EXHIBIT 99.2
CONFIDENTIAL
OPCO ENERGY COMPANY
BUSINESS PLAN
MAY 2002
This business plan is confidential and, by accepting this document, you agree to
hold the information contained or referred to herein in strict confidence. The
information contained in this business plan has been furnished by the company
and other sources believed by us to be reliable. No representation or warranty,
express or implied, is made as to the accuracy or completeness of any of the
information set forth herein. This business plan contains summaries of the terms
of certain agreements, but reference is made to the actual agreements for the
complete information contained therein. The information contained herein is as
of the date hereof and is subject to change, completion or amendment without
notice.
This business plan contains certain statements, estimates and projections with
respect to the anticipated future performance of OpCo and its operating units.
These statements, estimates and projections reflect various assumptions made by
the company concerning anticipated results, which may or may not prove to be
correct. All statements contained in this business plan that address operating
performance, events or developments that are expected to occur in the future
(including statements relating to earnings expectations, sales of assets, or
statements expressing general optimism about future operating results) are
forward-looking statements. Actual results could differ materially from those
reflected in the forward-looking statements herein. You should carefully read
the section of this business plan entitled "Risk Factors" which contains
disclosures of certain factors that could cause results to differ materially
from the results discussed in the forward-looking statements.
This business plan is neither an offer to sell nor a solicitation of an offer to
purchase securities.
CONFIDENTIAL
OPCO ENERGY COMPANY
<Table>
<Caption>
TRANSPORTATION GENERATION AND
SERVICES POWER DISTRIBUTION PRODUCTION
o TRANSWESTERNPIPELINE o PORTLAND GENERAL ELECTRIC o 4,800 MW GENERATION
- 1.9 Bcf/d; 2,600 MILES - OVER 24,300 DISTRIBUTION MILES o GENERATION SITE BANK
o FLORIDA GAS TRANSMISSION - OVER 730,000 CUSTOMERS - OVER 30 DEVELOPMENT SITES
- 1.6 Bcf/d; 4,800 MILES - 2ND LARGEST SERVICE TERRITORY IN - OVER 20,000 MW POTENTIAL
o NORTHERN BORDER PARTNERS PACIFIC NORTHWEST CAPACITY
- 3.0 Bcf/d; 1,750 MILES o ELEKTRO o 100 mmcfe/d PRODUCTION
o SOUTH/CENTRAL AMERICAN PIPELINES - OVER 52,000 DISTRIBUTION MILES o 2 Bcf/d OF GATHERING & TRANSPORT
- 1.5 Bcf/d; 6,400 MILES - OVER 1.7 MILLION CUSTOMERS o LNG RECEIVING & STORAGE
- 8TH LARGEST ELECTRICITY o SYNERGIES WITH KEY REGULATED ASSETS
DISTRIBUTOR IN BRAZIL
</Table>
NOTE: OPERATING STATISTICS PRESENTED GROSS (100%). OPCO'S INTEREST IN THE ASSETS
WILL RANGE FROM 100% TO A MINORITY INTEREST.
SECTION I - HIGHLIGHTS
o Enron proposes the formation of OpCo Energy Company to effectuate the
separation of an integrated asset portfolio from the bankruptcy estate.
o OpCo will be an energy infrastructure business focused on the
transportation, distribution, generation and production of natural gas
and electricity.
o The existing asset base provides a mix of fee-based cash flows
originating from a combination of regulated and unregulated businesses in
both developed and emerging markets.
o In each of its regions served, OpCo boasts valuable assets that are
critical to the energy grid.
o OpCo will have imbedded organic growth opportunities that stem from its
services to some of the Americas' fastest growing energy markets.
o As a low cost, efficient operator, OpCo will have the potential to expand
its asset base within its key regions and reduce its average cost per
unit of throughput.
o An experienced operating management team is in place.
o OpCo expects to generate 2003 EBITDA of $1.3 billion.
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CONFIDENTIAL
SECTION II - BUSINESS PLAN SUMMARY
The following summary is qualified in its entirety by, and is subject to, the
more detailed information and financial statements included elsewhere in this
business plan. In this business plan, references to the activities or financial
information of "OpCo" or the "Company" are to the combined activities and
financial information of the OpCo businesses listed herein under "Snapshot -
Worldwide Asset Base Statistics" after giving effect to the formation of OpCo,
and assuming the transfer of Enron's and certain finance vehicles' interests in
each OpCo business to OpCo without the imposition of any materially adverse
conditions, liabilities or restraints. See "Combined Pro Forma Financial
Information - Basis of Presentation" for a listing of financial assumptions used
in the preparation of this business plan. See "Appendix C - OpCo Section 363
Transfer Plan" for a summary description of the mechanisms to be used to form
OpCo.
BACKGROUND
Background information leading to the OpCo proposal includes:
o High quality assets provide the core of an integrated energy
company
o Chapter 11 hampers effective operations
o Going concern greater than liquidation value
o Section 363 sale preserves operations, maximizes value
Enron Corp. ("Enron") was once one of the world's largest market makers in
energy and other commodities. Enron was best known for its commodity trading
business, with lesser emphasis on physical asset ownership. However, Enron
historically has had a substantial and profitable asset-based business. These
assets have the potential to provide the core of an integrated energy company.
The financial collapse of Enron has not changed the fundamental nature of its
physical assets, which management believes are high quality, strategically
located and efficiently operated gas and power assets. However, the constraints
of the chapter 11 process have severely hampered the ability of operating
management to compete in the marketplace. In order to avoid further
deterioration in the value of these assets, the Company believes it is now
necessary to consider options for separating these assets from the bankruptcy
process on an expedited basis.
Taking into consideration Enron's core competencies, the market's post-petition
dynamics, and the nature of the individual assets comprising the Enron Estate,
Enron believes there is significantly more value in a combined company comprised
of certain key assets that regionally form an integrated asset portfolio versus
separate discrete asset sales. As such, Enron proposes the formation of OpCo
Energy Company (hereafter, "OpCo", "OpCo Energy" or the "Company") to effectuate
the separation of an integrated asset portfolio from the bankruptcy Estate.
Management believes that such an approach will maximize the value of the
business and will allow it to prosper as a going concern. The remaining Estate
assets will continue to be liquidated in an orderly process.
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CONFIDENTIAL
The OpCo approach is based on management's belief that:
o The bankruptcy court process in which OpCo will be formed will allow for
higher and better bids. OpCo itself will be the stalking horse in an
auction process that ensures the market the opportunity to create the
highest value for the creditors of the Estate. The market can bid for all
or specified segments of OpCo in a transparent auction process. Any
qualifying topping offers will be considered.
o The expected value of OpCo as a going concern significantly exceeds the
expected value resulting from a liquidation of the separate assets.
o Formation of OpCo will provide support to the auction process, given an
energy asset marketplace already overloaded with properties for sale.
o Formation of OpCo allows time for addressing change in control
provisions, rights of first refusal, required consents and similar
provisions associated with specific assets that the Company believes
would erode value if the respective assets were liquidated.
o OpCo minimizes the value erosion that will occur as Enron's assets,
customers, partners, employees and others are subjected to the
uncertainty of bankruptcy.
o OpCo affords a convenient means to preserve the operations of the
Estate's most valuable assets. OpCo has a strong operating management
team in place with extensive regional and regulatory expertise that would
be difficult to replicate.
OpCo's asset base, coupled with a regionally focused strategy of supplying
essential energy and physical delivery services, is well timed for today's
changing energy markets. As a pure-play energy infrastructure company, OpCo
provides its customers with what they want most - deep regional energy expertise
and infrastructure that ensures reliable physical delivery of energy
commodities. For its stakeholders, OpCo offers transparent earnings, solid
growth and a myriad of value creation opportunities that arise from the
Company's assets, management team and the currently chaotic market conditions.
Commercial Rationale for OpCo Section 363 Sale
There are three primary paths available to the Estate with regard to the
disposition of OpCo assets: reorganization, liquidation or Section 363 sale.
Enron believes that, because of the issues described below and the significant
investment of time required for completion, both reorganization and liquidation
expose the Estate to unnecessary execution risk and result in sub optimal value
realization. The following summarizes factors leading to management's
recommendation of a Section 363 sale process.
Reorganization
Reorganization via a chapter 11 plan is not the best path:
o Operating under chapter 11 destroys value
o Claims reconciliation is years away
o Litigation will continue
o Investigations are a major distraction
o The broader scope of bankruptcy means higher administrative costs
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CONFIDENTIAL
Reorganization is often the preferred alternative for companies facing the
chapter 11 process. However, in the case of the Enron Estate, the Company
believes reorganization, through a chapter 11 plan of reorganization, is not the
most economically viable path for the following reasons:
o Operating under chapter 11 destroys value. Regulators are distracted,
customers are concerned, joint venture partners are distressed, company
personnel are dismayed, and many other stakeholders are each adversely
impacted by a chapter 11 reorganization. In addition, while in chapter 11,
there is no access to the capital markets. Without access to capital it is
difficult to compete. The assets of OpCo cannot operate profitably in a
chapter 11 environment for an extended period of time and the risk of loss
of customers, employees, and in certain cases the right to operate, is
high.
o Claims reconciliation is years away. Enron's business, capital structure
and related financings are extremely complex. Many of the resultant
financial structures are likely to be contested in the bankruptcy court.
