessex EIB Loan #1 30.0 30.0 30.0 30.0 30.0 30.0
Wessex EIB Loan #2 6.5 6.5 6.5 6.5 6.5 6.5
Wessex EIB Loan #3 78.4 78.4 78.4 78.4 78.4 78.4
Wessex EIB Loan #4 21.6 21.6 21.6 21.6 21.6 21.6
Wessex Bonds 300.0 300.0 300.0 300.0 300.0 300.0
-------- -------- -------- -------- -------- --------
SUBTOTAL 717.6 745.8 804.4 873.3 922.7 922.7
AEL SUBTOTAL CONVERTED TO USD (3) $1,040.5 $1,081.4 $1,166.4 $1,266.3 $1,338.0 $1,338.0
Other (USD)
Azurix North America 8.0 8.0 8.0 8.0 8.0 8.0
Azurix Buenos Aires 3.0 3.0 3.0 3.0 3.0 3.0
IASA 9.0 9.0 9.0 9.0 9.0 9.0
SUBTOTAL $ 20.0 $ 20.0 $ 20.0 $ 20.0 $ 20.0 $ 20.0
TOTAL DEBT OUTSTANDING $1,913.5 $2,167.6 $2,360.7 $2,516.9 $2,634.5 $2,678.3
DEBT / EBITDA 7.4X 7.3X 6.6X 6.0X 5.3X 4.8X
- ----------
(1) Maturity Date: December 2001 (model assumes the Enron Revolver will be
rolled over)
(2) Maturity Date: May 2002 (model assumes the AEL Revolver will be rolled
over)
(3) Converted to USD using an exchange rate of 1.45 UDS/Gbp
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57
Discounted Cash Flow Analysis
WESSEX DISCOUNTED CASH FLOW ANALYSIS - EBITDA TERMINAL MULTIPLE
================================================================================
- ------------------------------------------------------------------ --------------------------------
TERMINAL VALUE MULTIPLE: YEAR 10 EBITDA FY 2010 EBITDA $390.5
DISCOUNT --------------------------------
RATE 6.0X 7.0X 8.0X
-----------------------------------------------
$ 386.6 $ 386.6 $ 386.6 Present Value of Free Cash Flows
1,248.3 1,456.3 1,664.4 Present Value of Terminal Value
--------- -------- --------
$ 1,634.8 $1,842.9 $2,050.9 NET ENTERPRISE VALUE
6.5%
(1.2)% (0.1)% 0.7% Implied Perpetuity Growth Rate
4.4x 4.9x 5.5x Multiple of 2000E Sales
6.8x 7.6x 8.5x Multiple of 2000E EBITDA
8.9x 10.0x 11.2x Multiple of 2000E EBIT
-----------------------------------------------
$ 369.5 $ 369.5 $ 369.5 Present Value of Free Cash Flows
1,191.2 1,389.7 1,588.2 Present Value of Terminal Value
--------- -------- --------
$ 1,560.7 $1,759.2 $1,957.8 NET ENTERPRISE VALUE
7.0%
(0.7)% 0.3% 1.1% Implied Perpetuity Growth Rate
4.2x 4.7x 5.2x Multiple of 2000E Sales
6.5x 7.3x 8.1x Multiple of 2000E EBITDA
8.5x 9.6x 10.6x Multiple of 2000E EBIT
-----------------------------------------------
$ 353.3 $ 353.3 $ 353.3 Present Value of Free Cash Flows
1,136.9 1,326.4 1,515.9 Present Value of Terminal Value
--------- -------- --------
$ 1,490.2 $1,679.7 $1,869.2 NET ENTERPRISE VALUE
7.5%
(0.2)% 0.8% 1.6% Implied Perpetuity Growth Rate
4.0x 4.5x 5.0x Multiple of 2000E Sales
6.2x 7.0x 7.7x Multiple of 2000E EBITDA
8.1x 9.1x 10.2x Multiple of 2000E EBIT
-----------------------------------------------
- ----------
Note: Valuation from 12/31/00 to 12/31/2010
[WASSERSTEIN PERELLA & CO LOGO]
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58
Discounted Cash Flow Analysis
WESSEX DISCOUNTED CASH FLOW ANALYSIS - RAB MULTIPLE ($MM)
================================================================================
- -------------------------------------------------- --------------------------------
TERMINAL VALUE MULTIPLE: YEAR 10 RAB FY 2010 RAB $3,321.8
DISCOUNT --------------------------------
RATE 0.9X 1.0X 1.1X
-------------------------------------
$ 386.6 $ 386.6 $ 386.6 Present Value of Free Cash Flows
1,592.7 1,769.6 1,946.6 Present Value of Terminal Value
-------- -------- --------
$1,979.2 $2,156.2 $2,333.1 NET ENTERPRISE VALUE
6.5%
0.4% 1.0% 1.5% Implied Perpetuity Growth Rate
5.3x 5.8x 6.3x Multiple of 2000E Sales
8.2x 8.9x 9.7x Multiple of 2000E EBITDA
10.8x 11.7x 12.7x Multiple of 2000E EBIT
-------------------------------------
$ 369.5 $ 369.5 $ 369.5 Present Value of Free Cash Flows
1,519.8 1,688.7 1,857.5 Present Value of Terminal Value
-------- -------- --------
$1,889.3 $2,058.2 $2,227.1 NET ENTERPRISE VALUE
7.0%
0.9% 1.5% 1.9% Implied Perpetuity Growth Rate
5.1x 5.5x 6.0x Multiple of 2000E Sales
7.8x 8.5x 9.2x Multiple of 2000E EBITDA
10.3x 11.2x 12.1x Multiple of 2000E EBIT
-------------------------------------
$ 353.3 $ 353.3 $353.3 Present Value of Free Cash Flows
1,450.6 1,611.7 1,772.9 Present Value of Terminal Value
-------- -------- --------
$1,803.9 $1,965.0 $2,126.2 NET ENTERPRISE VALUE
7.5%
1.3% 1.9% 2.4% Implied Perpetuity Growth Rate
4.8x 5.3x 5.7x Multiple of 2000E Sales
7.5x 8.1x 8.8x Multiple of 2000E EBITDA
9.8x 10.7x 11.6x Multiple of 2000E EBIT
- ---------------------------------------------------
- --------------
Note: Valuation from 12/31/00 to 12/31/2010
[WASSERSTEIN PERELLA & CO LOGO]
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59
Discounted Cash Flow Analysis
WESSEX WATER DCF ANALYSIS - PERPETUITY GROWTH RATE ($MM)
================================================================================
- --------------------------------------------------------------------- ------------------------------------
PERPETUITY GROWTH RATE: YEAR 10 UNLEVERED FREE CASH FLOW YEAR 2010 UNLV. FCF $181.4
------------------------------------
DISCOUNT
RATE 1.0% 1.5% 2.0%
----------------------------------------------------
386.6 386.6 386.6 Present Value of Free Cash Flows
1,774.8 1,961.9 2,190.7 Present Value of Perpetuity
-------- -------- --------
$2,161.3 $2,348.5 $2,577.2 NET ENTERPRISE VALUE
6.5%
9.5x 10.5x 11.7x Implied Terminal EBITDA Multiplier
5.8x 6.3x 6.9x Multiple of 2000E Sales
9.0x 9.7x 10.7x Multiple of 2000E EBITDA
11.8x 12.8x 14.0x Multiple of 2000E EBIT
----------------------------------------------------
369.5 369.5 369.5 Present Value of Free Cash Flows
1,552.4 1,702.0 1,881.4 Present Value of Perpetuity
-------- -------- --------
$1,922.0 $2,071.5 $2,250.9 NET ENTERPRISE VALUE
7.0%
8.7x 9.5x 10.5x Implied Terminal EBITDA Multiplier
5.2x 5.6x 6.0x Multiple of 2000E Sales
8.0x 8.6x 9.3x Multiple of 2000E EBITDA
10.5x 11.3x 12.2x Multiple of 2000E EBIT
----------------------------------------------------
353.3 353.3 353.3 Present Value of Free Cash Flows
1,367.7 1,489.1 1,632.4 Present Value of Perpetuity
-------- -------- --------
$1,721.0 $1,842.4 $1,985.7 NET ENTERPRISE VALUE
7.5%
8.0x 8.7x 9.6x Implied Terminal EBITDA Multiplier
4.6x 4.9x 5.3x Multiple of 2000E Sales
7.1x 7.6x 8.2x Multiple of 2000E EBITDA
9.4x 10.0x 10.8x Multiple of 2000E EBIT
- ---------------------------------------------------------------------
- ----------
Note: Valuation from 12/31/00 to 12/31/2010
[WASSERSTEIN PERELLA & CO LOGO]
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60
Discounted Cash Flow Analysis
WESSEX SUMMARY INCOME STATEMENT ($MM)
================================================================================
--------------------------------------------------------------------------------
ACTUAL ESTIMATES (1)
--------------------------------------------------------------------------------
1999 2000E 2001E 2002E 2003E 2004E 2005E
--------------------------------------------------------------------------------
OPERATING REVENUES
Regulated (Appointed) $399.0 $373.1 $362.7 $378.5 $411.6 $452.3 $481.0
Non-Appointed 4.8 5.0 7.1 7.7 8.2 8.9 9.5
Azurix Services Ltd. 2.4 1.9 10.8 27.9 45.1 66.1 75.0
SC Technology AG 11.3 15.1 15.6 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------ ------ ------
TOTAL OPERATING REVENUES 417.4 395.1 396.2 414.1 465.0 527.3 565.4
OPERATING EXPENSES
Regulated (Appointed) 110.4 106.4 116.5 126.5 136.4 147.8 157.4
Non-Appointed 3.9 3.8 3.4 3.6 3.9 4.2 4.4
Azurix Services Ltd. 2.5 2.5 9.8 23.0 36.7 53.8 61.0
SC Technology AG 14.8 18.9 16.7 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------ ------ ------
TOTAL OPERATING EXPENSES 131.5 131.5 146.4 153.0 177.0 205.7 222.8
Depreciation 53.2 57.4 65.9 72.3 79.5 86.6 91.2
Infrastructure Maintenance 16.3 22.3 25.5 27.1 28.8 30.4 32.4
------ ------ ------ ------ ------ ------ ------
EBIT 216.4 183.9 158.4 161.6 179.7 204.5 219.0
Interest Expense 32.8 36.3 47.1 50.5 59.4 67.8 73.3
------ ------ ------ ------ ------ ------ ------
EBT 183.6 147.6 111.3 111.2 120.3 136.7 145.8
Income Tax Expense 17.7 10.6 7.7 16.4 30.8 36.1 39.6
------ ------ ------ ------ ------ ------ ------
NET INCOME BEFORE DIVIDEND 165.9 137.0 103.6 94.8 89.6 100.5 106.1
Ordinary Dividend 135.6 76.9 55.7 51.5 46.4 49.9 50.5
------ ------ ------ ------ ------ ------ ------
NET INCOME AFTER DIVIDEND 30.3 60.2 47.8 43.3 43.2 50.6 55.6
D&A 53.2 57.4 65.9 72.3 79.5 86.6 91.2
------ ------ ------ ------ ------ ------ ------
EBITDA 269.6 241.3 224.3 234.0 259.2 291.1 310.3
Capital Expenditures (2) 221.7 187.6 228.8 266.3 282.1 275.8 239.3
% Increase/(Decrease) in CapEx (15.4)% 22.0% 16.4% 5.9% (2.2)% (13.2)%
FX Rate used to Convert to USD ($ / Sterling) 1.45 1.45 1.45 1.50 1.55 1.60 1.65
-----------------------------------------------------
ESTIMATES (1)
-----------------------------------------------------
2006E 2007E 2008E 2009E 2010E
-----------------------------------------------------
OPERATING REVENUES
Regulated (Appointed) $493.0 $505.3 $517.9 $530.9 $544.2
Non-Appointed 9.9 10.3 10.7 11.1 11.6
Azurix Services Ltd. 81.0 85.8 90.1 94.6 99.3
SC Technology AG 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------
TOTAL OPERATING REVENUES 583.8 601.4 618.8 636.6 655.1
OPERATING EXPENSES
Regulated (Appointed) 161.3 165.3 169.5 173.7 178.0
Non-Appointed 4.6 4.8 5.0 5.1 5.4
Azurix Services Ltd. 65.9 69.8 73.3 77.0 80.8
SC Technology AG 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------
TOTAL OPERATING EXPENSES 231.7 239.9 247.7 255.8 264.2
Depreciation 90.2 93.7 97.4 101.1 104.8
Infrastructure Maintenance 35.0 36.1 37.1 38.2 39.3
------ ------ ------ ------ ------
EBIT 226.8 231.8 236.5 241.6 246.8
Interest Expense 74.1 70.3 65.6 62.8 59.2
------ ------ ------ ------ ------
EBT 152.7 161.4 170.9 178.8 187.6
Income Tax Expense 41.8 45.3 49.2 52.6 56.2
------ ------ ------ ------ ------
NET INCOME BEFORE DIVIDEND 110.9 116.1 121.7 126.2 131.3
Ordinary Dividend 55.5 56.7 57.9 58.6 59.4
------ ------ ------ ------ ------
NET INCOME AFTER DIVIDEND 55.5 59.4 63.8 67.7 72.0
D&A 90.2 93.7 97.4 101.1 104.8
------ ------ ------ ------ ------
EBITDA 317.1 325.4 333.9 342.6 351.6
Capital Expenditures (2) 140.3 132.0 132.0 132.0 132.0
% Increase/(Decrease) in CapEx (41.4)% (5.9)% 0.0% 0.0% 0.0%
FX Rate used to Convert to USD ($ / Sterling) 1.65 1.65 1.65 1.65 1.65
- ----------
Note: Historical results exclude all non-recurring charges.
(1) Based on management projections
(2) Assumes "steady state" capex of approximately 80 million pounds
($132 million) per year
[WASSERSTEIN PERELLA & CO. LOGO]
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61
Discounted Cash Flow Analysis
WESSEX INCOME STATEMENT ANALYSIS
================================================================================
--------------------------------------------------------------------------------
ACTUAL ESTIMATES (1)
--------------------------------------------------------------------------------
1999 2000E 2001E 2002E 2003E 2004E 2005E
--------------------------------------------------------------------------------
GROWTH RATES:
Revenues
Regulated (Appointed) -- (6.5)% (2.8)% 4.4% 8.7% 9.9% 6.3%
Non-Appointed -- 5.3% 42.3% 7.3% 7.6% 7.5% 7.4%
Azurix Services Ltd. -- (19.2)% 456.9% 159.2% 61.7% 46.5% 13.4%
SC Technology AG -- 34.0% 3.4% (100.0)% 0.0% 0.0% 0.0%
TOTAL REVENUE GROWTH -- (5.3)% 0.3% 4.5% 12.3% 13.4% 7.2%
EBIT -- (15.0)% (13.9)% 2.0% 11.2% 13.8% 7.1%
Net Income before Dividend -- (17.4)% (24.4)% (8.5)% (5.5)% 12.3% 5.6%
OPERATING MARGINS
Regulated (Appointed) 72.3% 71.5% 67.9% 66.6% 66.9% 67.3% 67.3%
Non-Appointed 18.9% 23.7% 52.2% 53.6% 52.3% 53.0% 53.8%
Azurix Services Ltd. (4.1)% (27.8)% 9.1% 17.7% 18.6% 18.6% 18.6%
SC Technology AG (30.8)% (24.6)% (6.6)% 0.0% 0.0% 0.0% 0.0%
TOTAL EBIT 51.8% 46.5% 40.0% 39.0% 38.6% 38.8% 38.7%
TOTAL EBITDA 64.6% 61.1% 56.6% 56.5% 55.7% 55.2% 54.9%
OTHER MARGINS (% OF TOTAL REVENUES)
Depreciation 12.8% 13.7% 16.7% 18.3% 19.2% 18.6% 17.3%
Infrastructure Maintenance 3.9% 5.3% 6.5% 6.8% 6.9% 6.5% 6.1%
Net Income before Dividend 39.7% 36.7% 28.6% 25.0% 21.8% 22.2% 22.1%
-------------------------------------------------
ESTIMATES (1)
-------------------------------------------------
2006E 2007E 2008E 2009E 2010E
-------------------------------------------------
Revenues
Regulated (Appointed) 2.5% 2.5% 2.5% 2.5% 2.5%
Non-Appointed 4.0% 4.0% 4.0% 4.0% 4.0%
Azurix Services Ltd. 8.0% 6.0% 5.0% 5.0% 5.0%
SC Technology AG 0.0% 0.0% 0.0% 0.0% 0.0%
TOTAL REVENUE GROWTH 3.3% 3.0% 2.9% 2.9% 2.9%
EBIT 3.6% 2.2% 2.1% 2.1% 2.2%
Net Income before Dividend 4.5% 4.7% 4.8% 3.7% 4.1%
OPERATING MARGINS
Regulated (Appointed) 67.3% 67.3% 67.3% 67.3% 67.3%
Non-Appointed 53.8% 53.8% 53.8% 53.8% 53.8%
Azurix Services Ltd. 18.6% 18.6% 18.6% 18.6% 18.6%
SC Technology AG 0.0% 0.0% 0.0% 0.0% 0.0%
TOTAL EBIT 38.9% 38.5% 38.2% 37.9% 37.7%
TOTAL EBITDA 54.3% 54.1% 54.0% 53.8% 53.7%
OTHER MARGINS (% OF TOTAL REVENUES)
Depreciation 16.0% 16.0% 16.2% 16.3% 16.5%
Infrastructure Maintenance 6.0% 6.0% 6.0% 6.0% 6.0%
Net Income before Dividend 22.5% 23.0% 23.5% 23.8% 24.1%
[WASSERSTEIN PERELLA & CO. LOGO]
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62
Discounted Cash Flow Analysis
WESSEX BALANCE SHEET ($MM)
================================================================================
---------------------------------------------------------------------------------
ACTUAL ESTIMATES
---------------------------------------------------------------------------------
1999 2000E 2001E 2002E 2003E 2004E 2005E
---------------------------------------------------------------------------------
ASSETS
Fixed Assets $1,826.7 $1,929.9 $2,062.6 $2,224.4 $2,392.9 $2,546.1 $2,655.8
Other Investments 0.5 0.5 0.5 0.5 0.5 0.5 0.5
Investment in Shares 1.0 1.0 1.0 1.0 1.0 1.0 1.0
Inventory 3.4 4.0 1.3 1.4 1.5 1.6 1.7
Accounts Receivable 94.7 85.1 87.5 96.6 110.4 126.7 138.1
-------- -------- -------- -------- -------- -------- --------
TOTAL ASSETS 1,926.3 2,020.6 2,153.0 2,324.0 2,506.4 2,675.9 2,797.1
LIABILITIES
UMRIA (Unmeasured Receipts in Advance) $ 47.3 $ 41.4 $ 40.1 $ 42.3 $ 44.5 $ 44.4 $ 43.5
Capital 38.0 44.9 53.8 65.4 69.3 67.8 58.8
Deferred Taxation 32.6 40.9 38.7 43.3 50.7 53.4 54.6
Dividend 54.9 21.9 21.0 19.0 18.6 19.2 18.4
Accounts Payable 65.0 65.8 67.3 72.7 77.2 83.3 87.6
Deferred Income 32.4 31.3 30.1 30.0 29.8 29.5 29.1
Other Provisions 15.6 10.7 9.5 9.5 9.5 9.5 9.5
-------- -------- -------- -------- -------- -------- --------
285.6 256.8 260.7 282.2 299.7 307.0 301.5
Net Debt 587.5 650.5 731.1 837.4 959.1 1,070.6 1,141.8
-------- -------- -------- -------- -------- -------- --------
TOTAL LIABILITIES 873.1 907.3 991.8 1,119.6 1,258.8 1,377.6 1,443.3
SHAREHOLDERS' FUNDS
Share Capital $ 191.0 $ 191.0 $ 191.0 $ 191.0 $ 191.0 $ 191.0 $ 191.0
Share Premium 41.8 41.8 41.8 41.8 41.8 41.8 41.8
Reserves & Retained Profits 820.3 880.5 928.3 971.6 1,014.8 1,065.4 1,121.0
-------- -------- -------- -------- -------- -------- --------
TOTAL SHAREHOLDERS' FUNDS 1,053.2 1,113.3 1,161.2 1,204.4 1,247.6 1,298.2 1,353.8
TOTAL LIABILITIES & SHAREHOLDERS' FUNDS 1,926.3 2,020.6 2,153.0 2,324.0 2,506.4 2,675.9 2,797.1
----------------------------------------------------
ESTIMATES
----------------------------------------------------
2006E 2007E 2008E 2009E 2010E
----------------------------------------------------
ASSETS
Fixed Assets $2,664.7 $2,660.6 $2,651.7 $2,637.9 $2,619.0
Other Investments 0.5 0.5 0.5 0.5 0.5
Investment in Shares 1.0 1.0 1.0 1.0 1.0
Inventory 1.8 2.0 2.1 2.3 2.5
Accounts Receivable 139.2 143.4 147.5 151.7 156.1
-------- -------- -------- -------- --------
TOTAL ASSETS 2,807.2 2,807.5 2,802.9 2,793.5 2,779.2
LIABILITIES
UMRIA (Unmeasured Receipts in Advance) $ 41.9 $ 40.2 $ 38.3 $ 36.2 $ 34.0
Capital 60.7 62.5 64.3 66.2 68.1
Deferred Taxation 55.8 57.2 58.6 60.2 61.9
Dividend 18.4 18.4 18.4 18.4 18.4
Accounts Payable 88.9 92.0 95.0 98.1 101.3
Deferred Income 27.9 26.6 25.4 24.2 22.9
Other Provisions 9.5 9.5 9.5 9.5 9.5
-------- -------- -------- -------- --------
303.1 306.5 309.6 312.8 316.2
Net Debt 1,094.8 1,032.3 960.8 880.5 790.9
-------- -------- -------- -------- --------
TOTAL LIABILITIES 1,397.9 1,338.8 1,270.4 1,193.3 1,107.1
SHAREHOLDERS' FUNDS
Share Capital $ 191.0 $ 191.0 $ 191.0 $ 191.0 $ 191.0
Share Premium 41.8 41.8 41.8 41.8 41.8
Reserves & Retained Profits 1,176.4 1,235.9 1,299.6 1,367.3 1,439.3
-------- -------- -------- -------- --------
TOTAL SHAREHOLDERS' FUNDS 1,409.3 1,468.7 1,532.5 1,600.2 1,672.2
TOTAL LIABILITIES & SHAREHOLDERS' FUNDS 2,807.2 2,807.5 2,802.9 2,793.5 2,779.2
[WASSERSTEIN PERELLA & CO. LOGO]
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63
Discounted Cash Flow Analysis
WESSEX CASH FLOW STATEMENT ($MM)
================================================================================
--------------------------------------------------------------------
ESTIMATES
--------------------------------------------------------------------
2000E 2001E 2002E 2003E 2004E 2005E 2006E
--------------------------------------------------------------------
OPERATING CASH FLOW
Net Income (before Dividend) $137.0 103.6 94.8 89.6 100.5 106.1 110.9
Depreciation 57.4 65.9 72.3 79.5 86.6 91.2 90.2
Infrastructure Maintenance 22.3 25.5 27.1 28.8 30.4 32.4 35.0
Connection Charges & Grants 4.7 4.7 5.0 5.3 5.6 5.9 6.1
Dividend Paid in Cash
(Increase)/Decrease in Working Capital)
UMRIA (5.9) (1.3) 2.1 2.2 (0.1) (1.0) (1.5)
Capital 6.9 9.0 11.6 3.9 (1.5) (9.0) 1.9
Inventory (0.6) 2.7 (0.1) (0.1) (0.1) (0.1) (0.1)
Accounts Receivable 9.5 (2.4) (9.1) (13.8) (16.3) (11.4) (1.1)
Deferred Taxation 8.3 (2.2) 4.5 7.5 2.7 1.2 1.3
Accounts Payable 0.8 1.6 5.3 4.5 6.1 4.4 1.2
Deferred Income (1.1) (1.1) (0.1) (0.2) (0.3) (0.4) (1.2)
Other Provisions (4.8) (1.2) 0.0 0.0 0.0 0.0 0.0
------ ----- ---- ---- ----- ----- -----
TOTAL CASH FLOW FROM OPERATING ACTIVITIES 234.6 204.8 213.5 207.1 213.7 219.5 242.8
INVESTING CASH FLOW
Capital Expenditures (187.6) (228.8) (266.3) (282.1) (275.8) (239.3) (140.3)
------ ----- ---- ---- ----- ----- -----
TOTAL CASH FLOW FROM INVESTING ACTIVITIES (187.6) (228.8) (266.3) (282.1) (275.8) (239.3) (140.3)
FINANCING CASH FLOW
Dividend Paid in Cash (109.9) (56.6) (53.5) (46.8) (49.4) (51.3) (55.5)
Issuance / (Redemption) of Debt 62.9 80.6 106.3 121.8 111.5 71.2 (47.0)
------ ----- ---- ---- ----- ----- -----
TOTAL CASH FLOW FROM FINANCING ACTIVITIES (47.0) 24.1 52.8 75.0 62.1 19.9 (102.5)
Cash Flow Before Debt Incurrence (62.9) (80.6) (106.3) (121.8) (111.5) (71.2) 47.0
------------------------------------
ESTIMATES
------------------------------------
2007E 2008E 2009E 2010E
------------------------------------
OPERATING CASH FLOW
Net Income (before Dividend) 116.1 121.7 126.2 131.3
Depreciation 93.7 97.4 101.1 104.8
Infrastructure Maintenance 36.1 37.1 38.2 39.3
Connection Charges & Grants 6.3 6.4 6.6 6.8
Dividend Paid in Cash
(Increase)/Decrease in Working Capital)
UMRIA (1.7) (1.9) (2.1) (2.2)
Capital 1.8 1.8 1.9 1.9
Inventory (0.2) (0.2) (0.2) (0.2)
Accounts Receivable (4.2) (4.1) (4.3) (4.4)
Deferred Taxation 1.4 1.5 1.6 1.7
Accounts Payable 3.1 3.0 3.1 3.2
Deferred Income (1.2) (1.2) (1.2) (1.2)
Other Provisions 0.0 0.0 0.0 0.0
------ ------ ------ ------
TOTAL CASH FLOW FROM OPERATING ACTIVITIES 251.1 261.4 270.9 281.0
INVESTING CASH FLOW
Capital Expenditures (132.0) (132.0) (132.0) (132.0)
------ ------ ------ ------
TOTAL CASH FLOW FROM INVESTING ACTIVITIES (132.0) (132.0) (132.0) (132.0)
FINANCING CASH FLOW
Dividend Paid in Cash (56.7) (57.9) (58.6) (59.4)
Issuance / (Redemption) of Debt (62.4) (71.5) (80.3) (89.6)
------ ------ ------ ------
TOTAL CASH FLOW FROM FINANCING ACTIVITIES (119.1) (129.4) (138.9) (149.0)
Cash Flow Before Debt Incurrence 62.4 71.5 80.3 89.6
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Discounted Cash Flow Analysis
WESSEX UK / US GAAP ADJUSTMENTS
================================================================================
--------------------------------------------------------------------
ESTIMATES
--------------------------------------------------------------------
2000E 2001E 2002E 2003E 2004E 2005E 2006E
--------------------------------------------------------------------
EBIT FROM INCOME STATEMENT (UK GAAP) 183.9 158.4 161.6 179.7 204.5 219.0 226.8
Adjustments
Operational Costs (pension related) (1.2) (0.7) 0.0 0.0 0.0 0.0 0.0
------- ------ ------ ------ ------ ------ ------
General & Administrative (release of acquisition 1.2 (0.3) (0.3) (0.3) (0.3) (0.3) (0.3)
provision and AEL charges)
Subtotal 0.0 (1.0) (0.3) (0.3) (0.3) (0.3) (0.3)
Depreciation (see below) (10.6) (11.0) (12.2) (13.1) (14.1) (15.2) (16.3)
Amortization (Amortize Goodwill over 40 years) (19.3) (19.3) (19.9) (20.6) (21.2) (21.9) (21.9)
Infrastructure Renewals (see below) 20.7 23.9 25.5 27.1 28.7 30.6 33.2
------- ------ ------ ------ ------ ------ ------
Subtotal (9.1) (6.4) (6.6) (6.7) (6.7) (6.5) (5.0)
ADJUSTED EBIT (US GAAP) 174.8 151.0 154.7 172.7 197.4 212.2 221.5
Adjusted D&A (US GAAP) 88.8 97.7 106.1 114.9 123.8 130.1 130.2
------- ------ ------ ------ ------ ------ ------
ADJUSTED EBITDA (US GAAP) 263.6 248.8 260.8 287.6 321.2 342.4 351.8
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITALIZE INFRASTRUCTURE RENEWALS
Wessex Charge from I/S 22.3 25.5 27.1 28.8 30.4 32.4 35.0
Less: True Maintenance (1.6) (1.6) (1.7) (1.7) (1.8) (1.8) (1.8)
------- ------ ------ ------ ------ ------ ------
20.7 23.9 25.5 27.1 28.7 30.6 33.2
DEPRECIATION OF INFRASTRUCTURE ASSETS
Infrastructure Assets 1,132.6 1211.3 1293.2 1378.7 1467.8 1560.4 1657.0
Depreciation over 115 yrs 10.0 7.2 11.2 12.0 12.8 13.6 14.4
Additions 58.0 58.0 60.0 62.0 64.0 66.0 66.0
Capitalized Infrastructure Renewals 20.7 23.9 25.5 27.1 28.7 30.6 33.2
------- ------ ------ ------ ------ ------ ------
Total 78.7 81.9 85.5 89.1 92.7 96.6 99.2
Depreciation over 115yrs / 2 0.3 0.4 0.4 0.4 0.4 0.4 0.4
Depreciation of Capitalized Interest at 3% 0.2 0.3 0.6 0.8 1.0 1.2 1.4
------- ------ ------ ------ ------ ------ ------
Total Depreciation Adjustment 10.6 11.0 12.2 13.1 14.1 15.2 16.3
CAPITALISED INTEREST
Asssets in construction 130.5 123.3 112.5 116.3 120.0 123.8 123.8
Interest rate 6.1% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
------- ------ ------ ------ ------ ------ ------
Capitalised in year 8.0 7.4 6.8 7.0 7.2 7.4 7.4
Capitalised cumulatively 8.0 15.4 22.1 29.1 36.3 43.7 51.1
--------------------------------------
ESTIMATES
--------------------------------------
2007E 2008E 2009E 2010E
--------------------------------------