This situation, coupled with the sheer magnitude of the value of claims
against the Enron Estate, and the significant number of debtors, ensures a
lengthy reconciliation process.
o Litigation will continue. Litigation associated with Enron's complexity and
unprecedented issues is not anticipated to be resolved in the near future.
There are a substantial number of lawsuits against the Estate for a variety
of different reasons; likewise, material litigation exists against others
on behalf of the Estate.
o Investigations are a major distraction. Unlike a typical chapter 11
proceeding, Enron's is clouded and made more difficult and confusing by a
series of investigations. The investigations by regulatory, governmental
and law enforcement agencies distract management from operations and
further concern partners, customers and employees of Enron's
still-functioning power and gas businesses.
o The broader scope of bankruptcy means higher administrative costs. Without
question, the scope of a chapter 11 reorganization results in focus that
must be split between operating the business and dealing with the
bankruptcy case simultaneously. This combined approach will come with
significantly higher administrative costs than is expected from separating
the two activities.
Given these factors, among others, Enron believes the probability of successful
emergence from a reorganization is limited.
Liquidation
A piecemeal liquidation has several problems:
o Sends a "must sell" signal to the marketplace
o Uncertain general economic conditions
o Poor energy industry conditions
o Poor emerging market conditions
o Tenuous contractual provisions
o Expected result is lower value
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CONFIDENTIAL
Likewise, Enron does not believe that liquidation of the individual OpCo assets
will necessarily maximize the value of the Enron Estate. Many of the factors
impacting Enron's viewpoint are macroeconomic, including:
o Liquidation reduces leverage in the market place. By liquidating all of
Enron's assets, a "must sell" signal is sent to the market. The result is
reduced selling prices and lower recoveries for the creditors. This is
further exacerbated by the fact that many of the assets cannot be operated
in a chapter 11 environment for an extended period of time.
o Uncertain general economic conditions. At present, worldwide economic and
political uncertainty has limited the availability and/or raised the cost
of capital for M&A activities.
o Poor energy industry conditions. Similar to the general economy, the energy
industry has been hit by the recession, and even harder than most other
industries. Volatile commodity prices coupled with financial difficulties
by participants in the sector have severely reduced capital available for
acquisitions. Furthermore, required liquidity and credit standings have
increased for many of the logical buyers of individual OpCo assets, putting
pressure on their balance sheets and causing the sale of assets to improve
liquidity and financial position. This serves to create a buyers' market
with lower sale prices and reduced recovery for Enron creditors.
o Poor emerging market conditions. A significant portion of the OpCo asset
base is located in foreign jurisdictions, including South and Central
America. The difficulty of liquidating these assets at acceptable prices is
further exacerbated by a recent withdrawal of capital from emerging
international markets. Furthermore, regulatory permits and concessions may
be revoked if the financial condition of these assets deteriorate.
o Tenuous contractual provisions. A bidder other than OpCo may, in the case
of many of the OpCo assets, trigger "change in control" provisions that may
significantly diminish the value of the underlying assets. Furthermore,
"rights of first refusal" provisions on other assets may limit the number
of potential non-OpCo bidders. Additionally, almost any significant sale
will require numerous regulatory and third party consents that will take
considerable time. Enron believes the structure of the Section 363 sale to
OpCo as currently contemplated would in most instances avoid the
requirement of, or increase the time available to negotiate, these
provisions and consents.
o Whole is greater than the sum of the parts. Management believes that the
value of OpCo as a going concern exceeds the sum of the potential values
for discrete OpCo asset sales.
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CONFIDENTIAL
Section 363 Sale
<Table>
<Caption>
WHY DOES AN OPCO SECTION 363 SALE MAKE SENSE?
---------------------------------------------------------------------------------------
SECTION 363 SALE PROCESS MITIGATES RISK OPCO MAXIMIZES VALUE
------------------------------------------- -------------------------------------------
o Fully Transparent Process via o Significantly More Value
Section 363 Sale Combined vs. Separate ("Going
o Keeps All Sale Options Open Concern Value")
o Allows Flexibility for o Provides for Value Recovery
Acceptance of Higher and Better Opportunity as Market Strengthens
Offers o Avoids Change in Control
o May Accelerate Time to Value Provisions
Realization o Avoids "Fire Sale" Perception by
o Lowers Cost of Chapter 11 the Market ("Hold" scenario is
Administration Acceptable)
o Minimizes Bankruptcy Related
Value Erosion
o Capitalizes on Core Competencies
o Governance Remains in Control of
Creditors' Committee
------------------------------------------- -------------------------------------------
</Table>
As shown above, an OpCo Section 363 sale on the other hand, accomplishes two
objectives for the Estate - it mitigates risk and maximizes value.
While the Company believes there will be considerable interest in OpCo or its
individual assets by unaffiliated third parties through the market-driven
Section 363 bidding process, it is possible that the bids received may not
necessarily maximize value to, or be in the best interest of the Estate.
Conforming bids might be received that are substantially below the Estate's view
of market value or numerous, non-conforming market-based bids may be received
for only portions of the OpCo asset base that, upon consideration of the
discrete valuations of remaining assets, are detrimental to the going concern
value of OpCo as an integrated, regionally focused energy company.
The Company believes that regardless of the outcome of the Section 363 bidding
process, value to the Estate is maximized through the prompt separation of OpCo
or its businesses from the Estate's chapter 11 burdens. The Company believes the
OpCo value proposition is compelling and that any lengthy delay in separation
will significantly deteriorate the going concern value of these assets. The
table below summarizes some of Enron's considerations supporting its commercial
rationale for the formation of OpCo.
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CONFIDENTIAL
TURNING CHALLENGES INTO OPPORTUNITIES
<Table>
COMMERCIAL CHALLENGES IN CHAPTER 11 VALUE OPPORTUNITIES CREATED WITH OPCO
- ---------------------------------------- ------------------------------------------
"TAINT" OF BANKRUPTCY TARNISHES Ability to establish a solid reputation
REPUTATION as a "first class" energy company;
customer confidence in doing business
with OpCo will be revived and enhanced.
- ---------------------------------------- ------------------------------------------
CUSTOMERS ARE OFTEN NOT WILLING TO ENTER Customers will be more apt to enter into
INTO NEW LONG-TERM CONTRACTS WITH THE long-term contracts with OpCo's strong
COMPANY pro forma capitalization and anticipated
investment grade rating. In fact, OpCo's
capitalization will likely be a
competitive advantage over its less
financially sound peers.
- ---------------------------------------- ------------------------------------------
VALUE OPPORTUNITIES ARE MISSED OpCo will have the ability to move
quickly on market opportunities that
develop for its products, services and
assets.
- ---------------------------------------- ------------------------------------------
MANAGEMENT FOCUS IS DIFFUSED The management team will be able to
focus on executing and delivering on the
OpCo business plan rather than devoting
significant attention to chapter 11
issues.
- ---------------------------------------- ------------------------------------------
CLAIMS WITHOUT MERIT ARE ASSERTED BY OpCo will likely experience fewer
OTHERS instances of third parties making
unsubstantiated claims against OpCo
companies once it is able to operate
separately from the Estate.
- ---------------------------------------- ------------------------------------------
UNCERTAIN FUTURE OF ESTATE COMPANIES OpCo can maximize the value of its
SLOWS PERMITTING ACTIVITIES WITH VARIOUS various development opportunities
AGENCIES AS WELL AS OPCO'S DEVELOPMENT (development sites, for example) by
EFFORTS timely leveraging its market knowledge
and presence in its regional markets.
- ---------------------------------------- ------------------------------------------
DELAYED SPEED OF EXECUTION OpCo can act quickly to capture
opportunities in rapidly changing energy
markets rather than allowing value "slip
away" with inability to execute value
enhancing transactions.
- ---------------------------------------- ------------------------------------------
RETAINING AND ATTRACTING KEY PERSONNEL OpCo will be able to retain and attract
IS DIFFICULT key personnel more cost effectively as
an operating company with a clear vision
and strategy. Furthermore, OpCo
maximizes its value by leveraging a
knowledgeable workforce intimately
familiar with its industries, regions
and assets.
- ---------------------------------------- ------------------------------------------
ABILITY TO ENTER INTO STRATEGIC OpCo will be able to share commercial
ALLIANCES AND JOINT VENTURES WITH risk with joint venture and alliance
PARTNERS IS PROBLEMATIC partners and employ less capital in the
process.
- ---------------------------------------- ------------------------------------------
REGULATORY ENVIRONMENT IS DIFFICULT AND OpCo can overcome regulators' tendencies
CAN BE HOSTILE AT TIMES to become distracted with Enron
bankruptcy matters, and thus deal more
expeditiously with important Company
regulatory issues.