EBIT FROM INCOME STATEMENT (UK GAAP) 231.8 236.5 241.6 246.8
Adjustments
Operational Costs (pension related) 0.0 0.0 0.0 0.0
General & Administrative (release of acquisition
provision and AEL charges) (0.3) (0.3) (0.3) (0.3)
------ ------ ------ ------
Subtotal (0.3) (0.3) (0.3) (0.3)
Depreciation (see below) (17.4) (18.5) (19.6) (20.7)
Amortization (Amortize Goodwill over 40 years) (21.9) (21.9) (21.9) (21.9)
Infrastructure Renewals (see below) 34.3 35.3 36.4 37.5
------ ------ ------ ------
Subtotal (5.0) (5.0) (5.1) (5.1)
ADJUSTED EBIT (US GAAP) 226.4 231.2 236.1 241.4
Adjusted D&A (US GAAP) 134.7 139.5 144.3 149.2
------ ------ ------ ------
ADJUSTED EBITDA (US GAAP) 361.2 370.7 380.5 390.5
- --------------------------------------------------------------------------------------------------------
CAPITALIZE INFRASTRUCTURE RENEWALS
Wessex Charge from I/S 36.1 37.1 38.2 39.3
Less: True Maintenance (1.8) (1.8) (1.8) (1.8)
------ ------ ------ ------
34.3 35.3 36.4 37.5
DEPRECIATION OF INFRASTRUCTURE ASSETS
Infrastructure Assets 1756.3 1856.5 1957.8 2060.2
Depreciation over 115 yrs 15.3 16.1 17.0 17.9
Additions 66.0 66.0 66.0 66.0
Capitalized Infrastructure Renewals 34.3 35.3 36.4 37.5
------ ------ ------ ------
Total 100.3 101.3 102.4 103.5
Depreciation over 115yrs / 2 0.4 0.4 0.4 0.4
Depreciation of Capitalized Interest at 3% 1.6 1.9 2.1 2.3
------ ------ ------ ------
Total Depreciation Adjustment 17.4 18.5 19.6 20.7
CAPITALISED INTEREST
Asssets in construction 123.8 123.8 123.8 123.8
Interest rate 6.0% 6.0% 6.0% 6.0%
------ ------ ------ ------
Capitalised in year 7.4 7.4 7.4 7.4
Capitalised cumulatively 58.6 66.0 73.4 80.8
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Discounted Cash Flow Analysis
WESSEX UNLEVERED FREE CASH FLOW AND RAB CALCULATION ($MM)
================================================================================
--------------------------------------------------------------------
ESTIMATES
--------------------------------------------------------------------
2000E 2001E 2002E 2003E 2004E 2005E 2006E
--------------------------------------------------------------------
UNLEVERED FREE CASH FLOWS:
EBIT (US GAAP) 174.8 151.0 154.7 172.7 197.4 212.2 221.5
Less: Taxes on EBIT @ 30.0% (52.4) (45.3) (46.4) (51.8) (59.2) (63.7) (66.5)
Plus: Depreciation (US GAAP) 68.0 76.9 84.5 92.6 100.8 106.4 106.5
Plus: Amortization (US GAAP) 19.3 19.3 19.9 20.6 21.2 21.9 21.9
Less: Increase in Net Working Capital (1) 4.8 7.3 9.8 (3.5) (12.2) (17.4) (0.8)
Less: Capital Expenditures (187.6) (228.8) (266.3) (282.1) (275.8) (239.3) (140.3)
Less: Dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
UNLEVERED FREE CASH FLOW 26.8 (19.7) (43.8) (51.4) (27.7) 20.1 142.5
RAB CALCULATION:
RAB - BEGINNING BALANCE 1,800.0 1,948.2 2,129.6 2,344.7 2,571.8 2,789.2 2,968.7
Plus: Inflation on RAB 45.0 48.7 53.2 58.6 64.3 69.7 74.2
Plus: Capital Expenditures 187.6 228.8 266.3 282.1 275.8 239.3 140.3
Less: Connection Charges (4.7) (4.7) (5.0) (5.3) (5.6) (5.9) (6.1)
Less: Infrastructure Maintenance (22.3) (25.5) (27.1) (28.8) (30.4) (32.4) (35.0)
Less: Depreciation (57.4) (65.9) (72.3) (79.5) (86.6) (91.2) (90.2)
Less: Clawback 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
RAB - ENDING BALANCE 1,948.2 2,129.6 2,344.7 2,571.8 2,789.2 2,968.7 3,051.8
--------------------------------------
ESTIMATES
--------------------------------------
2007E 2008E 2009E 2010E
--------------------------------------
UNLEVERED FREE CASH FLOWS: 388.7
EBIT (US GAAP) 226.4 231.2 236.1 241.4
Less: Taxes on EBIT @ 30.0% (67.9) (69.3) (70.8) (72.4)
Plus: Depreciation (US GAAP) 111.0 115.8 120.6 125.4
Plus: Amortization (US GAAP) 21.9 21.9 21.9 21.9
Less: Increase in Net Working Capital (1) (2.4) (2.7) (2.8) (2.9)
Less: Capital Expenditures (132.0) (132.0) (132.0) (132.0)
Less: Dividends 0.0 0.0 0.0 0.0
------- ------- ------- -------
UNLEVERED FREE CASH FLOW 157.1 164.9 173.1 181.4
RAB CALCULATION:
RAB - BEGINNING BALANCE 3,051.8 3,124.0 3,193.2 3,259.2
Plus: Inflation on RAB 76.3 78.1 79.8 81.5
Plus: Capital Expenditures 132.0 132.0 132.0 132.0
Less: Connection Charges (6.3) (6.4) (6.6) (6.8)
Less: Infrastructure Maintenance (36.1) (37.1) (38.2) (39.3)
Less: Depreciation (93.7) (97.4) (101.1) (104.8)
Less: Clawback 0.0 0.0 0.0 0.0
------- ------- ------- -------
RAB - ENDING BALANCE 3,124.0 3,193.2 3,259.2 3,321.8
- ----------
(1) Excludes deferred taxes and dividend account on the balance sheet
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66
Discounted Cash Flow Analysis
BUENOS AIRES DISCOUNTED CASH FLOW ANALYSIS ($MM)
================================================================================
- ------------------------------------------------------------------------ ------------------------------------
TERMINAL VALUE MULTIPLE: YEAR 29 EBITDA (1) FY 2029 EBITDA NM
DISCOUNT NET DEBT $0.0
RATE 0.0X 0.0X 0.0X ------------------------------------
----------------------------------------
$116.6 $116.6 $116.6 Present Value of Free Cash Flows
0.0 0.0 0.0 Present Value of Terminal Value (1)
------ ------ ------
$116.6 $116.6 $116.6 NET ENTERPRISE VALUE
15.0%
NM NM NM Implied Perpetuity Growth Rate
1.2x 1.2x 1.2x Multiple of 2000E Sales
16.9x 16.9x 16.9x Multiple of 2000E EBITDA
NM NM NM Multiple of 2000E EBIT
----------------------------------------
$92.6 $92.6 $92.6 Present Value of Free Cash Flows
0.0 0.0 0.0 Present Value of Terminal Value (1)
------ ------ ------
$92.6 $92.6 $92.6 NET ENTERPRISE VALUE
16.0%
NM NM NM Implied Perpetuity Growth Rate
1.0x 1.0x 1.0x Multiple of 2000E Sales
13.4x 13.4x 13.4x Multiple of 2000E EBITDA
NM NM NM Multiple of 2000E EBIT
----------------------------------------
$72.2 $72.2 $72.2 Present Value of Free Cash Flows
0.0 0.0 0.0 Present Value of Terminal Value (1)
------ ------ ------
$72.2 $72.2 $72.2 NET ENTERPRISE VALUE
17.0%
NM NM NM Implied Perpetuity Growth Rate
0.8x 0.8x 0.8x Multiple of 2000E Sales
10.5x 10.5x 10.5x Multiple of 2000E EBITDA
NM NM NM Multiple of 2000E EBIT
----------------------------------------
- ------------
Note: Valuation from 12/31/00 to 12/31/2005
(1) At the end of the 30 year concession (2029), ownership of the concession
will transfer back to the Province of Buenos Aires. Therefore, the
terminal value is $0 million.
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67
Discounted Cash Flow Analysis
BUENOS AIRES 30-YEAR CONCESSION INCOME STATEMENT ($MM)
================================================================================
------------------------------------------------------------------------------------------------
ESTIMATES
------------------------------------------------------------------------------------------------
2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E 2011E
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
SALES $126.2 $133.7 $151.4 $167.7 $193.7 $203.0 $210.1 $217.2 $224.6 $245.6 $253.8
% Growth Rate 5.9% 13.3% 10.8% 15.5% 4.8% 3.5% 3.4% 3.4% 9.3% 3.3%
O&M Expense 69.6 71.9 75.3 76.4 82.4 85.2 85.9 88.3 90.8 95.9 98.9
G&A Expense 21.4 21.1 21.3 21.7 22.7 23.5 24.4 25.2 25.8 26.7 27.4
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
EBITDA 35.3 40.7 54.7 69.5 88.6 94.4 99.8 103.7 107.9 123.0 127.5
% Margin 27.9% 30.4% 36.2% 41.5% 45.7% 46.5% 47.5% 47.7% 48.1% 50.1% 50.2%
D&A 19.7 22.6 25.6 28.2 30.1 31.9 34.5 38.2 42.3 45.3 47.2
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
EBIT 15.6 18.1 29.2 41.4 58.5 62.5 65.2 65.5 65.7 77.7 80.3
% Margin 12.4% 13.5% 19.3% 24.7% 30.2% 30.8% 31.1% 30.1% 29.2% 31.6% 31.7%
------------------------------------------------------------------------------------------------
ESTIMATES
------------------------------------------------------------------------------------------------
2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
SALES $262.3 $271.0 $280.1 $306.4 $316.8 $327.6 $335.6 $344.3 $374.2 $384.4 $395.3
% Growth Rate 3.3% 3.3% 3.4% 9.4% 3.4% 3.4% 2.4% 2.6% 8.7% 2.7% 2.9%
O&M Expense 98.3 101.5 104.9 111.6 115.7 119.8 123.8 128.1 136.7 141.7 146.9
G&A Expense 28.1 29.0 29.9 30.9 31.9 32.9 33.9 35.0 36.3 37.5 38.7
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
EBITDA 135.9 140.5 145.3 163.8 169.2 174.8 177.9 181.3 201.2 205.2 209.7
% Margin 51.8% 51.8% 51.9% 53.5% 53.4% 53.4% 53.0% 52.6% 53.8% 53.4% 53.1%
D&A 49.0 50.7 52.5 54.1 55.4 56.7 58.2 59.7 61.5 63.5 66.5
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
EBIT 86.9 89.8 92.9 109.7 113.8 118.1 119.7 121.5 139.7 141.8 143.2
% Margin 33.1% 33.2% 33.2% 35.8% 35.9% 36.1% 35.7% 35.3% 37.3% 36.9% 36.2%
------------------------------------------------------------
ESTIMATES
------------------------------------------------------------
2023E 2024E 2025E 2026E 2027E 2028E 2029E
------ ------ ------ ------ ------ ------ ------
SALES $407.1 $419.6 $457.8 $471.8 $486.3 $501.2 $258.3
% Growth Rate 3.0% 3.1% 9.1% 3.1% 3.1% 3.1% (48.5)%
O&M Expense 152.5 158.4 169.8 176.5 183.4 190.7 99.9
G&A Expense 40.0 41.3 42.8 44.2 45.7 47.2 25.3
------ ------ ------ ------ ------ ------ ------
EBITDA 214.7 219.9 245.1 251.1 257.1 263.3 133.1
% Margin 52.7% 52.4% 53.5% 53.2% 52.9% 52.5% 51.5%
D&A 69.8 72.3 74.5 76.6 78.9 81.3 48.7
------ ------ ------ ------ ------ ------ ------
EBIT 144.8 147.6 170.6 174.4 178.2 182.0 84.4
% Margin 35.6% 35.2% 37.3% 37.0% 36.7% 36.3% 32.7%
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68
Discounted Cash Flow Analysis
BUENOS AIRES 30-YEAR UNLEVERED FREE CASH FLOW ($MM)
================================================================================
---------------------------------------------------------------------------
ESTIMATES
---------------------------------------------------------------------------
2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E 2011E
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
EBIT 15.6 18.1 29.2 41.4 58.5 62.5 65.2 65.5 65.7 77.7 80.3
Less: Taxes on EBIT @ 35.0% (5.5) (6.3) (10.2) (14.5) (20.5) (21.9) (22.8) (22.9) (23.0) (27.2) (28.1)
Plus: Depreciation & Amortization 19.7 22.6 25.6 28.2 30.1 31.9 34.5 38.2 42.3 45.3 47.2
Less: Capital Expenditures (62.2) (61.8) (57.7) (58.6) (29.5) (36.7) (72.2) (80.5) (82.1) (30.4) (29.1)
Less: Acquisition Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Less: Increase in Working Capital (30.3) (1.6) (5.6) (9.3) (7.3) (2.0) 6.3 (0.3) (1.0) 0.0 0.7
Plus: Other Reconciling Items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
UNLEVERED FREE CASH FLOW (62.7) (29.0) (18.7) (12.9) 31.4 33.8 11.1 (0.0) 1.9 65.4 71.0
---------------------------------------------------------------------------
ESTIMATES
---------------------------------------------------------------------------
2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
EBIT 86.9 89.8 92.9 109.7 113.8 118.1 119.7 121.5 139.7 141.8 143.2
Less: Taxes on EBIT @ 35.0% (30.4) (31.4) (32.5) (38.4) (39.8) (41.3) (41.9) (42.5) (48.9) (49.6) (50.1)
Plus: Depreciation & Amortization 49.0 50.7 52.5 54.1 55.4 56.7 58.2 59.7 61.5 63.5 66.5
Less: Capital Expenditures (23.8) (22.5) (27.5) (17.3) (14.9) (16.1) (17.5) (17.8) (20.2) (23.8) (46.5)
Less: Acquisition Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Less: Increase in Working Capital (0.8) (0.3) 0.8 3.4 (0.2) 1.4 0.9 0.6 4.7 (0.5) 4.1
Plus: Other Reconciling Items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
UNLEVERED FREE CASH FLOW 80.9 86.2 86.1 111.5 114.3 118.8 119.4 121.5 136.8 131.3 117.2
-----------------------------------------------
ESTIMATES
-----------------------------------------------
2023E 2024E 2025E 2026E 2027E 2028E 2029E
----- ----- ----- ----- ----- ----- -----
EBIT 144.8 147.6 170.6 174.4 178.2 182.0 84.4
Less: Taxes on EBIT @ 35.0% (50.7) (51.7) (59.7) (61.1) (62.4) (63.7) (29.5)
Plus: Depreciation & Amortization 69.8 72.3 74.5 76.6 78.9 81.3 48.7
Less: Capital Expenditures (28.0) (24.4) (19.6) (20.4) (21.1) (21.7) (21.1)
Less: Acquisition Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Less: Increase in Working Capital (2.9) (0.3) 5.1 (1.0) 0.4 0.9 7.1
Plus: Other Reconciling Items 0.0 0.0 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- ----- ----- -----