- ---------------------------------------- ------------------------------------------
</Table>
INDUSTRY CONDITIONS
The economic slowdown, volatile commodity prices and the Enron bankruptcy have
created a difficult environment for the gas and power industry. Enron's collapse
resulted in energy traders and energy merchants coming under significant
pressure from both the debt and capital markets. Credit rating agencies and
market stakeholders have lost considerable confidence in the business models of
certain energy traders and merchants as evidenced by rating downgrades and
massive share price declines. As a result, Enron believes that energy traders
and merchants of the future will require stronger credit ratings than in the
recent past. In Washington, there is an effort to regulate this business that
may lead to this sector being dominated by financial institutions with high
credit ratings. In summary, the rules are changing, but industry actions have
been primarily reactionary to date. With its asset-backed business model,
regional focus and an anticipated investment-grade rating, OpCo should be well
positioned to navigate the challenges of the changing energy industry.
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CONFIDENTIAL
North America
North American energy companies face near-term constraints; long-term
outlook is favorable:
o Energy consumption expected to grow at 1.4% per annum
o Energy prices fell dramatically in 2001, but recently rebounded
o Post-Enron distress resulting in tight capital markets
o Companies focused on strengthening balance sheets
o Constrained capital markets and asset overhang create a buyers'
market
According to the Energy Information Administration ("EIA"), total energy
consumption in the United States is projected to increase at an average annual
compounded rate of 1.4 percent from 2000 to 2020. During this same period, the
U.S. gross domestic product ("GDP") is projected to grow at an average annual
compounded rate of 3.0 percent.
For the same period, residential energy consumption is projected by the EIA to
grow at an average compounded rate of 1.0 percent per year, with the most rapid
growth driven by computers, electronic equipment, and appliances. Commercial
energy demand is projected to grow at an average annual compounded rate of 1.7
percent and includes non-manufacturing business establishments such as hotels,
motels, restaurants, retail stores, health, social, educational institutions and
wholesale businesses. Industrial energy demand is projected to increase at an
average rate of 1.1 percent per year and includes sectors such as manufacturing,
construction, mining, agriculture, fishing and forestry establishments. Overall,
energy use per person generally declined from 1970 through the mid-1980s;
however, for the period from 2000 to 2020, the EIA forecasts continued slight
increases in energy use per capita through 2020 with efficiency gains only
partially offsetting higher demand for energy services.
In 2001, economic growth fell dramatically. After annual GDP increases of 4.1%
in 1999 and 2000, in 2001 GDP increased only 1.7%. Also, in the third quarter of
2001, GDP decreased 1.3%, creating the first recessionary environment in the
U.S. since 1991 (U.S. Department of Commerce, Bureau of Economic Analysis, March
28, 2002). This decline in growth led to a decreased demand for natural gas and
power. The GDP decline in combination with a 4% decline in industrial
consumption and a 13.2% decline in gas consumption by electric generation caused
a decrease in U.S. natural gas consumption of approximately 4.8%. The economic
environment also affected the power industry, which experienced a 6% drop in net
generation of electricity (Electric Power Monthly, EIA, February 2002).
Gas and power prices have fallen dramatically since the beginning of 2001.
Natural gas prices fell over 65% from the first quarter of 2001 to the first
quarter of 2002 (CSFB, March 2002). Declines were caused by concerns over lower
demand in a recessionary environment and mild winter weather in the fourth
quarter of 2001. Following the California power crisis in January of 2001,
western power prices fell 89%. However, all power markets experienced price
decreases including the Northeast Region wholesale markets, with New England and
PJM (Pennsylvania, New Jersey, Maryland) power prices down 60% and 87%,
respectively. Lower commodity prices, mitigated by very recent commodity price
increases, have had a negative impact on the earnings and cash flow of many
companies.
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CONFIDENTIAL
Credit spreads widened materially in the aftermath of September 11 and have
generally maintained a negative trend as fixed income markets demonstrate
concern over the gas and power sector's financial position. Since the collapse
of Enron, there has been a retrenchment in the gas and power business as the
capital markets have put increased focus on 1) reliance on risk
management/trading activities and/or marked-to-market activities in the overall
mix of income for a company, and 2) balance sheet exposure to additional
off-balance sheet obligations and/or leverage. The result has been a compression
of earnings and cash flow multiples that are in some instances at or below
historic growth rates, and merchant businesses that, while significant in some
cases, are not reflected in current market valuations. Equity valuations since
the beginning of 2001 have generally declined by 33%, with a 45% decline from
2001's the second quarter peak.
The industry's response has been to focus efforts on balance sheet
restructurings, including proposed asset sales, reduced capital expenditure
plans and debt and equity issuances designed to boost liquidity. The chart below
shows announced changes since the beginning of 2001 for a select group of
companies.
FINANCIAL METRICS FOR SELECT COMPANIES
<Table>
<Caption>
ASSET CAPEX DEBT EQUITY
SALES(10) REDUCTION(7) OFFERINGS(1) OFFERINGS(2) MOODY'S RATING(3) S&P(4) OUTLOOK(9) DEBT/CAP(5)
COMPANY (BILLIONS) (BILLIONS) (MILLIONS) (MILLIONS) 1/1/01 3/31/02 3/31/02 MOODY'S S&P 12/31/01
- ------- ---------- ------------ ------------ ------------ -------- --------- -------- -------- ------- -----------
NRG Energy $ 1.90 $ 1.1 $ 1,478 $ 432 Baa3 Baa3(-) BBB-(+) N/A N/A 80%
Duke Energy -- $ (1.1)(8) $ 2,725 $ 975 A1 A1 A+ Stable Stable 52%
Dynegy $.15-$.30 $ 0.5 $ -- $ 519 Baa3 Ba1 BBB+(-) Neg N/A 49%
El Paso $ 2.25 $ 1.7 $ 4,067 $ 765 Baa2 Baa2 BBB+ Stable Stable 65%
Williams $ 1.93 $ 0.4 $ 4,880 $ 1,192 Baa2 Baa2 BBB+(-) Neg N/A 66%
CMS $ 1.0 $ 1.0 $ 619 $ 298 Ba3(-) Ba3 BB Pos Pos 81%
Kinder Morgan -- -- $ 200 $ -- Baa2 Baa2 BBB Stable Stable 57%
Mirant $ 0.70 $ 1.5 $ 1,500 $ 822 Baa2 Ba1(-) BBB- N/A Stable 61%
Calpine $ 0.45 $ 2.0 $ 4,400 $ -- Ba1 Ba1(-) BB Neg Stable 81%
Reliant -- $ 0.9 $ -- $ -- Baa1(-) Baa1 BBB+ N/A Stable 59%(6)
AES Corp. $1.0-$1.5 $ 0.5 $ 1,485 $ -- Ba1 Ba1(-) BB(-) N/A N/A 80%
National Fuel Gas -- -- $ 150 $ -- A2 A3 A- Stable Neg 62%
Questar -- -- $ -- $ -- N/A N/A A Neg N/A 59%
</Table>
(1) Reflects gross proceeds and includes only corporate level debt, not
subsidiary or project related debt for offerings from 1/1/01 - 3/31/02.
(2) Reflects gross proceeds from public offerings from 1/1/01 - 3/31/02.
(3) Senior unsecured debt rating; includes ratings watch positive (+) and
negative (-).
(4) Long-term local issuer credit rating; includes ratings watch positive (+)
and negative (-).
(5) Book value.
(6) Used 9/30/01 data as a proxy for year-end balances for Debt/Cap because no
12/31/01 information was available as of the date of this analysis.
(7) Planned reductions in 2002 vs. 2001.
(8) Represents a planned increase in CapEx spending for 2002 vs. 2001.
(9) As of 4/17/02
(10) Announced Sales are in varying stages of execution.
Based on information compiled by Batchelder & Partners, Inc. ("B&P") from
publicly available data, it is estimated that over $12 billion of energy
infrastructure assets are currently in the sales process (see Appendix D).
Although the data is limited, the large supply of announced asset sales and lack
of stated strategic buyers appear to be impacting prices based on multiples paid
in recent transactions. The mean multiple paid has decreased by approximately
13% and the median multiple paid has decreased by approximately 7% when
comparing post-second quarter 2001 announced transactions to previously
announced transactions.
Valuations and transaction multiples are expected to be under increased pressure
in the near term as many companies in the industry are forced to sell assets
into the currently depressed markets in attempts to improve their balance sheets
and restore financial market confidence. B&P expects the financial constraints
experienced by strategic acquirers to result in many transactions driven by more
conservative valuations from opportunistic financial buyers.
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CONFIDENTIAL
While B&P believes that strategic acquirers will continue to vie for coveted
assets, these purchasers can be expected to be protective of their financial
position, more conservative in their valuations and keenly focused on
opportunities to reduce the purchase price, especially in light of complexities
or uncertainties such as those relating to certain assets in the Enron Estate.
South and Central America
High growth South and Central American markets require investor
vigilance:
o South and Central America expect strong energy consumption growth
o Foreign investment is critical to future growth
o Recent events expected to impact future South and Central American
investments
According to the EIA, high rates of economic growth in Latin America are
expected to improve standards of living and increase the demand for energy by
residential, business and industry users. Between 1999 and 2020, consumption is
expected to increase 215%, or 3.9% per year, from 13.7 to 43.1 quadrillion Btu
per year. South America is forecasted to be one of the regions in which gas use
is expected to grow significantly, rising 5.2% annually as compared to 2.4%
within industrialized countries.