UNLEVERED FREE CASH FLOW 133.1 143.6 170.9 168.6 174.1 178.9 89.6
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Discounted Cash Flow Analysis
NORTH AMERICA DISCOUNTED CASH FLOW ANALYSIS - EBITDA TERMINAL MULTIPLE ($MM)
================================================================================
TERMINAL VALUE MULTIPLE: YEAR 5 EBITDA
- ------------------------------------------------------------------- -----------------------------------
FY 2005 EBITDA $53.7
DISCOUNT NET DEBT $ 0.0
RATE 6.0X 7.0X 8.0X -----------------------------------
------ ------ ------
(21.9) $(21.9) $(21.9) Present Value of Free Cash Flows
200.0 233.3 266.6 Present Value of Terminal Value
------ ------ ------
$178.1 $211.4 $244.7 NET ENTERPRISE VALUE
10.0%
7.9% 8.2% 8.4% Implied Perpetuity Growth Rate
1.1x 1.4x 1.6x Multiple of 2000E Sales
13.9x 16.5x 19.1x Multiple of 2000E EBITDA
31.9x 37.9x 43.9x Multiple of 2000E EBIT
--------------------------------------------------
(21.8) $(21.8) ($21.8) Present Value of Free Cash Flows
191.1 223.0 254.8 Present Value of Terminal Value
------ ------ ------
$169.4 $201.2 $233.1 NET ENTERPRISE VALUE
11.0%
8.8% 9.1% 9.4% Implied Perpetuity Growth Rate
1.1x 1.3x 1.5x Multiple of 2000E Sales
13.2x 15.7x 18.2x Multiple of 2000E EBITDA
30.4x 36.1x 41.8x Multiple of 2000E EBIT
--------------------------------------------------
(21.6) $(21.6) ($21.6) Present Value of Free Cash Flows
182.8 213.2 243.7 Present Value of Terminal Value
------ ------ ------
$161.2 $191.6 $222.1 NET ENTERPRISE VALUE
12.0%
9.8% 10.1% 10.4% Implied Perpetuity Growth Rate
1.0x 1.2x 1.4x Multiple of 2000E Sales
12.6x 15.0x 17.3x Multiple of 2000E EBITDA
28.9x 34.4x 39.8x Multiple of 2000E EBIT
--------------------------------------------------
- -----------------
Note: Valuation from 12/31/00 to 12/31/2005
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Discounted Cash Flow Analysis
AZURIX NORTH AMERICA INCOME STATEMENT ($MM)
================================================================================
----------------------------------------------------------------------------
ACTUAL ESTIMATES (1)
----------------------------------------------------------------------------
1999 2000E 2001E 2002E 2003E 2004E 2005E
------- ------- ------- ------- ------- ------- -------
OPERATING REVENUE $ 87.8 $ 156.2 $ 180.4 $ 231.6 $ 291.8 $ 357.5 $ 432.4
Growth % 15.5% 28.4% 26.0% 22.5% 20.9%
Operating & maintenance expense 68.3 119.1 137.7 174.5 220.7 271.0 327.5
G&A expense 9.4 24.4 24.6 31.0 37.4 44.0 51.2
Equity in gain/(loss) of unconsolidated
affiliates 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
EBITDA 10.0 12.8 18.1 26.1 33.7 42.6 53.7
Margin % 11.4% 8.2% 10.0% 11.3% 11.5% 11.9% 12.4%
Goodwill & concession rights amortization 1.6 2.6 3.2 3.6 4.0 4.5 5.0
expense
Depreciation & other amortization expense 2.1 4.6 6.2 8.0 10.2 12.5 14.3
------- ------- ------- ------- ------- ------- -------
Total depreciation & amortization 3.7 7.2 9.3 11.6 14.2 17.0 19.3
Equity in gain/(loss) of consolidated
affiliates 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
EBIT 6.3 5.6 8.8 14.4 19.5 25.6 34.4
Margin % 7.2% 3.6% 4.9% 6.2% 6.7% 7.2% 8.0%
Interest income (0.2) (0.9) 0.0 0.0 0.0 0.0 0.0
Interest expense 1.4 3.5 0.7 0.7 0.7 0.7 0.7
Less: capitalized interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
Net interest (income)/expense 1.3 2.6 0.7 0.7 0.7 0.7 0.7
Minority interest 0.1 0.0 0.0 0.0 0.0 0.1 0.1
Other income 0.0 0.0 (0.0) 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
Profit before tax 5.0 3.0 8.0 13.7 18.7 24.8 33.6
Income tax expense, current 0.9 3.3 3.2 5.5 7.6 10.0 13.6
Income tax expense, deferred 1.7 (0.1) 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
Total income tax expense 2.7 3.2 3.2 5.5 7.6 10.0 13.6
Tax rate % 54.1% 108.5% 40.5% 40.3% 40.5% 40.5% 40.5%
NET INCOME 2.3 (0.3) 4.8 8.2 11.1 14.7 20.0
- ----------------
(1) Estimates based on management projections
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Discounted Cash Flow Analysis
AZURIX NORTH AMERICA BALANCE SHEET AND CASH FLOW STATEMENT ($MM)
================================================================================
-------------------------------------------------------------------------
ACTUAL ESTIMATES
-------------------------------------------------------------------------
1999 2000E 2001E 2002E 2003E 2004E 2005E
------- ------- ------- ------- ------- ------- -------
ASSETS
Cash & Equivalents 3.9 7.9 0.0 0.0 0.0 0.0 4.1
Restricted Cash 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other Assets 165.4 198.7 221.1 240.3 256.7 272.8 288.7
------- ------- ------- ------- ------- ------- -------
TOTAL ASSETS 169.3 206.6 221.1 240.3 256.7 272.8 292.9
LIABILITIES & STOCKHOLDERS EQUITY
Intercompany Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Debt 14.0 8.0 8.0 8.0 8.0 8.0 8.0
Other Liabilities 32.9 71.5 71.5 71.5 71.5 71.5 71.5
------- ------- ------- ------- ------- ------- -------
TOTAL LIABILITIES 46.8 79.5 79.5 79.5 79.5 79.5 79.5
Minority Interest 0.0 0.0 0.0 0.1 0.1 0.2 0.2
Stockholders' Equity 118.2 122.5 132.2 143.2 148.5 149.8 149.8
Retained Earnings 4.3 4.7 9.4 17.6 28.7 43.4 63.4
Cumulative Foreign Currency Translation Adj 0.0 (0.0) (0.0) (0.0) (0.0) (0.0) (0.0)
------- ------- ------- ------- ------- ------- -------
TOTAL STOCKHOLDERS' EQUITY 122.5 127.1 141.6 160.7 177.1 193.2 213.1
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 169.3 206.6 221.1 240.3 256.7 272.8 292.9
OPERATING ACTIVITIES
Net Income 4.8 8.1 11.1 14.7 20.0
Reconciling Items 9.4 11.7 14.3 17.0 19.3
------- ------- ------- ------- -------
TOTAL OPERATING CASH FLOW 14.1 19.8 25.4 31.8 39.3
INVESTING ACTIVITIES
Capital Expenditures (11.7) (10.8) (10.7) (13.1) (15.2)
Acquisition Costs (20.0) (20.0) (20.0) (20.0) (20.0)
Cash to Affiliate 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- -------
TOTAL INVESTING CASH FLOW (31.7) (30.8) (30.7) (33.1) (35.2)
FINANCING ACTIVITIES
Change in Debt - Total Affiliates 0.0 0.0 0.0 0.0 0.0
Change in Debt - Public 0.0 0.0 0.0 0.0 0.0
Dividends 0.0 0.0 0.0 0.0 0.0
Contribution from Parent 9.7 11.0 5.3 1.3 0.0
Equity Financing 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- -------
TOTAL FINANCING CASH FLOW 9.7 11.0 5.3 1.3 0.0
Change in Cash - Increase/(Decrease) (7.9) 0.0 0.0 0.0 4.1
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Discounted Cash Flow Analysis
BRAZIL DISCOUNTED CASH FLOW ANALYSIS - EBITDA TERMINAL MULTIPLE ($MM)
================================================================================
TERMINAL VALUE MULTIPLE: YEAR 5 EBITDA
----------------------------------------
FY 2005 EBITDA $52.6
DISCOUNT NET DEBT $ 0.0
RATE 4.0X 5.0X 6.0X ----------------------------------------
- ---------------------------------------------------------------------
$ (77.0) $ (77.0) $ (77.0) Present Value of Free Cash Flows
104.7 130.9 157.0 Present Value of Terminal Value
-------- -------- --------
$ 27.7 $ 53.9 $ 80.0 NET ENTERPRISE VALUE
15.0%
16.2% 16.0% 15.8% Implied Perpetuity Growth Rate
1.9x 3.8x 5.6x Multiple of 2000E Sales
7.8x 15.2x 22.6x Multiple of 2000E EBITDA
90.8x 176.6x 262.4x Multiple of 2000E EBIT
---------------------------------------------------
$ (75.4) $ (75.4) $ (75.4) Present Value of Free Cash Flows
100.3 125.3 150.4 Present Value of Terminal Value
-------- -------- --------
$ 24.9 $ 49.9 $ 75.0 NET ENTERPRISE VALUE
16.0%
17.2% 17.0% 16.8% Implied Perpetuity Growth Rate
1.7x 3.5x 5.2x Multiple of 2000E Sales
7.0x 14.1x 21.2x Multiple of 2000E EBITDA
81.6x 163.7x 245.9x Multiple of 2000E EBIT
---------------------------------------------------
$ (73.8) $ (73.8) $ (73.8) Present Value of Free Cash Flows
96.0 120.0 144.1 Present Value of Terminal Value
-------- -------- --------
$ 22.2 $ 46.2 $ 70.2 NET ENTERPRISE VALUE
17.0%
18.2% 18.0% 17.8% Implied Perpetuity Growth Rate
1.6x 3.2x 4.9x Multiple of 2000E Sales
6.3x 13.0x 19.8x Multiple of 2000E EBITDA
72.9x 151.6x 230.3x Multiple of 2000E EBIT
---------------------------------------------------
Note: Valuation from 12/31/00 to 12/31/2005
Note: Valuation includes impact of potential earnout of approximately $53 MM in
2003
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Discounted Cash Flow Analysis
AZURIX BRAZIL INCOME STATEMENT ($MM)
================================================================================
---------------------------------------------------------------------------
ACTUAL ESTIMATES (1)
---------------------------------------------------------------------------
1999 2000E 2001E 2002E 2003E 2004E 2005E
------- ------- ------- ------- ------- ------- -------
OPERATING REVENUE $ 3.2 $ 14.3 $ 22.9 $ 37.9 $ 49.3 $ 64.8 $ 80.7
Growth % 60.1% 65.3% 30.2% 31.4% 24.4%
Operating & maintenance expense 1.6 6.4 9.8 10.6 13.3 17.2 21.5
G&A expense 0.5 4.4 4.8 5.3 5.6 6.1 6.5
Equity in gain/(loss) of unconsolidated
affiliates 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
EBITDA 1.1 3.5 8.3 22.0 30.4 41.5 52.6
Margin % 33.9% 24.8% 36.2% 58.1% 61.6% 64.1% 65.3%
Goodwill & concession rights amortization
expense 0.3 1.4 1.2 1.2 1.1 1.1 1.0
Depreciation & other amortization expense 0.2 1.8 3.6 6.6 8.8 11.6 14.2
------- ------- ------- ------- ------- ------- -------
Total depreciation & amortization 0.5 3.2 4.8 7.8 9.9 12.7 15.3
Equity in gain/(loss) of consolidated
affiliates 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
EBIT 0.6 0.3 3.5 14.2 20.4 28.8 37.4
Margin % 19.1% 2.1% 15.3% 37.5% 41.4% 44.5% 46.3%
Interest income 0.0 (0.2) 0.0 0.0 0.0 0.0 0.0
Interest expense 0.9 1.3 0.0 0.0 0.0 0.0 0.0
Less: capitalized interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
Net interest (income)/expense 0.9 1.1 0.0 0.0 0.0 0.0 0.0
Minority interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other income 0.0 0.0 0.2 0.3 0.4 0.5 0.6
------- ------- ------- ------- ------- ------- -------
Profit before tax (0.4) (0.9) 3.3 14.5 20.0 28.3 36.7
Income tax expense, current 0.0 0.5 1.2 4.9 7.0 9.9 12.8
Income tax expense, deferred 0.2 (0.7) 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
Total income tax expense 0.2 (0.2) 1.2 4.9 7.0 9.9 12.8
Tax rate % (63.3)% 21.7% 35.0% 33.6% 35.0% 35.0% 35.0%
NET INCOME (0.6) (0.7) 2.2 9.6 13.0 18.4 23.9
(1) Estimates based on management projections
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Discounted Cash Flow
AZURIX BRAZIL BALANCE SHEET AND CASH FLOW STATEMENT ($MM)
================================================================================
------------------------------------------------------------------------
ACTUAL ESTIMATES
------------------------------------------------------------------------
1999 2000E 2001E 2002E 2003E 2004E 2005E
------- ------- ------- ------- ------- ------- -------
ASSETS
Cash & Equivalents 0.9 2.4 0.0 0.0 0.0 0.0 0.0
Restricted Cash 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other Assets 64.3 74.9 98.4 122.9 147.2 172.3 198.8
------- ------- ------- ------- ------- ------- -------
TOTAL ASSETS 65.2 77.3 98.4 122.9 147.2 172.3 198.8
LIABILITIES & STOCKHOLDERS EQUITY
Intercompany Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Debt 48.0 0.0 0.0 0.0 0.0 0.0 0.0
Other Liabilities 3.1 11.9 11.9 11.9 11.9 11.9 11.9
------- ------- ------- ------- ------- ------- -------
TOTAL LIABILITIES 51.1 11.9 11.9 11.9 11.9 11.9 11.9
Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Stockholders' Equity 11.6 64.5 83.4 98.9 110.2 116.9 119.5
Retained Earnings 2.5 (1.6) 0.5 9.6 22.6 41.0 64.9
Cumulative Foreign Currency Translation Adj 0.0 2.5 2.5 2.5 2.5 2.5 2.5
------- ------- ------- ------- ------- ------- -------
TOTAL STOCKHOLDERS' EQUITY 14.1 65.4 86.4 111.0 135.3 160.4 186.8
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 65.2 77.3 98.4 122.9 147.2 172.3 198.8
- -----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income 2.2 9.0 13.0 18.4 23.9
Reconciling Items 4.8 7.8 9.9 12.7 15.3
------- ------- ------- ------- -------
TOTAL OPERATING CASH FLOW 7.0 16.9 23.0 31.1 39.1
INVESTING ACTIVITIES
Capital Expenditures (28.2) (32.4) (34.3) (37.8) (41.8)