The growth in South America is largely a result of an increased demand for
natural gas to fuel more efficient, environmentally friendlier turbines, which
is replacing fuel oil and hydro as the choice fuel source for new power
generation. Markets are being further opened through the continued privatization
of state owned entities and the introduction of new competition in the retail
distribution sector. The gas demand in the "Southern Cone", which includes
Brazil, Bolivia, Argentina and Chile, is expected to rise from its current level
of 5 Bcfd to 9 Bcfd by the year 2010, translating to an annual growth rate of
6.5%. Excess gas produced in Argentina will compensate for shortfalls in
neighboring Southern Cone countries.
During the 1990s, Latin America's energy sector attracted nearly $80 billion in
foreign direct investment ("FDI"), of which 71% was equity. However,
macroeconomic factors have greatly affected the flow of FDI. The Brazilian Real
experienced major deterioration in 2001, losing over 18% of its value relative
to the U.S. dollar. In addition, the currency has experienced significant
volatility in 2002. Brazil's long-term foreign currency is rated B1 by Moody's
and BB- by S&P and Fitch IBCA. In response, the Brazilian Central Bank has
increased reserve requirements in order to avert further currency depreciation,
but this will restrict credit availability. These factors, among others,
increase investor risk and, as a result, Brazilian FDI decreased from $33.4
billion in 2000 to an estimated $10.6 billion in 2001.
FDI has been and continues to be an important factor in electricity reform, and
money flowing into developing nations has allowed these countries to construct
vital infrastructure assets and deliver electricity to people in outlying
regions. Prior to the last decade's upturn in FDI, the construction and
maintenance of such infrastructure was nearly impossible.
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CONFIDENTIAL
The economic outlook for the Central American region is generally positive given
recent political stability in most areas and increased intra-regional economic
integration. Major problems in the region include heavy reliance on
multi-lateral aid, financial sector problems and poor infrastructure. To fight
the poor infrastructure, there are several energy infrastructure improvements
anticipated. Six Central American nations are in the process of completing a
Central American power grid. Although the regulatory system is fully in place,
connecting the countries' individual grids could alleviate periodic power
shortages, reduce operating costs, create a competitive market in the region and
attract foreign investment.
In 1999, Central American countries collectively consumed 0.70 quadrillion Btus
of energy. The region only produced 0.20 quadrillion Btus and was therefore a
net importer of energy, mainly from Venezuela and Mexico. As a result, Guatemala
and Mexico have recently agreed to build a natural gas pipeline into Central
America, supplying future thermal power plants with an estimated 40 MMcfd.
Furthermore, Colombia natural gas producers have proposed building a pipeline
into Central America to support additional thermal plants. Exports would start
at 40 MMcfd and could grow with demand.
See Appendix D for additional industry overview information.
COMPANY OVERVIEW
The OpCo businesses comprise a focused energy infrastructure company, providing
low cost gas and power, transmission, distribution and related services in a
safe, reliable manner to millions of customers in the Americas. Focusing on its
core skill sets of developing, owning and operating energy infrastructure
assets, the management of OpCo intends to retain its position as a low cost,
efficient operator in the markets in which it serves, and use this position to
compete effectively.
The OpCo businesses provide critical infrastructure to growth markets through
gas supply, transmission and storage, power generation and distribution
activities. In North America, the Company will focus on growth opportunities in
the Gulf Coast and West Coast regions of the United States. In Central and South
America, the Company will focus on further developing its strategically located
assets that support the needs of growing regional energy markets. The Company
will be active in both the regulated and non-regulated areas of the gas and
power markets and management believes that both of these areas will provide
stable cash flows as well as growth opportunities.
The Company will operate through the following three business segments -
Transportation Services, Power Distribution, and Generation and Production.
Transportation Services
Transportation Services has premier pipeline assets:
o 15,000 miles of pipeline assets with 8.0 bcf/day total capacity
o Major markets include Florida, California and Brazil
o Efficient operations and stable cash flow
o 2003 projected EBITDA of $260 million (19% of total OpCo)
12
CONFIDENTIAL
Transportation Services provides services to its customers through a variety of
pipeline assets. These pipelines have a daily throughput capacity of
approximately 8.0 bcf/day and span a total of more than 15,000 miles. Generally,
the Transportation Services assets are either subject to firm contracts for
their capacity (long-term transportation contracts that provide a fixed customer
fee regardless of the level of actual throughput) or regulated by their region's
government and, therefore, provide a stable, predictable stream of cash flows.
Additionally, the markets served include the U.S. Midwest and some of the
fastest growing natural gas consumption markets in the Western Hemisphere:
Florida, California and Brazil. By utilizing and building on its existing
infrastructure in these markets, Transportation Services will strive to capture
additional throughput volumes and, therefore, additional cash flows as gas
consumption in these markets increases. In times of reduced demand, the
contracted capacity and regulated rate base provide support for this segment's
financial performance.
Transportation Services operates on a relatively simple premise: capitalize on
the fact that it is generally more cost efficient to expand existing pipelines
than build new ones, and act as a springboard for high margin, complementary
businesses such as gathering, storage and other gas supply services. Management
believes the Company's assets will maintain a favorable competitive position
because they will continue to be low cost providers of transportation services
given the existing asset base. The construction of new pipeline assets has many
hurdles, including raising capital, environmental opposition, permitting, and
pre-contracting customers. This market dynamic provides Transportation Services
with a significant cost advantage over potential new competitors. Transportation
Services is projected to provide $260 million, or 19% of total Company EBITDA
(earnings before interest, taxes, depreciation and amortization) in 2003.
Power Distribution
Power Distribution offers stability and growth:
o Provide retail electricity to 2.5 million customers in Oregon and
Brazil
o 75,000 miles of distribution assets and 1,900 megawatts of
generation
o Predictable cash flow with opportunities for growth
o 2003 projected EBITDA of $655 million (49% of total OpCo)
Power Distribution provides retail electricity delivery to over 2.5 million
customers in Portland, Oregon and the state of Sao Paulo, Brazil. Through its
Portland General Electric and Elektro subsidiaries, Power Distribution operates
approximately 75,000 miles of distribution assets, 2,100 miles of transmission
lines as well as over 1,900 megawatts of generation. Power Distribution is a
franchise business that inherently limits downside risks and also provides a
stable, predictable cash flow stream with moderate growth. Both Portland and Sao
Paulo electricity demands are projected to grow in excess of each of their
respective country's national average, producing organic growth opportunities
for this business unit. As part of an integrated company with extensive
generating, gas supply and marketing activities in the regions in which it
operates, management believes that OpCo's Power Distribution business enhances
opportunities for other assets in the OpCo portfolio. Additionally, OpCo should
be able to expand horizontally within the franchise territories (e.g., gas
distribution), and significant cost savings should be able to be achieved,
providing additional return opportunities.
Power Distribution provides opportunities for growth in each of its markets. The
Pacific Northwest's electricity demand is expected to grow at approximately a 2%
compound rate over the next five years. Management believes the Company's
franchise position in this market ensures that the majority of the benefit of
this growth will be realized by the Company.
13
CONFIDENTIAL
Additionally, the potential for add-on acquisitions of other energy utility
operations in this market could offer growth opportunities with significant cost
savings within one combined franchise. In Brazil, electricity consumption is
projected to grow at approximately a 4.5% compound rate over the next five
years. This market offers opportunities for growth as the franchise to provide
electric power has been segregated into multiple areas. Therefore, not only is
straight consumption growth expected to be realized by the Company, but
additional opportunities may create value through unregulated services to
neighboring areas currently supplied by major LDC's. Power Distribution is
expected to provide $655 million, or 49% of total Company EBITDA in 2003.
Generation and Production
Generation and Production uses its energy infrastructure assets to create
regional growth opportunities:
o 4,800 MW of independent power generating capacity
o Gathering systems with 2.0 bcf throughput
o 100 mcfe oil and gas production
o Significant growth opportunities through non-regulated assets
o 2003 projected EBITDA of $434 million (32% of total OpCo)
Generation and Production provides power generation, gas production and related
services to its customers. With equity ownership in over 4,800 MW of independent
power generating capacity, 2.0 bcf/day throughput of gathering and 100 mmcfe/day
of oil and gas production, Generation and Production is a mid-size energy
provider in each of its core North, South and Central American markets.
Additionally, the asset base of this segment highly complements the regulated
asset base in the Company's other two segments by providing an additional range
of service opportunities to its customers. Due to the fact that this segment is
not regulated, Generation and Production provides additional cash flow growth
opportunities by utilizing its asset-base in a flexible opportunistic manner.