Acquisition Costs 0.0 0.0 0.0 0.0 0.0
Cash to Affiliate 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- -------
TOTAL INVESTING CASH FLOW (28.2) (32.4) (34.3) (37.8) (41.8)
FINANCING ACTIVITIES
Change in Debt - Total Affiliates 0.0 0.0 0.0 0.0 0.0
Change in Debt - Public 0.0 0.0 0.0 0.0 0.0
Dividends 0.0 0.0 0.0 0.0 0.0
Contribution from Parent 18.9 15.5 11.3 6.7 2.6
Equity Financing 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- -------
TOTAL FINANCING CASH FLOW 18.9 15.5 11.3 6.7 2.6
Change in Cash - Increase/(Decrease) (2.4) 0.0 0.0 0.0 0.0
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Discounted Cash Flow Analysis
AZURIX BRAZIL UNLEVERED FREE CASH FLOW ($MM)
================================================================================
-------------------------------------------
ESTIMATES
-------------------------------------------
2001E 2002E 2003E 2004E 2005E
------ ------ ------ ------ ------
EBIT 3.5 14.2 20.4 28.8 37.4
Less: Taxes on EBIT @ 35.0% (1.2) (5.0) (7.2) (10.1) (13.1)
Plus: Depreciation & Amortization 4.8 7.8 9.9 12.7 15.3
Less: Capital Expenditures (28.2) (32.4) (34.3) (37.8) (41.8)
Less: Acquisition Costs 0.0 0.0 0.0 0.0 0.0
Less: Increase in Working Capital 0.0 0.0 0.0 0.0 0.0
Less: Potential Earnout (see below) 0.0 0.0 (53.3) 0.0 0.0
Plus: Other Reconciling Items 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------
UNLEVERED FREE CASH FLOW (21.1) (15.3) (64.3) (6.3) (2.2)
CALCULATION OF EARNOUT IN 2003
EBITDA 30.4
Enterprise Valuation at 12/31/03 (5.5x EBITDA) 167.1
Earnout Payment:
If (Actual EBITDA < Targeted EBITDA of $48.6 MM)
Total Azurix Investment ($57.7 MM Purchase Price Compounded at 18.5%) 113.8
------
EARNOUT PAYMENT (ENTERPRISE VALUE LESS INVESTMENT) (1) 53.3
If (Actual EBITDA > Targeted EBITDA of $48.6 MM)
50% * ENTERPRISE VALUE AT 12/31/03 0.0
Additional Incentive Payment:
2003 Target EBITDA 48.6
2003 Actual EBITDA 30.4
------
Incremental 2003 EBITDA over 2003 Target EBITDA (18.2)
Distribution 50.0%
Azurix EBITDA Multiple 6.5
------
BONUS PAYMENT 0.0
TOTAL EARNOUT 53.3
- -----------
(1) Capped at $50.0 million compounded at 18.5%
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76
Discounted Cash Flow Analysis
IASA (MEXICO) DISCOUNTED CASH FLOW ANALYSIS ($MM)
================================================================================
TERMINAL VALUE MULTIPLE: YEAR 5 EBITDA (1)
- ---------------------------------------------------------------- -----------------------------------
FY 2005 EBITDA NM
DISCOUNT NET DEBT $0.0
RATE 0.0X 0.0X 0.0X -----------------------------------
------- ------- -------
PRESENT VALUE OF FREE CASH FLOWS
$ 27.5 $ 27.5 $ 27.5 IASA (100% Interest)
14.6 14.6 14.6 Leon (60% Interest)
11.7 11.7 11.7 Torreon (90% Interest)
0.0 0.0 0.0 Terminal Value (1)
------- ------- -------
12.0% $ 53.7 $ 53.7 $ 53.7 NET ENTERPRISE VALUE
NM NM NM Implied Perpetuity Growth Rate
2.7x 2.7x 2.7x Multiple of 2000E Sales
7.9x 7.9x 7.9x Multiple of 2000E EBITDA
10.4x 10.4x 10.4x Multiple of 2000E EBIT
----------------------------------------------
PRESENT VALUE OF FREE CASH FLOWS
$ 25.8 $ 25.8 $ 25.8 IASA (100% Interest)
14.0 14.0 14.0 Leon (60% Interest)
10.9 10.9 10.9 Torreon (90% Interest)
0.0 0.0 0.0 Terminal Value (1)
------- ------- -------
13.0% $ 50.7 $ 50.7 $ 50.7 NET ENTERPRISE VALUE
NM NM NM Implied Perpetuity Growth Rate
0.7x 0.7x 0.7x Multiple of 2000E Sales
2.1x 2.1x 2.1x Multiple of 2000E EBITDA
2.7x 2.7x 2.7x Multiple of 2000E EBIT
----------------------------------------------
PRESENT VALUE OF FREE CASH FLOWS
$ 24.2 $ 24.2 $ 24.2 IASA (100% Interest)
13.5 13.5 13.5 Leon (60% Interest)
10.2 10.2 10.2 Torreon (90% Interest)
0.0 0.0 0.0 Terminal Value (1)
------- ------- -------
14.0% $ 47.9 $ 47.9 $ 47.9 NET ENTERPRISE VALUE
NM NM NM Implied Perpetuity Growth Rate
0.7x 0.7x 0.7x Multiple of 2000E Sales
2.0x 2.0x 2.0x Multiple of 2000E EBITDA
2.6x 2.6x 2.6x Multiple of 2000E EBIT
----------------------------------------------
- -----------------
Note: Valuation period based on remaining life of each concession/project
(1) Individual projects/concessions terminate after specified time period.
Therefore, 100% of IASA's value is in the cash flows of each project
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77
Discounted Cash Flow Analysis
IASA (MEXICO) INCOME STATEMENT ($MM)
================================================================================
----------------------------------------------------------------------------
ACTUAL ESTIMATES (1)
----------------------------------------------------------------------------
1999 2000E 2001E 2002E 2003E 2004E 2005E
------- ------- ------- ------- ------- ------- -------
OPERATING REVENUE $ 6.7 $ 19.9 $ 29.3 $ 34.1 $ 39.6 $ 43.4 $ 45.7
Growth % 47.6% 16.3% 16.1% 9.6% 5.2%
Operating & maintenance expense 4.0 10.6 13.8 15.8 17.3 18.7 18.9
G&A expense 0.6 2.5 3.0 2.8 3.4 3.7 3.8
Equity in gain/(loss) of unconsolidated
affiliates 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
EBITDA 2.1 6.8 12.6 15.6 19.0 21.1 23.0
Margin % 31.7% 34.1% 43.0% 45.7% 47.8% 48.5% 50.4%
Goodwill & concession rights amortization
expense 0.1 0.3 0.3 0.2 0.2 0.2 0.2
Depreciation & other amortization expense 0.3 1.3 3.8 4.5 4.9 4.8 4.3
------- ------- ------- ------- ------- ------- -------
Total depreciation & amortization 0.3 1.6 4.1 4.7 5.1 5.0 4.5
Equity in gain/(loss) of consolidated
affiliates 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
EBIT 1.8 5.2 8.5 10.9 13.8 16.1 18.5
Margin % 26.7% 26.0% 29.1% 31.8% 35.0% 37.0% 40.4%
Interest income (0.0) (1.8) 0.0 0.0 0.0 0.0 0.0
Interest expense 0.4 3.7 2.1 2.1 2.1 2.1 2.1
Less: capitalized interest 0.0 0.0 0.0 (0.1) 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
Net interest (income)/expense 0.3 1.9 2.1 2.0 2.1 2.1 2.1
Minority interest 0.0 0.0 0.0 0.1 0.1 0.1 0.1
Other income 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
Profit before tax 1.5 3.3 6.5 9.0 11.7 13.9 16.3
Income tax expense, current 0.0 0.5 2.3 3.1 4.1 4.9 5.7
Income tax expense, deferred 0.6 1.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
Total income tax expense 0.6 1.6 2.3 3.1 4.1 4.9 5.7
Tax rate % 40.9% 46.8% 35.0% 34.4% 35.0% 35.0% 35.0%
NET INCOME 0.9 1.8 4.2 5.9 7.6 9.0 10.6
- --------------
(1) Estimates based on management projections
[WASSERSTEIN PERELLA & CO. LOGO]
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78
Discounted Cash Flow Analysis
IASA (MEXICO) BALANCE SHEET AND CASH FLOW STATEMENT ($MM)
================================================================================
------------------------------------------------------------------------
ACTUAL ESTIMATES
------------------------------------------------------------------------
1999 2000E 2001E 2002E 2003E 2004E 2005E
------- ------- ------- ------- ------- ------- -------
ASSETS
Cash & Equivalents 2.7 5.0 11.3 18.3 23.0 31.4 41.2
Restricted Cash 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other Assets 30.0 44.9 44.1 44.3 48.7 50.7 53.0
------- ------- ------- ------- ------- ------- -------
TOTAL ASSETS 32.8 49.9 55.5 62.6 71.6 82.1 94.2
LIABILITIES & STOCKHOLDERS EQUITY
Intercompany Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Debt 0.0 9.0 9.0 9.0 9.0 9.0 9.0
Other Liabilities 30.5 30.2 30.2 30.2 30.2 30.2 30.2
------- ------- ------- ------- ------- ------- -------
TOTAL LIABILITIES 30.5 39.2 39.2 39.2 39.2 39.2 39.2
Minority Interest 0.0 4.6 4.6 4.7 4.7 4.8 4.9
Stockholders' Equity 1.4 1.9 3.3 4.6 6.0 7.4 8.7
Retained Earnings 0.9 3.5 7.7 13.5 21.1 30.1 40.7
Cumulative Foreign Currency Translation Adj (0.0) 0.6 0.6 0.6 0.6 0.6 0.6
------- ------- ------- ------- ------- ------- -------
TOTAL STOCKHOLDERS' EQUITY 2.2 6.1 11.7 18.8 27.7 38.1 50.0
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 32.8 49.9 55.5 62.6 71.6 82.1 94.2
- -----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income 4.2 5.7 7.6 9.0 10.6
Reconciling Items 4.1 4.6 5.0 4.9 4.4
------- ------- ------- ------- -------
TOTAL OPERATING CASH FLOW 8.3 10.3 12.6 13.9 15.0
INVESTING ACTIVITIES
Capital Expenditures (3.3) (4.7) (9.2) (6.9) (6.5)
Acquisition Costs 0.0 0.0 0.0 0.0 0.0
Cash to Affiliate 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- -------
TOTAL INVESTING CASH FLOW (3.3) (4.7) (9.2) (6.9) (6.5)
FINANCING ACTIVITIES
Change in Debt - Total Affiliates 0.0 0.0 0.0 0.0 0.0
Change in Debt - Public 0.0 0.0 0.0 0.0 0.0
Dividends 0.0 0.0 0.0 0.0 0.0
Contribution from Parent 1.4 1.4 1.4 1.4 1.4
Equity Financing 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- -------
TOTAL FINANCING CASH FLOW 1.4 1.4 1.4 1.4 1.4
Change in Cash - Increase/(Decrease) 6.3 7.0 4.7 8.4 9.8
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79
Discounted Cash Flow Analysis
IASA (MEXICO) UNLEVERED FREE CASH FLOW CALCULATION ($MM)
================================================================================
-----------------------------
ESTIMATES
-----------------------------
2001E 2002E 2003E
------- ------- -------
IASA - REMAINDER OF CONCESSION
EBIT 5.2 10.9 8.9
Less: Taxes on EBIT @ 35.0% (1.8) (3.8) (3.1)
Plus: Depreciation & Amortization 1.3 4.7 2.3
Less: Capital Expenditures (3.3) (4.7) (9.1)
Less: Increase in Working Capital 0.0 0.0 0.0
Plus: Other Reconciling Items 0.0 0.0 0.0
UNLEVERED FREE CASH FLOW 1.3 7.1 (1.1)
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
2004E 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
IASA - 10 YEAR EXTENSION
EBIT (5% ANNUAL GROWTH AFTER 2005) 10.8 12.8 13.5 14.1 14.9 15.6 16.4 17.2 18.1 19.0
Less: Taxes on EBIT @ 35.0% (3.8) (4.5) (4.7) (5.0) (5.2) (5.5) (5.7) (6.0) (6.3) (6.6)
Plus: Depreciation & Amortization 2.2 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7
Less: Capital Expenditures (6.7) (6.3) (4.0) (3.0) (2.0) (1.7) (1.7) (1.7) (1.7) (1.7)
Less: Increase in Working Capital 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Plus: Other Reconciling Items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
UNLEVERED FREE CASH FLOW 2.5 3.7 6.5 7.9 9.4 10.1 10.6 11.2 11.7 12.3
x Probability of Receiving Extension 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0%
ADJUSTED UNLEVERED FREE CASH FLOW 1.7 2.6 4.5 5.5 6.6 7.1 7.4 7.8 8.2 8.6
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80
Discounted Cash Flow Analysis
IASA (MEXICO) UNLEVERED FREE CASH FLOW CALCULATION ($MM)
================================================================================
--------------------------------------------------------------------
ESTIMATES
--------------------------------------------------------------------
2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
LEON - 10 YEAR CONCESSION ENDING 2010 (half year)
EBIT 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.7 2.4
Less: Taxes on EBIT @ 35.0% (1.1) (1.2) (1.2) (1.3) (1.4) (1.5) (1.5) (1.6) (1.7) (0.8)
Plus: Depreciation & Amortization 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 1.0
Less: Capital Expenditures (0.0) (0.0) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.2) (0.1)
Less: Increase in Working Capital 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Plus: Other Reconciling Items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
UNLEVERED FREE CASH FLOW 4.0 4.2 4.3 4.4 4.6 4.6 4.7 4.8 4.9 2.5
--------------------------------------------------------------------
ESTIMATES
--------------------------------------------------------------------
2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TORREON - 20 YEAR CONCESSION ENDING 2020
EBIT 0.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1
Less: Taxes on EBIT @ 35.0% (0.1) (0.5) (0.5) (0.5) (0.6) (0.6) (0.6) (0.7) (0.7) (0.7)
Plus: Depreciation & Amortization 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8
Less: Capital Expenditures (0.0) (0.1) (0.1) (0.1) (0.1) (0.2) (0.2) (0.2) (0.2) (0.2)
Less: Increase in Working Capital 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Plus: Other Reconciling Items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
UNLEVERED FREE CASH FLOW 0.9 1.5 1.7 1.7 1.7 1.7 1.8 1.8 1.9 1.9
--------------------------------------------------------------------