Generation and Production is a business that focuses on niche market
opportunities, particularly in power generation. By contracting the majority of
a power generation facility's output on a long-term basis to cover the fixed
cost of operations, the Company expects to be able to maximize its cash flows by
diverting excess generation to the highest priced market. In Central America,
Generation and Production provides approximately 10% of the market's total
installed capacity. Additionally, Generation and Production provides upstream
Gulf of Mexico gas production that feeds the segment's gathering assets and, in
turn, OpCo's long haul transportation assets operated by Transportation
Services. The Generation and Production segment allows the Company to capitalize
on market opportunities as they arise without the constraints of a fixed
regulatory environment. Generation and Production is expected to provide $434
million, or 32% of total Company EBITDA in 2003.
v v v
Management believes that the Company's efficient operations, existing
infrastructure platform and energy industry know-how provide the necessary
components to build significant value around its regionally focused
opportunities in growing markets throughout the Americas. The map on the
following page provides a snapshot of the Company's worldwide asset base.
14
CONFIDENTIAL
SNAPSHOT - WORLDWIDE ASSET BASE
[PARTIAL WORLD MAP INDICATING PHYSICAL LOCATION OF OPCO ASSETS]
- - Gas Pipelines
- - LPG Assets
- - Power Plants
- - Electricity Distribution
- - Power Development Projects
- - Upstream Properties
- - LNG Assets
- - Wind Farms
- - Other Assets
15
CONFIDENTIAL
SNAPSHOT - WORLDWIDE ASSET BASE STATISTICS
<Table>
<Caption>
-SIZE(1) GEOGRAPHIC(2) - OPCO3
SEGMENT/ASSET ASSET DESCRIPTION CAPACITY(1) METRICS LOCATION OWNERSHIP
- ---------------------------------------- ---------------------- ----------- --------- ------------- ---------
Transportation Services
TRANSWESTERN PIPELINE COMPANY INTERSTATE PIPELINE 1.9 BCF/D 2,600 MILES NA - WESTERN 100%
FLORIDA GAS TRANSMISSION ("FGT") INTERSTATE PIPELINE 1.6 BCF/D 4,800 MILES NA - GULF COAST 50%(4)
NORTHERN BORDER PARTNERS, L.P.
o NORTHERN BORDER PIPELINE INTERSTATE PIPELINE 2.4 BCF/D 1,400 MILES NA - NORTHERN 9%5
o MIDWESTERN GAS TRANSMISSION INTERSTATE PIPELINE 0.6 BCF/D 350 MILES NA - MIDWEST -
o VARIOUS MIDSTREAM ASSETS GATHERING & PROCESSING -- - NA - ROCKIES -
BOLIVIA-TO-BRAZIL PIPELINE ("BBPL") PIPELINES 0.575 BCF/D 2,000 MILES LA - VARIOUS -
o GAS TRANSBOLIVIANO S.A. ("GTB") PIPELINE - - LA - BOLIVIA 30%
o TRANSPORTADORA BRASILEIRA GASODUTO PIPELINE - - LA - BRAZIL 7%
BOLIVIA-
BRAZIL S.A. ("TBG")
TRANSREDES S.A. GAS & LIQUIDS PIPELINE 0.575 BCF/D 3,600 MILES LA - BOLIVIA 25%
CENTRAGAS GAS TRANSMISSION 0.2 BCF/D 460 MILES LA - COLOMBIA 50%
CUIABA PIPELINE PROJECT GAS PIPELINE 0.1 BCF/D 400 MILES LA - BOLIVIA/ BRAZIL -
o GASORIENTE BOLIVIANO LTDA. ("GASBOL") PIPELINE - - LA - BOLIVIA 50%
o GASOCIDENTE DO MATO GROSSO LTDA. PIPELINE - - LA - BRAZIL 56%
("GASMAT") ACCROVEN LPG FACILITY - - LA - VENEZUELA 49%
o NATURAL GAS LIQUIDS ("NGL") EXTRACTION NGL EXTRACTION PLANT 0.4 BSCF/D - LA - VENEZUELA -
o NGL FRACTATION NGL FRACTATION PLANT 35,000 BBLS/D - LA - VENEZUELA -
o NGL STORAGE & REFRIGERATION NGL REFRIGERATION/ 510,000 BBLS - LA - VENEZUELA -
STORAGE
VENGAS LPG DISTRIBUTION - - LA - VENEZUELA 97%
Power Distribution
PORTLAND GENERAL ELECTRIC ELECTRIC UTILITY - - NA - WESTERN 100%
o ELECTRICITY DISTRIBUTION DISTRIBUTION ASSETS - 24,576 MILES NA - WESTERN -
o ELECTRICITY TRANSMISSION TRANSMISSION LINES - 1,509 MILES NA - WESTERN -
o ELECTRICITY GENERATION POWER PLANTS 1,900 MW - NA - WESTERN -
o ELEKTRO ELECTRIC UTILITY - - LA - BRAZIL 76%
o ELECTRICITY DISTRIBUTION DISTRIBUTION ASSETS - 52,000 MILES LA - BRAZIL -
o ELECTRICITY TRANSMISSION TRANSMISSION LINES - 836 MILES LA - BRAZIL -
Generation and Production
BAHIA LAS MINAS POWER GENERATION 335 MW - LA - PANAMA 51%
EMPRESA ENERGETICA DE CORINTO POWER GENERATION 71 MW - LA - NICARAGUA 35%
PUERTO QUETZAL POWER POWER GENERATION 234 MW - LA - GUATEMALA 38%
SMITH ENRON COGENERATION LP POWER GENERATION 185 MW - LA - DOMINICAN 85%
EMPRESA PRODUTORA DE ENERGIA LTD. ("CUIABA POWER 480 MW/ - LA - BRAZIL 72%
EPE") GENERATION/DEVELOPMENT REPUBLIC
960 MW
ELETROBOLT PROJECT POWER GENERATION 379 MW - LA - BRAZIL 100%
RIOGEN PROJECT (PLANT UNDER DEVELOPMENT) GENERATION DEVELOPMENT 992 MW - LA - BRAZIL 100%
POTENTIAL
ECOELECTRICA POWER GENERATION 542 MW - NA - PUERTO RICO 48%
TRAKYA POWER GENERATION 478 MW - TURKEY 28%
EASTERN & WESTERN US POWER PLANT GENERATION DEVELOPMENT 18,600 MW 30 SITES NA - 15 US STATES & 100%
DEVELOPMENT CANADA
POTENTIAL
SITHE CONTRACTED POWER 1,042 MW - NA - EASTERN 40%(6)
EAST COAST POWER SWAP, CONTINGENT PAYMENT CONTRACTED POWER 953 MW - NA - EASTERN 100%
& DEBT WIND CONTRACTED POWER 174 MW - NA - WESTERN 42%
MARINER ENERGY, LLC EXPLORATION & PRODUCTION - - NA - GULF COAST 96%
o ANNUAL PRODUCTION HYDROCARBON PRODUCTION - 36.7 BCFE NA - GULF COAST -
o PROVED DEVELOPED RESERVES HYDROCARBON EXPLORATION - 72.2 BCFE NA - GULF COAST -
o PROVED RESERVES HYDROCARBON EXPLORATION - 237.1 BCFE NA - GULF COAST -
OTHER E&P ASSETS EXPLORATION & PRODUCTION - 110.3 BCFE NA - GULF COAST VARIOUS
BRIDGELINE INTRASTATE PIPE & 2.0 BCF/D 1,000 MILES NA - GULF COAST 50% GP;
STORAGE 40% LP
TRANSBORDER GAS SERVICES LTD. ("TBS") GAS SUPPLIER TO CUIABA - - LA - BRAZIL 73%
EPE
SOUTHERN CONE GAS LTD. ("SCG") GAS SUPPLIER TO TBS - - LA - BRAZIL 100%
MEGS INTRASTATE PIPE & 40 MMCF/D 29 MILES NA - GULF COAST 100%
STORAGE
TRANSPORTATION AGREEMENTS W/ BRIDGELINE GAS SUPPLY & MARKETING 150 MMCF/D - NA - GULF COAST 100%
STORAGE AGREEMENTS W/ BRIDGELINE GAS SUPPLY & MARKETING 2.5 BCF - NA - GULF COAST 100%
CITRUS TRADING GAS SUPPLY & MARKETING - - NA - GULF COAST 50%
HOUSTON PIPELINE COMPANY LEASE GAS SUPPLY & MARKETING - 800 MILES NA - GULF COAST (LEASE)
BAHAMAS TO FLORIDA TERMINAL & PIPELINE LIQUEFIED NATURAL GAS 832 MMCF/D - NA - EASTERN 100% (NOT
YET BUILT)
TANKER CHARTER - "HOEGH GALLEON" LIQUEFIED NATURAL GAS 87,608 CM - WORLDWIDE (LEASE)
ELBA ISLAND - VAPORIZATION CAPACITY LIQUEFIED NATURAL GAS 58 BCF/YEAR - NA - EASTERN (CONTRACT
RIGHTS)
PUERTO RICO - MARKETING LIQUEFIED NATURAL GAS 210 MMCF/D - NA - PUERTO RICO (CONTRACT
RIGHTS)
COMPRESSION SERVICES OTHER - - NA 100%
HANOVER MEASUREMENT SERVICES OTHER - - NA 47.5%
STADACONA OTHER 410,000 METRIC- NA - EASTERN 100%
TONS
</Table>
(1) Statistics are presented gross (100%). OpCo ownership percentage for each
asset is separately disclosed above.