ESTIMATES
--------------------------------------------------------------------
2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
EBIT (5% ANNUAL INCREASE 2011-2020) 2.2 2.3 2.4 2.5 2.6 2.8 2.9 3.0 3.2 3.3
Less: Taxes on EBIT @ 35.0% (0.8) (0.8) (0.8) (0.9) (0.9) (1.0) (1.0) (1.1) (1.1) (1.2)
Plus: Depreciation & Amortization 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8
Less: Capital Expenditures (0.2) (0.2) (0.2) (0.3) (0.3) (0.3) (0.3) (0.3) (0.3) (0.3)
Less: Increase in Working Capital 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Plus: Other Reconciling Items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
UNLEVERED FREE CASH FLOW 2.0 2.0 2.1 2.2 2.2 2.3 2.4 2.5 2.5 2.6
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81
Discounted Cash Flow Analysis
LURGI DISCOUNTED CASH FLOW ANALYSIS - EBITDA TERMINAL MULTIPLE ($MM)
================================================================================
TERMINAL VALUE MULTIPLE: YEAR 5 EBITDA
-----------------------------------
FY 2005 EBITDA $3.1
DISCOUNT NET DEBT $0.0
RATE 4.0X 5.0X 6.0X -----------------------------------
------- ------- -------
$ (1.1) $ (1.1) $ (1.1) Present Value of Free Cash Flows
7.0 8.7 10.5 Present Value of Terminal Value
------- ------- -------
$ 5.9 $ 7.6 $ 9.4 NET ENTERPRISE VALUE
12.0%
3.0% 4.7% 5.8% Implied Perpetuity Growth Rate
0.2x 0.3x 0.3x Multiple of 2000E Sales
-1.3x -1.7x -2.1x Multiple of 2000E EBITDA
-1.3x -1.7x -2.1x Multiple of 2000E EBIT
---------------------------------------------------------
$ (1.1) $ (1.1) $ (1.1) Present Value of Free Cash Flows
6.7 8.3 10.0 Present Value of Terminal Value
------- ------- -------
$ 5.6 $ 7.2 $ 8.9 NET ENTERPRISE VALUE
13.0%
3.9% 5.6% 6.8% Implied Perpetuity Growth Rate
0.2x 0.2x 0.3x Multiple of 2000E Sales
-1.3x -1.7x -2.0x Multiple of 2000E EBITDA
-1.2x -1.6x -1.9x Multiple of 2000E EBIT
---------------------------------------------------------
$ (1.1) $ (1.1) $ (1.1) Present Value of Free Cash Flows
6.4 8.0 9.6 Present Value of Terminal Value
------- ------- -------
$ 5.3 $ 6.8 $ 8.4 NET ENTERPRISE VALUE
14.0%
4.9% 6.6% 7.7% Implied Perpetuity Growth Rate
0.2x 0.2x 0.3x Multiple of 2000E Sales
-1.2x -1.6x -1.9x Multiple of 2000E EBITDA
-1.2x -1.5x -1.9x Multiple of 2000E EBIT
---------------------------------------------------------
- --------------------
Note: Valuation from 12/31/00 to 12/31/2005
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82
Discounted Cash Flow Analysis
LURGI INCOME STATEMENT ($MM)
================================================================================
-------------------------------------------------------------------------------
ACTUAL ESTIMATES(1)
-------------------------------------------------------------------------------
1999 2000E 2001E 2002E 2003E 2004E 2005E
------- ------- ------- ------- ------- ------- -------
OPERATING REVENUE $ 13.2 $ 30.5 $ 56.9 $ 61.0 $ 74.0 $ 83.9 $ 91.2
Growth % 86.9% 7.1% 22.0% 15.7% 12.8%
Operating & maintenance expense 10.6 25.6 52.3 55.2 66.6 74.6 80.8
G&A expense 1.7 9.3 5.4 5.8 6.3 6.8 7.4
Equity in gain/(loss) of unconsolidated
affiliates 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
EBITDA 0.9 (4.4) (0.8) 0.0 1.1 2.5 3.1
Margin % 6.6% (14.3%) (1.4%) 0.0% 1.5% 3.0% 3.4%
Goodwill & concession rights amortization
expense 0.1 0.0 0.0 0.0 0.0 0.0 0.0
Depreciation & other amortization expense 0.1 0.2 0.2 0.2 0.2 0.2 0.2
------- ------- ------- ------- ------- ------- -------
Total depreciation & amortization 0.2 0.2 0.2 0.2 0.2 0.2 0.2
------- ------- ------- ------- ------- ------- -------
Equity in gain/(loss) of consolidated
affiliates 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
EBIT 0.7 (4.6) (1.0) (0.2) 0.9 2.3 2.9
Margin % 5.0% (15.0%) (1.8%) (0.3%) 1.3% 2.7% 3.1%
Interest income (0.5) (0.3) (0.4) (0.4) (0.4) (0.5) (0.5)
Interest expense 0.0 0.6 0.0 0.0 0.0 0.0 0.0
Less: capitalized interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
Net interest (income)/expense (0.4) 0.3 (0.4) (0.4) (0.4) (0.5) (0.5)
Minority interest (0.1) 0.0 0.0 0.0 0.0 0.0 0.0
Other income 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
Profit before tax 1.2 (4.8) (0.6) 0.2 1.3 2.8 3.3
Income tax expense, current 0.5 (1.7) (0.2) 0.1 0.5 1.0 1.2
Income tax expense, deferred 0.5 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
Total income tax expense 1.0 (1.7) (0.2) 0.1 0.5 1.0 1.2
Tax rate % 82.9% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
NET INCOME 0.2 (3.1) (0.4) 0.1 0.8 1.8 2.2
- ----------------
(1) Estimates based on management projections
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83
Discounted Cash Flow Analysis
LURGI BALANCE SHEET AND CASH FLOW STATEMENT ($MM)
================================================================================
ACTUAL ESTIMATES
------------------------------------------------------------------
1999 2000E 2001E 2002E 2003E 2004E 2005E
------ ------ ------ ------ ------ ------ ------
ASSETS
Cash & Equivalents 12.4 7.7 6.5 5.8 5.9 6.9 8.3
Restricted Cash 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other Assets 66.0 85.3 86.1 86.9 87.7 88.5 89.3
------ ------ ------ ------ ------ ------ ------
TOTAL ASSETS 78.3 93.1 92.6 92.7 93.6 95.4 97.5
LIABILITIES & STOCKHOLDERS EQUITY
Intercompany Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other Liabilities 50.5 65.8 65.8 65.8 65.8 65.8 65.8
------ ------ ------ ------ ------ ------ ------
TOTAL LIABILITIES 50.5 65.8 65.8 65.8 65.8 65.8 65.8
Minority Interest (0.2) (0.4) (0.4) (0.4) (0.4) (0.4) (0.4)
Stockholders' Equity 27.9 27.9 27.9 27.9 27.9 27.9 27.9
Retained Earnings 0.1 (1.7) (2.1) (2.0) (1.2) 0.6 2.8
Cumulative Foreign Currency Translation Adj 0.0 1.4 1.4 1.4 1.4 1.4 1.4
------ ------ ------ ------ ------ ------ ------
TOTAL STOCKHOLDERS' EQUITY 28.0 27.6 27.2 27.3 28.1 29.9 32.1
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 78.3 93.1 92.6 92.7 93.6 95.4 97.5
- -----------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income (0.4) 0.1 0.8 1.8 2.2
Reconciling Items 0.2 0.2 0.2 0.2 0.2
------ ------ ------ ------ ------
TOTAL OPERATING CASH FLOW (0.2) 0.3 1.0 2.0 2.4
INVESTING ACTIVITIES
Capital Expenditures (1.0) (1.0) (1.0) (1.0) (1.0)
Acquisition Costs 0.0 0.0 0.0 0.0 0.0
Cash to Affiliate 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------
TOTAL INVESTING CASH FLOW (1.0) (1.0) (1.0) (1.0) (1.0)
FINANCING ACTIVITIES
Change in Debt - Total Affiliates 0.0 0.0 0.0 0.0 0.0
Change in Debt - Public 0.0 0.0 0.0 0.0 0.0
Dividends 0.0 0.0 0.0 0.0 0.0
Contribution from Parent 0.0 0.0 0.0 0.0 0.0
Equity Financing 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------
TOTAL FINANCING CASH FLOW 0.0 0.0 0.0 0.0 0.0
Change in Cash - Increase/(Decrease) (1.2) (0.7) 0.0 1.0 1.4
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84
Discounted Cash Flow Analysis
CANCUN CONCESSION DISCOUNTED CASH FLOW ANALYSIS ($MM)
================================================================================
TERMINAL VALUE MULTIPLE: 2023 EBITDA (1)
-------------------------------------------
DISCOUNT FY 2023 EBITDA NM
RATE 0.0X 0.0X 0.0X NET DEBT $20.0
- ---------------------------------------------------------------------- -------------------------------------------
$ 49.2 $ 49.2 $ 49.2 Present Value of Free Cash Flows
23.4 23.4 23.4 Present Value of Terminal: Book Value (1)
------- ------- -------
$ 72.5 $ 72.5 $ 72.5 NET ENTERPRISE VALUE OF CONCESSION
20.0 20.0 20.0 Less: Debt
------- ------- -------
$ 52.5 $ 52.5 $ 52.5 TOTAL EQUITY VALUE
$ 26.2 $ 26.2 $ 26.2 AZURIX'S EQUITY OWNERSHIP (49.9%)
11.0% $ 46.2 $ 46.2 $ 46.2 TOTAL ENTERPRISE VALUE TO AZURIX (2)
NM NM NM Implied Perpetuity Growth Rate
2.4x 2.4x 2.4x Multiple of 2000E Sales
6.8x 6.8x 6.8x Multiple of 2000E EBITDA
8.1x 8.1x 8.1x Multiple of 2000E EBIT
-----------------------------------------------------
$ 42.9 $ 42.9 $ 42.9 Present Value of Free Cash Flows
19.0 19.0 19.0 Present Value of Terminal: Book Value (1)
------- ------- -------
$ 61.9 $ 61.9 $ 61.9 NET ENTERPRISE VALUE OF CONCESSION
20.0 20.0 20.0 Less: Debt
------- ------- -------
$ 41.9 $ 41.9 $ 41.9 TOTAL EQUITY VALUE
$ 20.9 $ 20.9 $ 20.9 AZURIX'S EQUITY OWNERSHIP (49.9%)
12.0% $ 40.9 $ 40.9 $ 40.9 TOTAL ENTERPRISE VALUE TO AZURIX (2)
NM NM NM Implied Perpetuity Growth Rate
2.1x 2.1x 2.1x Multiple of 2000E Sales
5.8x 5.8x 5.8x Multiple of 2000E EBITDA
6.9x 6.9x 6.9x Multiple of 2000E EBIT
-----------------------------------------------------
$ 37.5 $ 37.5 $ 37.5 Present Value of Free Cash Flows
15.5 15.5 15.5 Present Value of Terminal: Book Value (1)
------- ------- -------
$ 53.0 $ 53.0 $ 53.0 NET ENTERPRISE VALUE OF CONCESSION
20.0 20.0 20.0 Less: Debt
------- ------- -------
$ 33.0 $ 33.0 $ 33.0 TOTAL EQUITY VALUE
$ 16.5 $ 16.5 $ 16.5 AZURIX'S EQUITY OWNERSHIP (49.9%)
13.0% $ 36.5 $ 36.5 $ 36.5 TOTAL ENTERPRISE VALUE TO AZURIX (2)
NM NM NM Implied Perpetuity Growth Rate
1.8x 1.8x 1.8x Multiple of 2000E Sales
5.0x 5.0x 5.0x Multiple of 2000E
EBITDA
5.9x 5.9x 5.9x Multiple of 2000E EBIT
-----------------------------------------------------
Note: Valuation from 12/31/00 to 12/31/2023
(1) By contract, the concession is entitled to receive its net book value at
the end of 2023. Therefore, terminal value consists solely of net book
value in 2023 discounted to the present
(2) Azurix loaned $20 million to the Cancun concession. Therefore, the
$20 million loan has been added back in order to estimate the total
enterprise value to Azurix
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85
Discounted Cash Flow Analysis
AZURIX CANCUN CONCESSION INCOME STATEMENT ($MM) (1)
================================================================================
-------------------------------------------------------------------
ESTIMATES (2)
-------------------------------------------------------------------
2000E 2001E 2002E 2003E 2004E 2005E
------- ------- ------- ------- ------- -------
OPERATING REVENUE $ 30.1 $ 32.6 $ 35.5 $ 36.2 $ 37.8 $ 40.9
Growth % 8.3% 8.9% 1.9% 4.4% 8.1%
Operating & maintenance expense 13.8 15.0 15.0 14.9 15.0 15.5
G&A expense 5.7 6.2 6.4 6.6 6.9 7.5
Equity in gain/(loss) of unconsolidated
affiliates 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- -------
EBITDA 10.6 11.5 14.1 14.8 16.0 17.9
Margin % 35.3% 35.3% 39.7% 40.7% 42.2% 43.9%
Goodwill & concession rights amortization 0.5 0.5 0.4 0.4 0.4 0.4
expense
Depreciation & other amortization expense 1.2 2.0 2.4 2.7 3.1 3.6
------- ------- ------- ------- ------- -------
Total depreciation & amortization 1.7 2.5 2.8 3.1 3.5 4.0
Equity in gain/(loss) of consolidated
affiliates 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- -------
EBIT 9.0 9.0 11.3 11.7 12.5 13.9
Margin % 29.8% 27.7% 31.8% 32.2% 33.0% 34.1%
Interest income (0.2) (0.1) (0.1) (0.1) (0.1) (0.1)
Interest expense 2.5 2.6 2.5 2.6 2.7 2.8
Less: capitalized interest (0.6) (0.4) (0.3) (0.3) (0.4) (0.4)
------- ------- ------- ------- ------- -------
Net interest (income)/expense 1.7 2.1 2.1 2.2 2.2 2.3
Minority interest 0.0 0.0 0.0 0.0 0.0 0.0
Other income (0.4) 1.2 1.2 1.9 0.0 0.0
------- ------- ------- ------- ------- -------
Profit before tax 7.7 5.7 8.0 7.6 10.3 11.6
Income tax expense, current 1.4 2.0 2.8 2.7 3.6 4.1
Income tax expense, deferred (1.1) 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- -------
Total income tax expense 0.4 2.0 2.8 2.7 3.6 4.1
Tax rate % 4.6% 35.0% 35.0% 35.0% 35.0% 35.0%
NET INCOME 7.3 3.7 5.2 4.9 6.7 7.6
(1) Represents entire concession, of which Azurix owns 49.9%
(2) Based on management projections
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86
Discounted Cash Flow Analysis
CANCUN CONCESSION UNLEVERED FREE CASH FLOW ($MM)
================================================================================
----------------------------------------------------------------------------
ESTIMATES
----------------------------------------------------------------------------
2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E
------ ------ ------ ------ ------ ------ ------ ------
UFCF OF CANCUN'S STREAM OF CASH FLOWS (CONCESSION)