(2) For Geographic Location Statistics, "NA" and "LA" refer to North America
and Latin America, respectively. Additionally, statistics also include
primary region served by the respective asset.
(3) Certain interests are currently held by or though one or more financing
structures formed by Enron or its affiliates. Transfer of such interests
to OpCo may be subject to various rights in favor of the investors in the
relevant financing structure. See "Combined Pro Forma Financial
Information - Basis of Presentation". The ability to transfer interests
to OpCo may also be subject to resolution of certain project-level
indebtedness.
(4) Held through Citrus Corp. ("Citrus"), the holding company for FGT.
(5) Includes Enron's 7.7% LP interest in the common units and its 1.7% GP
interest in Northern Border Partners, L.P. Northern Border Partners, L.P.
holds a 70% interest in the Northern Border Pipeline and a 100% interest
in its other assets.
(6) In addition to the 40% equity ownership, OpCo will hold an approximately
$420 million face value subordinated note that has a 35-year term and
pays 7% quarterly interest.
16
CONFIDENTIAL
STRATEGY
OpCo's strategy is to:
o Profitably operate stable, fee-based assets that are critical to
the energy markets they serve
o Build on its asset base to expand and develop earnings streams
o Utilize its "best in class" pipeline and power plant operating
expertise
o Minimize operating costs while maintaining its strong safety
record
o Increase asset utilization within current markets
o Minimize and mitigate commodity and currency exposure
o Employ disciplined capital allocation with accounting transparency
o Pursue high-value, strategic reinvestments and "bolt-on"
acquisition opportunities
The Company's strategy is to combine its low cost leadership position in gas and
power assets and its comprehensive market knowledge and industry expertise to
create a leading, regionally integrated energy company. The Company will take a
"deep", regional approach to its business rather than act as an energy merchant
delivering to a "broad" market. The foundation of the Company's regional
approach will be a strong, stable, regulated asset "anchor" in each regional
focus area. The Company's specific strategy with respect to each of its business
units is described below.
Transportation Services
Transportation Services expects to continue its business formula:
o Cost effective and efficient operations
o Stable cash generation platform with expansion opportunities
o Accessible, flexible and diverse markets
The Transportation Services (TS) businesses are cost effective and efficient
conduits into the fast growing markets they serve and provide both a stable cash
generation platform for OpCo and additional expansion opportunities. The TS
commercial focus is to subscribe the majority of its existing capacity and
future capacity expansion on a long-term, firm basis, thereby generating a
consistent, reliable revenue stream and mitigating any cost recovery risk. The
key components of the marketing strategy are the accessibility, flexibility and
diversity of its markets, supplies and services, and the maintenance of a
competitive cost of service through comprehensive cost control measures.
17
CONFIDENTIAL
Transwestern's Red Rock and Mexico expansion projects and its system
flexibility, which provides access to multiple markets (California, Southwest
U.S.) and to multiple supply basins (San Juan, Permian and Rockies), place it in
an excellent strategic position for both near and long-term growth
opportunities.
Management expects FGT's Phase V and VI expansion projects, currently under
construction, to provide stable and predictable cash flows and earnings growth
for the next five years because the capacity for the projects is subject to firm
commitments. Beyond this period, FGT's access to multiple gas supply areas, its
extensive pipeline network within the State of Florida and the growth in the
demand for additional gas-fired electric generation in Florida should provide
for additional expansion opportunities.
On-going consolidation in the midstream sector should provide Northern Border
Partners with asset acquisition opportunities that are complementary to its
existing business mix and should allow the partnership to achieve greater
operating economies of scale.
Internationally, the Transredes, GTB and TBG pipelines have long-term firm
transportation contracts in place that provide for inherent growth in earnings
and cash flow. Execution of the related expansions on a timely and cost
effective basis are substantially all that is needed to deliver this growth.
Transredes operates the only liquids transport system in Bolivia and it is
unlikely that any competing system can be developed economically in the near
term. GTB and TBG are positioned to capture most of the natural gas volumes that
are produced from Bolivia for sale to Brazil. Lastly, future growth of the
market for natural gas is likely in the State of Mato Grosso, and the GasMat and
GasBol pipeline segments have uncommitted capacity available to serve this
growth.
Power Distribution
Power Distribution builds on solid foundations in franchise service
areas:
o Safe, efficient, cost effective and reliable operations
o Organic growth potential
o Strong customer relationships
OpCo plans to efficiently run its Power Distribution business, aggressively
manage power supply costs and take advantage of organic growth potential.
Through these operations, OpCo plans to be a low cost leader with regulatory and
industry experience in the power distribution sector. In addition to the
strategy of the business unit as a whole, both Portland General Group (PGG) and
Elektro have asset-specific strategies.
PGG focuses on being customer-centric through safe, efficient, cost effective
and reliable operations. This allows PGG to continue to receive fair regulatory
treatment in the rate setting process and earn its Oregon Public Utility
Commission (OPUC) authorized rate of return on regulated assets, currently set
at 10.5%. In addition, PGG expects to utilize its long-standing customer
relationships and strong brand name to enter into new business ventures. PGG
will focus first on its local service territory, and then branch out to
surrounding areas in Washington and California. PGG is expected to benefit as
demand increases and opportunities present themselves through non-regulated
operations. Currently, PGG is working to expand its energy efficiency, energy
services and infrastructure services business lines.
18
CONFIDENTIAL
Elektro's primary strategy is cost leadership and the strengthening of its brand
with continuous focus on customer service and high standards in power quality.
This strategy supports the ability of Elektro's management team to influence the
regulatory framework and to allow a reasonable return on assets in the periodic
rate review mechanism.
As the unregulated power market develops in Brazil, Elektro will be in a
prominent position to explore opportunities by utilizing its energy marketing
skills. Moreover, Elektro has been successful in delivering a wide range of
services to its customer base, which can be easily replicated in a competitive
market. Other opportunities are also possible through ancillary services, such
as technology and telecommunications, which will complement Elektro's core
activities.
Generation and Production
Generation and Production applies regionally focused strategies in high
growth unregulated markets:
o Leading competitive position in select fast growing markets
o OpCo asset base creates opportunities
o Significant organic growth potential
With a focus on the efficient operation of its assets in power generation and
natural gas supply, Generation and Production (GP) will combine its core
competencies, market knowledge, and organic growth opportunities to maintain a
leading competitive position in fast growing regions in which it currently
operates. Management believes that Generation and Production can maintain a
strong competitive position in its markets and grow revenues in those markets by
continued ownership and operation of its existing generation facilities,
continued development of its existing portfolio of sites and further penetration
of those regional markets through offering additional services.
This strategy is based upon offering a portfolio of three product lines across
regionally focused domestic and international markets.
Generation and Production Product Lines by Region
<Table>
<Caption>
PRINCIPAL REGION PRODUCT LINES
- ------------------------------------------------- ----------------------------------------------------------
North American - o Intrastate Pipelines and Production
Gulf Coast/ South East o Power Generation
o Other
- ------------------------------------------------- ----------------------------------------------------------
North American - West Coast o Power Generation
- ------------------------------------------------- ----------------------------------------------------------
South America o Power Generation
- ------------------------------------------------- ----------------------------------------------------------
Central America o Power Generation
- ------------------------------------------------- ----------------------------------------------------------
</Table>
19
CONFIDENTIAL
Through understanding specific market attributes within a region, both
domestically and internationally, Generation and Production has historically
succeeded at identifying regions that are likely to face either electricity
constraints or surplus. Management believes there is a significant economic
benefit to continue leveraging this "skill set" to identify future development
opportunities. The Generation and Production segment will focus on continued
operation of existing generation facilities and redeploying cash flow from these
assets into its current portfolio of development sites to expand its generation
capacity from 4,800 MWs in 2002 to over 9,500 MWs by 2006. Philosophically,
Generation and Production will maintain an ownership interest through the
construction phase of a generation facility when an attractive market is
identified and developed, and a long-term Power Purchase Agreement ("PPA") can
be secured.
HISTORICAL AND PROJECTED GENERATION GROWTH
(MWs)
1999 2000 2001 2002 2003 2004 2005 2006
---- ---- ---- ---- ---- ---- ---- ----
4,200 4,800 4,800 4,800 4,800 5,400 7,000 9,600
Established generation facilities produce a reliable source of cash flow due to
long-term PPAs, which support the economic viability of these assets. As the
markets in which these assets are located continue to develop and expand,
Generation and Production should be in an advantageous position to understand
the daily, weekly, monthly, and annual fluctuations in these regions. Through
the collection and analysis of this information, both short-term and long-term
regional strategies can be assembled based on the potential volatility and
resulting opportunities or risks that are forecasted for each respective market.
20
CONFIDENTIAL
SUMMARY COMBINED PRO FORMA FINANCIAL DATA
(Millions of Dollars)
The summary combined pro forma financial data set forth below should be read in
conjunction with the "Combined Pro Forma Financial Statement Information"
section of this business plan.
<Table>
<Caption>
1999 2000 2001 2002 2003 2004 2005 2006
-------- -------- -------- -------- -------- -------- -------- --------
Statement of Income Data
Revenues 2,052.7 2,326.8 2,657.0 3,161.0 3,253.2 3,509.1 3,765.4 3,931.4
Cost of Sales 765.6 842.4 1,110.7 1,561.1 1,441.4 1,621.3 1,785.8 1,895.2
Gross Margin 1,287.1 1,484.4 1,546.4 1,599.9 1,811.8 1,887.8 1,979.5 2,036.2
Operating Expenses 855.8 917.8 1,078.3 1,092.1 1,171.2 1,221.3 1,249.8 1,259.6
Other Income 153.4 164.4 150.0 114.7 226.4 325.3 360.1 406.7
EBITDA 852.8 1,039.1 970.2 1,022.3 1,345.2 1,492.7 1,604.5 1,692.2
Net Income 314.8 379.8 252.5 242.9 352.2 450.0 502.6 562.6
Cash Flow Data
Operating Cash Flow 290.0 866.5 1,074.6 717.4 897.7 948.8 982.9 1,044.2
Equity Earnings of
Unconsolidated Affiliates, (43.5) (89.3) (62.5) (27.8) (29.5) (6.9) (25.3) (42.4)
net of dividends received
Capital Expenditures (418.1) (497.6) (526.6) (461.0) (410.2) (495.4) (472.8) (422.9)
Equity Investments (112.7) (448.2) (152.1) (111.1) (2.2) (1.2) (92.6) (186.3)
Balance Sheet Data
Cash and Equivalents 31.6 166.8 114.3 452.4 945.5 1,479.1 1,941.5 2,261.3
Working Capital 351.0 715.6 (151.5) 620.1 1,094.1 1,649.4 2,111.4 2,420.2
Total Assets 7,712.5 8,769.2 9,910.6 10,048.4 10,362.4 10,813.8 11,306.5 11,726.8
Long-Term Debt 1,131.3 1,460.8 2,151.8 2,420.1 2,404.0 2,429.7 2,403.2 2,207.1
Total Shareholders' Equity 3,808.6 4,184.6 3,990.6 4,707.3 5,052.2 5,504.5 6,007.7 6,569.8
</Table>
Note:
Earnings before interest, income taxes, depreciation and amortization, or
"EBITDA," is presented because the Company believes that EBITDA may provide
additional information about its ability to meet its future requirements for
debt service, capital expenditures and working capital. It is not a measure of
operating results, but is derived from the Company's combined pro forma
financial statements and is not presented in OpCo's combined pro forma financial
statements. EBITDA should not be considered in isolation or as a substitute for
a measure of performance prepared in accordance with generally accepted
accounting principles, or ("GAAP"), in the United States and is not indicative
of operating income or cash flow from operations as determined under GAAP.
Because EBITDA excludes some, but not all, items that affect net income and may
vary among companies, OpCo's EBITDA may not be comparable with other companies'
EBITDA. The Company defines EBITDA by simply taking EBIT as presented in its
combined pro forma financial statements and adding back depreciation and
amortization, also as reflected in its combined pro forma financial statements.
EBITDA amounts include non-cash equity earnings from unconsolidated affiliates
and exclude cash dividends received from unconsolidated affiliates. Debt of
unconsolidated affiliates is not presented in the combined pro forma financial
data. See the "Basis of Presentation" section for debt of unconsolidated
affiliates.
21
CONFIDENTIAL
ORGANIZATIONAL STRUCTURE
The following summarizes OpCo's anticipated organizational structure. For
information about the current management team, see "Appendix B - Management
Team."
<Table>
<Caption>
OPCO BOARD OF DIRECTORS
OPCO MANAGEMENT
TRANSPORTATION POWER GENERATION AND FINANCE & CORPORATE
SERVICES DISTRIBUTION PRODUCTION ADMINISTRATION LEGAL COMMUNICATIONS
</Table>
Corporate Governance
Enron's management proposes governance designed to safeguard creditors:
o Creditors' Committee would approve OpCo's board of directors
o Predominantly independent board of directors
o Opportunity for exemplary corporate governance
Management of Enron anticipates proposing that the Unsecured Creditors'
Committee approve the Company's board of directors, the majority of which are
expected to be independent candidates. The new OpCo board of directors will have
the opportunity to establish an exemplary corporate governance policy as it
relates not only to its board of directors and their oversight of the Company,
but also in regard to its policies and procedures concerning outside auditors,
advisors, counsel and corporate ethics.
22
CONFIDENTIAL
COMBINED PRO FORMA CAPITALIZATION
Key points regarding OpCo's capitalization:
o Sound capital structure required for operations
o Investment grade credit rating
o Debt of unconsolidated affiliates not in combined pro forma
financials
The Company believes a strong capital structure is necessary to reassure
regulators, partners, customers and other stakeholders, and will provide an
immediate differentiation versus less financially sound competitors. It is
anticipated that OpCo would garner an investment grade credit rating based on
the base case pro forma capitalization shown below. The following table sets
forth the Company's base case pro forma capitalization as of December 31, 2001
and assumes no corporate level debt is outstanding.
The information in this table should be read together with the "Combined Pro
Forma Financial Information" section of this business plan.
<Table>
<Caption>
COMBINED
PRO FORMA AS OF
DECEMBER 31, 2001
------------------
(MILLIONS OF
DOLLARS)
Short-Term Obligations $ 942
==================
Long-Term Debt(4) 2,152
Minority Interests 586
Company-Obligated Preferred Securities of Subsidiaries 98
Shareholders' Equity:
Preferred Stock (1) 29
Common Stock 2,775
Retained Earnings 1,254
Accumulated Other Comprehensive Income (2) (750)
Restricted Stock & Other (3) 683
------------------
Total Shareholders' Equity 3,991
------------------
Total Capitalization (Excluding Short-Term Obligations) $ 6,827
==================
</Table>
NOTES:
(1) Preferred Stock primarily relates to preferred stock of Portland General
Electric. The common stock of PGE is expected to be wholly-owned by OpCo,
in which event PGE will be consolidated into the OpCo financial
statements.
23
CONFIDENTIAL
(2) Accumulated Other Comprehensive Income ("AOCI") is primarily comprised of
cumulative translation adjustment (or "CTA") for Elektro and other
international assets. Note that the total AOCI balance reflects the
historical carryover basis attributable to the assets comprising OpCo's
businesses.
(3) Restricted Stock & Other is comprised of restricted stock of
Transwestern, which is expected to be wholly-owned and consolidated by
OpCo, and the equity impacts of certain pro forma adjustments as more
fully described in the "Basis of Presentation" section.
(4) Represents subsidiary level debt. No long-term debt is assumed at the
OpCo parent level. See "Basis of Presentation" section for debt of
unconsolidated subsidiaries, which is not presented in the combined pro
forma capitalization.
24
CONFIDENTIAL
SECTION III - COMBINED PRO FORMA FINANCIAL INFORMATION
BASIS OF PRESENTATION
Assumptions underlying the basis of financial statement presentation
include:
o Book and tax basis carryover
o Few assets come from structured finance vehicles
o Capital structure and uses of cash to be determined
o Net 2002 corporate overhead of $23.3 million
The following provides a discussion of the presentation of historical and
projected combined pro forma financial information for OpCo, and each of its
three business units, for the years ending 1999 through 2006:
Basis
o OpCo has assumed predecessor carryover basis rather than purchase
accounting (i.e. fair value)
o Pro forma adjustments reverse the historical effects of the
following:
- Goodwill
- Bankruptcy related items
- Corporate overhead
o Tax effects have been pushed down to assets from the previous
holding company reporting entities
o Certain of the assets included in OpCo's historical and projected
financial statements are wholly or partially held through existing
structured finance vehicles. Historical and projected pro forma
financial estimates assume that these assets are not encumbered in
structured finance vehicles. The unwind and resolution of these
structures may affect the financial results presented. The
following lists the assets currently in structured finance
vehicles that are assumed to be included in OpCo's financial
results:
- CGAS Inc.
- Centragas
- ECP Trutta Swap
- Eletrobolt
- Mariner Exploration, inclusive of certain debt held by
structured vehicles, which was assumed to be restructured
to a lower interest coupon.
- Northern Border Partners (certain L.P. Interests)
25
CONFIDENTIAL
o OpCo assumes that it (or a subsidiary) acquires certain
receivables (principal plus accrued interest) held by Enron or
its affiliates and payable by unconsolidated subsidiaries of OpCo
by issuing equity. The following provides a listing of such
receivables:
- Enron Netherlands receivable from Cuiaba EPE and Cuiaba
Gasmat ($195.0 million and $101.0 million, respectively)
- Enron Development Corp. receivables from EcoElectrica
($19.3 million)
- Enron Power Holdings CV receivable from Trakya Electrik
($11.8 million)
o Cash balances on hand at the formation of OpCo and net cash flow
thereafter is assumed to accumulate during the projection period.