EBIT (7% ANNUAL GROWTH AFTER 2005) 9.0 11.3 11.7 12.5 13.9 14.9 16.0 17.1
Less: Taxes on EBIT @ 35.0% (3.2) (4.0) (4.1) (4.4) (4.9) (5.2) (5.6) (6.0)
Plus: Depreciation & Amortization 2.5 2.8 3.1 3.5 4.0 4.3 4.6 4.9
Less: Capital Expenditures (10.6) (11.0) (11.2) (11.6) (12.5) (9.0) (9.0) (9.0)
Less: Acquisition Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Less: Increase in Working Capital 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Plus: Other Reconciling Items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
UNLEVERED FREE CASH FLOW (2.2) (0.9) (0.5) (0.0) 0.6 5.0 6.0 7.0
----------------------------------------------------------------------------
ESTIMATES
----------------------------------------------------------------------------
2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E
------ ------ ------ ------ ------ ------ ------ ------
UFCF OF CANCUN'S STREAM OF CASH FLOWS (CONCESSION)
EBIT (7% ANNUAL GROWTH AFTER 2005) 18.3 19.6 20.9 22.4 24.0 25.6 27.4 29.4
Less: Taxes on EBIT @ 0.0% (6.4) (6.8) (7.3) (7.8) (8.4) (9.0) (9.6) (10.3)
Plus: Depreciation & Amortization 5.2 5.6 6.0 6.4 6.9 7.3 7.9 8.4
Less: Capital Expenditures (10.0) (10.0) (10.0) (11.0) (11.0) (11.0) (12.0) (12.0)
Less: Acquisition Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Less: Increase in Working Capital 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Plus: Other Reconciling Items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
UNLEVERED FREE CASH FLOW 7.1 8.3 9.6 10.0 11.4 13.0 13.7 15.5
-------------------------------------------------------------------
ESTIMATES
-------------------------------------------------------------------
2017E 2018E 2019E 2020E 2021E 2022E 2023E
------ ------ ------ ------ ------ ------ ------
UFCF OF CANCUN'S STREAM OF CASH FLOWS (CONCESSION)
EBIT (7% ANNUAL GROWTH AFTER 2005) 31.4 33.6 36.0 38.5 41.2 44.0 47.1
Less: Taxes on EBIT @ 0.0% (11.0) (11.8) (12.6) (13.5) (14.4) (15.4) (16.5)
Plus: Depreciation & Amortization 9.0 9.6 10.3 11.0 11.8 12.6 13.5
Less: Capital Expenditures (12.0) (13.0) (13.0) (13.0) (13.0) (13.0) (13.0)
Less: Acquisition Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Less: Increase in Working Capital 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Plus: Other Reconciling Items 0.0 0.0 0.0 0.0 0.0 0.0 0.0
UNLEVERED FREE CASH FLOW 17.4 18.5 20.7 23.0 25.6 28.3 31.1
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87
Discounted Cash Flow Analysis
MENDOZA CONCESSION DCF ANALYSIS - EBITDA TERMINAL MULTIPLE ($MM)
================================================================================
TERMINAL VALUE MULTIPLE: YEAR 15 EBITDA
-------------------------------------
FY 2015 EBITDA $34.7
DISCOUNT NET DEBT $ 0.0
RATE 5.0X 5.5X 6.0X -------------------------------------
------- ------- -------
$ 29.9 $ 29.9 $ 29.9 Present Value of Free Cash Flows
24.3 26.7 29.2 Present Value of Terminal Value
------- ------- -------
$ 54.2 $ 56.6 $ 59.0 NET ENTERPRISE VALUE
$ 17.4 $ 18.2 $ 19.0 AZURIX'S OWNERSHIP (32.1%)
14.0%
4.8% 5.6% 6.2% Implied Perpetuity Growth Rate
0.9x 0.9x 1.0x Multiple of 2000E Sales
3.1x 3.2x 3.4x Multiple of 2000E EBITDA
4.6x 4.8x 5.0x Multiple of 2000E EBIT
------------------------------------------------------
$ 27.7 $ 27.7 $ 27.7 Present Value of Free Cash Flows
21.3 23.5 25.6 Present Value of Terminal Value
------- ------- -------
$ 49.0 $ 51.2 $ 53.3 NET ENTERPRISE VALUE
$ 15.7 $ 16.4 $ 17.1 AZURIX'S OWNERSHIP (32.1%)
15.0%
3.6% 4.5% 5.2% Implied Perpetuity Growth Rate
0.8x 0.9x 0.9x Multiple of 2000E Sales
2.8x 2.9x 3.0x Multiple of 2000E EBITDA
4.1x 4.3x 4.5x Multiple of 2000E EBIT
------------------------------------------------------
$ 25.8 $ 25.8 $ 25.8 Present Value of Free Cash Flows
18.7 20.6 22.5 Present Value of Terminal Value
------- ------- -------
$ 44.5 $ 46.4 $ 48.3 NET ENTERPRISE VALUE
$ 14.3 $ 14.9 $ 15.5 AZURIX'S OWNERSHIP (32.1%)
16.0%
2.3% 3.3% 4.1% Implied Perpetuity Growth Rate
0.7x 0.8x 0.8x Multiple of 2000E Sales
2.5x 2.7x 2.8x Multiple of 2000E EBITDA
3.7x 3.9x 4.1x Multiple of 2000E EBIT
Note: Valuation from 12/31/00 to 12/31/2015
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88
Discounted Cash Flow Analysis
MENDOZA CONCESSION INCOME STATEMENT ($MM)
-----------------------------------------------------------------------------------------------
ESTIMATES
-----------------------------------------------------------------------------------------------
2000E 2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
SALES $60.0 $61.0 $62.7 $64.3 $65.7 $67.1 $68.6 $70.0 $71.4 $72.9 $74.5
% Growth Rate 9.1% 1.7% 2.8% 2.6% 2.2% 2.1% 2.2% 2.0% 2.0% 2.1% 2.2%
Operating Expenses 48.1 47.2 49.6 50.5 50.9 50.7 50.9 51.1 52.1 52.5 52.8
EBIT 11.9 13.8 13.1 13.8 14.8 16.4 17.7 18.9 19.3 20.4 21.7
% Margin 19.8% 22.6% 20.9% 21.5% 22.5% 24.4% 25.8% 27.0% 27.0% 28.0% 29.1%
D&A 5.6 6.4 6.8 7.1 7.1 7.6 8.2 8.2 8.5 8.3 8.0
EBITDA 17.5 20.2 19.9 20.9 21.9 24.0 25.9 27.1 27.8 28.7 29.7
% Margin 29.2% 33.1% 31.7% 32.5% 33.3% 35.8% 37.8% 38.7% 38.9% 39.4% 39.9%
-----------------------------------------
ESTIMATES
-----------------------------------------
2011E 2012E 2013E 2014E 2015E
----- ----- ----- ----- -----
SALES $76.0 $77.6 $79.3 $80.9 $82.7
% Growth Rate 2.0% 2.1% 2.2% 2.0% 2.2%
Operating Expenses 53.8 54.3 54.8 55.4 56.0
EBIT 22.2 23.3 24.5 25.5 26.7
% Margin 29.2% 30.0% 30.9% 31.5% 32.3%
D&A 8.3 8.2 8.0 8.0 8.0
EBITDA 30.5 31.5 32.5 33.5 34.7
% Margin 40.1% 40.6% 41.0% 41.4% 42.0%
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89
Discounted Cash Flow Analysis
MENDOZA CONCESSION UNLEVERED FREE CASH FLOW ($MM)
--------------------------------------------------------------------------------------
ESTIMATES
--------------------------------------------------------------------------------------
2000E 2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
EBIT 11.9 13.8 13.1 13.8 14.8 16.4 17.7 18.9 19.3 20.4 21.7
Less: Taxes on EBIT @ 35.0% (4.2) (4.8) (4.6) (4.8) (5.2) (5.7) (6.2) (6.6) (6.8) (7.1) (7.6)
Plus: Depreciation & Amortization 5.6 6.4 6.8 7.1 7.1 7.6 8.2 8.2 8.5 8.3 8.0
Less: Capital Expenditures (9.2) (10.7) (16.1) (15.4) (13.6) (13.6) (17.6) (15.1) (15.1) (15.1) (15.1)
Less: Acquisition Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Less: Increase in Working Capital 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Plus: Other Reconciling Items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
UNLEVERED FREE CASH FLOW 4.1 4.7 (0.8) 0.7 3.1 4.7 2.1 5.4 5.9 6.5 7.0
-------------------------------------
ESTIMATES
-------------------------------------
2011E 2012E 2013E 2014E 2015E
----- ----- ----- ----- -----
EBIT 30.5 31.5 32.5 33.5 34.7
Less: Taxes on EBIT @ 35.0% (10.7) (11.0) (11.4) (11.7) (12.1)
Plus: Depreciation & Amortization 8.3 8.2 8.0 8.0 8.0
Less: Capital Expenditures (15.1) (15.8) (15.8) (15.3) (15.3)
Less: Acquisition Costs 0.0 0.0 0.0 0.0 0.0
Less: Increase in Working Capital 0.0 0.0 0.0 0.0 0.0
Plus: Other Reconciling Items 0.0 0.0 0.0 0.0 0.0
UNLEVERED FREE CASH FLOW 13.0 12.9 13.3 14.5 15.3
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Discounted Cash Flow Analysis
RDM DISCOUNTED CASH FLOW ANALYSIS - EBITDA TERMINAL MULTIPLE ($MM)
================================================================================
TERMINAL VALUE MULTIPLE: YEAR 5 EBITDA
--------------------------------
FY 2005 EBITDA $5.0
DISCOUNT NET DEBT $0.0
RATE 5.0X 6.0X 7.0X --------------------------------
- ------------------------------------------------------------------- --------------------------------
5.9 $ 5.9 $ 5.9 Present Value of Free Cash Flows
14.1 16.9 19.8 Present Value of Terminal Value
----- ----- -----
$20.0 $22.8 $25.7 NET ENTERPRISE VALUE
12.0%
(0.9%) 1.1% 2.5% Implied Perpetuity Growth Rate
NM NM NM Multiple of 2000E Sales
NM NM NM Multiple of 2000E EBITDA
NM NM NM Multiple of 2000E EBIT
---------------------------------------------------
5.7 $ 5.7 $ 5.7 Present Value of Free Cash Flows
13.5 16.2 18.9 Present Value of Terminal Value
----- ----- -----
$19.2 $21.9 $24.6 NET ENTERPRISE VALUE
13.0%
0.0% 2.0% 3.4% Implied Perpetuity Growth Rate
NM NM NM Multiple of 2000E Sales
NM NM NM Multiple of 2000E EBITDA
NM NM NM Multiple of 2000E EBIT
---------------------------------------------------
5.5 $ 5.5 $ 5.5 Present Value of Free Cash Flows
12.9 15.5 18.1 Present Value of Terminal Value
----- ----- -----
$18.4 $21.0 $23.6 NET ENTERPRISE VALUE
14.0%
0.9% 2.9% 4.3% Implied Perpetuity Growth Rate
NM NM NM Multiple of 2000E Sales
NM NM NM Multiple of 2000E EBITDA
NM NM NM Multiple of 2000E EBIT
---------------------------------------------------
Note: Valuation from 12/31/00 to 12/31/2005
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Discounted Cash Flow Analysis
RDM INCOME STATEMENT ($MM)
================================================================================
----------------------------------------------------------------------------
ACTUAL ESTIMATES (1)
----------------------------------------------------------------------------
1999 2000E 2001E 2002E 2003E 2004E 2005E
------- ------- ------- ------- ------- ------- -------
OPERATING REVENUE $ 0.0 $ 0.0 $ 3.3 $ 4.6 $ 6.0 $ 7.7 $ 9.9
Growth % NM 40.9% 30.0% 29.0% 28.0%
Operating & maintenance expense 0.0 0.0 2.2 0.0 0.6 0.4 0.4
G&A expense 0.0 0.0 1.5 2.2 2.4 3.3 4.6
Equity in gain/(loss) of unconsolidated
affiliates 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
EBITDA 0.0 0.0 (0.4) 2.4 3.0 4.0 5.0
Margin % NM NM (12.2%) 51.4% 49.9% 52.4% 50.3%
Goodwill & concession rights amortization
expense 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Depreciation & other amortization expense 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
Total depreciation & amortization 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Equity in gain/(loss) of consolidated
affiliates 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
EBIT 0.0 0.0 (0.4) 2.4 3.0 4.0 5.0
Margin % NM NM -12.2% 51.4% 49.9% 52.4% 50.3%
Interest income 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Interest expense 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Less: capitalized interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net interest (income)/expense 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Minority interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other income 0.0 0.0 (0.0) (0.0) (0.0) (0.0) (0.0)
------- ------- ------- ------- ------- ------- -------
Profit before tax 0.0 0.0 (0.4) 2.4 3.0 4.1 5.0
Income tax expense, current 0.0 0.0 (0.1) 0.8 1.0 1.4 1.7
Income tax expense, deferred 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total income tax expense 0.0 0.0 (0.1) 0.8 1.0 1.4 1.7
Tax rate % NM NM 35.0% 35.1% 35.0% 35.0% 35.0%
NET INCOME 0.0 0.0 (0.3) 1.5 1.9 2.6 3.2
- ---------------------
(1) Estimates based on management projections
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92
Discounted Cash Flow Analysis
RDM BALANCE SHEET AND CASH FLOW STATEMENT ($MM)
================================================================================
-----------------------------------------------
ESTIMATES
-----------------------------------------------
2000E 2001E 2002E 2003E 2004E 2005E
----- ----- ----- ----- ----- -----
ASSETS
Cash & Equivalents 0.0 0.5 2.0 4.0 6.6 9.8
Restricted Cash 0.0 0.0 0.0 0.0 0.0 0.0
Other Assets 31.5 31.5 31.5 31.5 31.5 31.5
----- ----- ----- ----- ----- -----
TOTAL ASSETS 31.5 32.0 33.5 35.5 38.1 41.3
LIABILITIES & STOCKHOLDERS EQUITY
Intercompany Debt 0.0 0.0 0.0 0.0 0.0 0.0
Debt 0.0 0.0 0.0 0.0 0.0 0.0
Other Liabilities 0.0 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- ----- -----
TOTAL LIABILITIES 0.0 0.0 0.0 0.0 0.0 0.0
Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0
Stockholders' Equity 31.5 32.2 32.2 32.2 32.2 32.2
Retained Earnings 0.0 (0.3) 1.3 3.2 5.9 9.1
Cumulative Foreign Currency Translation Adj 0.0 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- ----- -----
TOTAL STOCKHOLDERS' EQUITY 31.5 32.0 33.5 35.5 38.1 41.3
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 31.5 32.0 33.5 35.5 38.1 41.3
- -----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income (0.3) 1.5 1.9 2.6 3.2
Reconciling Items 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- -----
TOTAL OPERATING CASH FLOW (0.3) 1.5 1.9 2.6 3.2
INVESTING ACTIVITIES
Capital Expenditures 0.0 0.0 0.0 0.0 0.0
Acquisition Costs 0.0 0.0 0.0 0.0 0.0
Cash to Affiliate 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- -----
TOTAL INVESTING CASH FLOW 0.0 0.0 0.0 0.0 0.0
FINANCING ACTIVITIES
Change in Debt - Total Affiliates 0.0 0.0 0.0 0.0 0.0
Change in Debt - Public 0.0 0.0 0.0 0.0 0.0
Dividends 0.0 0.0 0.0 0.0 0.0
Contribution from Parent 0.7 0.0 0.0 0.0 0.0
Equity Financing 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- -----
TOTAL FINANCING CASH FLOW 0.7 0.0 0.0 0.0 0.0
Change in Cash - Increase/(Decrease) 0.5 1.5 1.9 2.6 3.2
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93
Discounted Cash Flow Analysis
CORPORATE DISCOUNTED CASH FLOW ANALYSIS - PERPETUITY GROWTH RATE ($MM)
================================================================================
PERPETUITY GROWTH RATE: YEAR 5 UNLEVERED FREE CASH FLOW
-------------------------------------
YEAR 2005 FCF ($10.9)
DISCOUNT NET DEBT $0.0
RATE 0.0% 0.5% 1.0% -------------------------------------
- -----------------------------------------------------------------------
(50.3) (50.3) (50.3) Present Value of Free Cash Flows (1)
(92.5) (99.2) (106.8) Present Value of Perpetuity
------- ------- -------
$(142.8) $(149.5) $(157.1) NET ENTERPRISE VALUE
8.0%
9.1x 9.7x 10.5x Implied Terminal EBITDA Multiplier
NM NM NM Multiple of 2000E Sales
NM NM NM Multiple of 2000E EBITDA
NM NM NM Multiple of 2000E EBIT
-----------------------------------------------------
(49.1) (49.1) (49.1) Present Value of Free Cash Flows (1)
(78.5) (83.6) (89.2) Present Value of Perpetuity
------- ------- -------
$(127.7) $(132.7) $(138.4) NET ENTERPRISE VALUE
9.0%
8.1x 8.6x 9.2x Implied Terminal EBITDA Multiplier
NM NM NM Multiple of 2000E Sales
NM NM NM Multiple of 2000E EBITDA
NM NM NM Multiple of 2000E EBIT
-----------------------------------------------------
(48.0) (48.0) (48.0) Present Value of Free Cash Flows (1)
(67.5) (71.4) (75.8) Present Value of Perpetuity
------- ------- -------
$(115.5) $(119.4) $(123.8) NET ENTERPRISE VALUE
10.0%
7.3x 7.7x 8.1x Implied Terminal EBITDA Multiplier
NM NM NM Multiple of 2000E Sales
NM NM NM Multiple of 2000E EBITDA
NM NM NM Multiple of 2000E EBIT
-----------------------------------------------------
Note: Valuation from 12/31/00 to 12/31/2005
(1) Assumes corporate expenses are $15 million per year Assumes Azurix receives
tax benefit from loss at from 2002-2005. corporate
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94
Discounted Cash Flow Analysis
CORPORATE INCOME STATEMENT ($MM)
================================================================================
----------------------------------------------------------------------------
ACTUAL ESTIMATES (1)
----------------------------------------------------------------------------
1999 2000E 2001E 2002E 2003E 2004E 2005E
------- ------- ------- ------- ------- ------- -------
OPERATING REVENUE $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0
Growth % NM NM 0.0% 0.0% 0.0%
Operating & maintenance expense 0.0 0.1 0.0 0.0 0.0 0.0 0.0
G&A expense 63.5 50.3 26.0 15.0 15.0 15.0 15.0
Equity in gain/(loss) of unconsolidated
affiliates 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
EBITDA (63.5) (50.4) (26.0) (15.0) (15.0) (15.0) (15.0)
Margin % NM NM NM NM NM NM NM
Goodwill & concession rights amortization
expense 0.0 0.0 (1.6) 0.0 0.0 0.0 0.0
Depreciation & other amortization expense 1.2 3.4 3.2 2.5 2.5 2.5 2.5
------- ------- ------- ------- ------- ------- -------
Total depreciation & amortization 1.2 3.4 1.6 2.5 2.5 2.5 2.5
Equity in gain/(loss) of consolidated affiliates 96.6 72.2 62.6 74.9 95.5 122.7 0.0
------- ------- ------- ------- ------- ------- -------
EBIT 31.9 18.4 35.0 57.4 78.0 105.2 (17.5)
Margin % NM NM NM NM NM NM NM
Interest income (2.4) (8.8) (3.2) (0.2) 0.0 0.0 0.0
Interest expense 2.6 61.2 74.4 75.2 75.2 75.2 75.2
Less: capitalized interest 0.0 (1.0) 3.1 0.0 0.0 0.0 0.0
Net interest (income)/expense 0.2 51.4 74.3 75.0 75.2 75.2 75.2
Minority interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other income 0.0 (0.1) 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
Profit before tax 31.7 (32.9) (39.3) (17.7) 2.8 30.0 (92.7)
Income tax expense, current 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Income tax expense, deferred (35.0) (38.3) (33.8) (32.4) (32.4) (32.4) (32.4)
------- ------- ------- ------- ------- ------- -------
Total income tax expense (35.0) (38.3) (33.8) (32.4) (32.4) (32.4) (32.4)
Tax rate % NM NM 85.9% 183.3% (1159.0%) (108.1%) 35.0%
NET INCOME 66.7 5.5 (5.6) 14.7 35.2 62.5 (60.3)
- -----------------
(1) Estimates based on management projections
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95
Discounted Cash Flow Analysis
CORPORATE BALANCE SHEET AND CASH FLOW STATEMENT ($MM)
================================================================================
------------------------------------------------------------------------
ACTUAL ESTIMATES
------------------------------------------------------------------------
1999 2000E 2001E 2002E 2003E 2004E 2005E
------- ------- ------- ------- ------- ------- -------
ASSETS
Cash & Equivalents 0.0 0.0 5.3 7.7 0.0 0.0 0.0
Restricted Cash 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other Assets 2,271.4 2,788.2 2,881.9 2,988.6 3,116.1 3,270.8 3,302.7
------- ------- ------- ------- ------- ------- -------
TOTAL ASSETS 2,271.4 2,788.2 2,887.2 2,996.3 3,116.1 3,270.8 3,302.7
LIABILITIES & STOCKHOLDERS EQUITY
Intercompany Debt 62.7 120.0 180.0 180.0 180.0 180.0 180.0
Debt 150.0 598.0 598.0 598.0 598.0 598.0 598.0
Other Liabilities 38.0 22.2 22.2 22.2 22.2 22.2 22.2
------- ------- ------- ------- ------- ------- -------
TOTAL LIABILITIES 250.7 740.2 800.2 800.2 800.2 800.2 800.2
Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Stockholders' Equity 1,972.8 1,973.7 2,018.2 2,112.6 2,197.1 2,289.3 2,381.6
Retained Earnings 37.6 60.4 54.8 69.6 104.8 167.3 107.0
Cumulative Foreign Currency Translation Adj 10.2 13.9 13.9 13.9 13.9 13.9 13.9
------- ------- ------- ------- ------- ------- -------
TOTAL STOCKHOLDERS' EQUITY 2,020.7 2,048.0 2,086.9 2,196.1 2,315.9 2,470.6 2,502.5
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 2,271.4 2,788.2 2,887.2 2,996.3 3,116.1 3,270.8 3,302.7
- -----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income (5.6) 14.7 35.2 62.5 (60.3)
Reconciling Items (91.6) (104.7) (125.5) (152.7) (29.9)
------- ------- ------- ------- -------
TOTAL OPERATING CASH FLOW (97.2) (90.0) (90.2) (90.2) (90.2)
INVESTING ACTIVITIES
Capital Expenditures (2.0) (2.0) (2.0) (2.0) (2.0)
Acquisition Costs 0.0 0.0 0.0 0.0 0.0
Cash to Affiliate 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- -------
TOTAL INVESTING CASH FLOW (2.0) (2.0) (2.0) (2.0) (2.0)
FINANCING ACTIVITIES
Change in Debt - Total Affiliates 0.0 0.0 0.0 0.0 0.0
Change in Debt - Public 60.0 0.0 0.0 0.0 0.0
Dividends 0.0 0.0 0.0 0.0 0.0
Contribution from Parent 44.5 94.4 84.5 92.2 92.2
Equity Financing 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- -------
TOTAL FINANCING CASH FLOW 104.5 94.4 84.5 92.2 92.2
Change in Cash - Increase/(Decrease) 5.3 2.4 (7.7) 0.0 0.0
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96
Discounted Cash Flow Analysis
VALUATION OF MADERA WATER BANK ($MM)
================================================================================
SALE VALUE VALUE OF TRADING RIGHTS
2002E
ANNUAL TRADING INCOME $ 7.0
GROSS SALE VALUE (1) $220.0 Less: Operating Expenses 0.5
Less: Capital Expenditures Required 45.0 Less: Tax 2.3
------ -----
Net Sale Value to Azurix 175.0 OPERATING INCOME IN PERPETUITY 4.2
Less: Partner's Ownership (15%) 26.3 PRESENT VALUE OF 0% PERPETUITY @
------
12% Discount Rate 28.1
PRE-TAX PROCEEDS TO AZURIX 148.8 14% Discount Rate 23.2
16% Discount Rate 19.6
Tax Basis 35.0
Tax on Sale 39.8
------
SURFACE RIGHTS
AFTER-TAX PROCEEDS TO AZURIX 108.9 SURFACE RIGHT (AGRICULTURAL VALUE) $30.0
DISCOUNTED VALUE TO AZURIX @ DISCOUNTED VALUE TO AZURIX @
12.0% Discount Rate 86.8 12% Discount Rate 23.9
14.0% Discount Rate 83.8 14% Discount Rate 23.1
16.0% Discount Rate 81.0 16% Discount Rate 22.3
TOTAL VALUE TO AZURIX
$120 - $140
- -----------------
(1) Based on management's estimate
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================================================================================
COMPARABLE
COMPANIES ANALYSIS
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98
Comparable Companies Analysis
SELECTED U.K. WATER COMPANY TRADING MULTIPLES
ENTERPRISE VALUE / PRICE /
----------------------------------------------------------- -----------------------
RAB EBITDA(2) EBIT(2) NET INCOME(2)
DIVIDEND PRICE(1) ---- ------------------------ ----------------------- -----------------------
COMPANY YIELD POUND 2000 2000A 2001E 2002E 2000A 2001E 2002E 2000A 2001E 2002E
- ------- -------- -------- ---- ----- -------- ----- ----- ----- ----- ----- ----- -----
Anglian 7.4% 5.79 0.91x 6.6x 7.4x 7.1x 9.3x 11.0x 10.7x 8.3x 11.8x 11.8x
Kelda 6.5% 3.69 0.90x 6.4x 7.2x 6.7x 9.6x 12.0x 11.2x 6.3x 10.6x 10.3x
Severn Trent 6.2% 7.23 0.93x 6.2x 6.4x 5.5x 9.7x 10.7x 8.7x 7.8x 10.8x 8.2x
Pennon 7.1% 6.75 0.93x 6.9x 7.7x 7.5x 9.5x 12.3x 12.2x 7.9x 11.7x 13.0x
United Utilities 6.5% 6.97 0.94x 6.7x 7.2x 7.1x 9.3x 11.3x 11.1x 7.9x 12.2x 13.2x
- -------------------------------------------------------------------------------------------------------------------------------
MEAN 0.92X 6.6X 7.2X 6.8X 9.5X 11.4X 10.8X 7.6X 11.4X 11.3X
MEDIAN 0.93X 6.6X 7.2X 7.1X 9.5X 11.3X 11.1X 7.9X 11.7X 11.8X
HIGH 0.94X 6.9X 7.7X 7.5X 9.7X 12.3X 12.2X 8.3X 12.2X 13.2X
LOW 0.90X 6.2X 6.4X 5.5X 9.3X 10.7X 8.7X 6.3X 10.6X 8.2X
- -------------------------------------------------------------------------------------------------------------------------------
- -------------
(1) Share prices as of 12/8/00
(2) Fiscal Year ends March 31 (i.e., FY 2000 ended 03/31/00)
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99
================================================================================
COMPARABLE
TRANSACTIONS
ANALYSIS
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100
Comparable Transactions Analysis
SELECTED COMPARABLE U.K. WATER ACQUISITIONS - DETAIL
================================================================================
ENTERPRISE VALUE/LFY
ENTERPRISE -------------------- EQUITY VALUE /
ANNOUNCED EFFECTIVE TARGET ACQUIROR VALUE EBITDA EBIT LFY NET INC.
- --------- --------- ------ -------- ----- ------ ---- ------------
11/95 2/96 Northumbrian Water Lyonnaise des Eaux 889 6.1x 8.3x 10.5x
5/96 8/96 Southern Water Scottish Power 1,764 8.4x 10.3x 11.4x
7/98 10/98 Wessex Water Enron 1,665 9.9x 12.1x 12.6x
5/00 10/00 Hyder WPD Holdings 2,827 9.9x 10.3x 4.7x
9/00 11/00 Thames Water RWE AG 5,974 8.4x 11.6x 10.2x
AVERAGE 8.5X 10.5X 9.9X
MEDIAN 8.4X 10.3X 10.5X
HIGH 9.9X 12.1X 12.6X
LOW 6.1X 8.3X 4.7X
- -----------------
(1) Transaction values in Pounds.
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101
================================================================================
THAMES WATER TRANSACTION MULTIPLES
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Thames Water Transaction Multiples
ANALYSIS OF THAMES WATER ACQUISITION (L MILLIONS)
================================================================================
LOW MID HIGH
----- ----- -----
Enterprise Value of Transaction 5,974 5,974 5,974
Less: Value of Non-Regulated Assets (1) 500 750 1,000
TOTAL VALUE ATTRIBUTABLE TO UK WATER ASSETS 5,474 5,224 4,974
UK WATER ASSET RAB (1)
March 31, 2000A 4,155 4,155 4,155
March 31, 2001E 4,450 4,450 4,450
Average 4,303 4,303 4,303
IMPLIED MULTIPLE OF UK WATER ASSETS RAB
March 31, 2000A 1.32x 1.26x 1.20x
March 31, 2001E 1.23x 1.17x 1.12x
Average 1.27x 1.21x 1.16x
Overall Average 1.22x
- ----------------
(1) Estimates
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