Management expects to assess and recommend an appropriate capital
structure for OpCo. As a result of this assessment, assumptions
concerning cash available at formation, development and project
financing strategies, capital expenditures and other uses of cash,
which are presently incorporated into the projections, are likely
to change.
Consolidation
o OpCo consolidates investments in investees in which OpCo maintains
more than 50% of the voting control of the investees and reflects
minority ownership interests accordingly.
o OpCo uses the equity method to account for investments in
investees in which OpCo does not maintain more than 50% of the
voting control (directly or indirectly) of the investees.
Intercompany Balances
o Intercompany account balances as of December 31, 2001 between
consolidated OpCo subsidiaries and Enron and its affiliates have
been netted and reclassified as equity of OpCo. The methodology
ultimately used in the formation of OpCo may result in a different
treatment of intercompany account balances, requiring adjustments
to the presentation assumed in the combined pro forma financial
statements.
o Intercompany activities among companies within OpCo have been
eliminated in the historical and projected combined pro forma
financial statements.
Cash Management
o Cash management will be performed at the OpCo level; therefore,
(1) excess cash balances from entities that are available for
distribution are shown as advances to OpCo with a corresponding
intercompany asset balance reflected on the entity's balance sheet
and (2) cash requirements for entities are provided by OpCo with a
corresponding liability reflected on the entity's balance sheet.
The advance balance is reflected in other current liabilities as
either a positive or negative liability. The net advance account
eliminates in combination.
o Some entities, such as those that are regulated, reflect cash
distributions to OpCo as dividends for financial reporting
purposes rather than intercompany advances.
o Debt requirements for certain project developments will be
financed on a non-recourse basis. The cash proceeds and
corresponding borrowings are shown at the investment level and,
depending on the accounting method (i.e. consolidation or equity
method), may or may not be shown on the face of the financial
statements for OpCo.
26
CONFIDENTIAL
Corporate Overhead
o Corporate overhead is included in the "Operating Expense" line
item of the income statement. Actual corporate overhead
attributable to historical periods was materially in excess of
expected overhead for OpCo. Accordingly, historical overhead has
been eliminated from the income statement and replaced by an
amount equal to estimated 2002 corporate overhead of $23.3
million, which is net of overhead billable to third parties.
o Corporate overhead includes the following cost components not
directly attributable to the business units:
- Corporate legal
- Corporate risk assessment
- Corporate finance and treasury
- Corporate development
- Corporate accounting and tax
- Corporate information technology
- Corporate public relations
- Executive compensation
- Security
- Human resources and benefits
o Additional assumptions regarding corporate overhead include the
following:
- Projections do not include bonus or additional incentive
compensation
- Projections do not include the potential cost to move to a
new office facility
- OpCo utilizes existing hardware currently owned by Enron to
support its operations
- Overhead cost components are escalated at rates generally
ranging between three and six percent.
General Tax Assumptions
Consolidation
o OpCo files a consolidated U.S. federal tax return that includes
each domestic corporation in which it owns at least 80% of the
vote and value. Separate tax returns will be filed for
corporations owned less than 80%.
o Taxes are computed at the U.S. federal statutory tax rate of 35%.
OpCo's effective income tax rate, however, will be higher or lower
due to certain differences (e.g. net state income taxes, foreign
tax rate differentials, equity earnings, etc.).
o The consolidated tax attributes of the Estate (e.g. net operating
losses, AMT credits, etc.) are not transferred to OpCo.
o In certain circumstances, however, OpCo is using net operating
losses (e.g. Mariner Energy Inc., a deconsolidated corporation
prior to its transfer to OpCo). The utilization of such losses is
limited under the SRLY rules. Additional limitations may be
necessary due to a future change in control of OpCo under Internal
Revenue Code Section 382.
o The transfers of assets to OpCo are tax-free, resulting in
carryover tax basis (i.e. no "step-up"). Further, it is assumed
that the Enron Estate debt discharge will not result in any
reduction of OpCo tax attributes.
27
CONFIDENTIAL
International
o OpCo will not be able to claim foreign tax credits. Current U.S.
tax at 37% (i.e. U.S. federal tax at 35% plus 2% for state tax,
net of the federal benefit) is provided on actual dividends, and
deemed dividends (under Subpart F), to the U.S. from foreign
subsidiaries.
o OpCo is not adopting a policy of long-term reinvestment of its
foreign earnings (under APB 23); therefore, deferred U.S. tax at
37% is provided on the unremitted book earnings of its foreign
subsidiaries.
- Where applicable, foreign withholding tax that would be due
on the unremitted earnings when paid out as dividends has
been accrued.
o The transfers of the foreign subsidiaries to OpCo will occur in
such a way that existing loss carry forwards will not be limited
under applicable foreign tax law.
- A full valuation allowance, however, has been provided for
deferred tax assets relating to losses of foreign
subsidiaries that have not made profits during the three
historical years presented.
State
o State taxes are accrued at rates up to 8.5% (or up to 5.5%, net of
the federal benefit), where applicable.
- It is assumed unitary returns are filed wherever possible.
o No State tax attributes are assumed to follow the transfers of
assets to OpCo.
28
CONFIDENTIAL
Method of Accounting
The following table depicts the accounting method for each of OpCo's assets.
<Table>
<Caption>
OPCO
ASSET OWNERSHIP ACCOUNTING METHOD
- ----------------------------------------- -------------- --------------------------------------------------
TRANSPORTATION SERVICES
TRANSWESTERN PIPELINE COMPANY 100% CONSOLIDATED
CITRUS CORP. 50% EQUITY METHOD
NORTHERN BORDER PARTNERS, L.P. 9% EQUITY METHOD
GAS TRANSBOLIVIANO S.A. ("GTB") 30% EQUITY METHOD
TRANSPORTADORA BRASILEIRA GASODUTO 7% COST METHOD
BOLIVIA-BRAZIL S.A. ("TBG")
TRANSREDES S.A. 25% EQUITY METHOD
CENTRAGAS 50% EQUITY METHOD
GASBOL 50% EQUITY METHOD
GASMAT 56% CONSOLIDATED
ACCROVEN 49% EQUITY METHOD
VENGAS 97% CONSOLIDATED
- ----------------------------------------- -------------- --------------------------------------------------
- ----------------------------------------- -------------- --------------------------------------------------
POWER DISTRIBUTION
PORTLAND GENERAL ELECTRIC 100% CONSOLIDATED
ELEKTRO 76% CONSOLIDATED
- ----------------------------------------- -------------- --------------------------------------------------
- ----------------------------------------- -------------- --------------------------------------------------
PRODUCTION AND GENERATION
BAHIA LAS MINAS 51% CONSOLIDATED
EMPRESA ENERGETICA DE CORINTO 35% EQUITY METHOD
PUERTO QUETZAL POWER 38% EQUITY METHOD
SMITH ENRON COGENERATION LP 85% EQUITY METHOD
CUIABa EPE 72% CONSOLIDATED
ELETROBOLT PROJECT 100% CONSOLIDATED
RIOGEN PROJECT 100% CONSOLIDATED
ECOELECTRICA 48% EQUITY METHOD
TRAKYA 28% EQUITY METHOD
EASTERN US POWER PLANT DEVELOPMENT 100% CONSOLIDATED
WESTERN US POWER PLANT DEVELOPMENT 100% CONSOLIDATED
SITHE 40% EQUITY METHOD
EAST COAST POWER 100% INVESTMENT IN DEBT SECURITIES & PRICE RISK
MANAGEMENT
WIND 42% EQUITY METHOD
MARINER ENERGY LLC 96% CONSOLIDATED
UPSTREAM MERCHANT E&P ASSETS VARIOUS EQUITY METHOD
CGAS 100% CONSOLIDATED
BRIDGELINE 40% EQUITY METHOD
TBS 73% CONSOLIDATED
SCG 100% CONSOLIDATED
MEGS 100% CONSOLIDATED
TRANSPORTATION & STORAGE AGREEMENTS 100% CONSOLIDATED
CITRUS TRADING 50% EQUITY METHOD
HOUSTON PIPELINE COMPANY N/A NOT INCLUDED
BAHAMAS TO FLORIDA TERMINAL & PIPELINE 100% CONSOLIDATED
TANKER CHARTER N/A OPERATING LEASE
ELBA ISLAND - VAPORIZATION CAPACITY N/A NOT INCLUDED
PUERTO RICO - MARKETING N/A NOT INCLUDED
COMPRESSION SERVICES 100% CONSOLIDATED
HANOVER MEASUREMENT SERVICES 47.5% EQUITY METHOD
STADACONA 100% CONSOLIDATED
- ----------------------------------------- -------------- --------------------------------------------------
</Table>
29
CONFIDENTIAL
COMBINED PRO FORMA FINANCIAL STATEMENTS
The following combined pro forma financial statements should be read in
conjunction with "Basis of Presentation", "Management's Discussion and
Analysis", "Appendix A - Projection Assumptions and Combining Pro Forma
Financial Statements" and "Risk Factors" sections of this business plan.
Combined Pro Forma Income Statement
(Millions of Dollars)
<Table>
<Caption>
1999 2000 2001 2002 2003 2004 2005 2006
-------- -------- -------- -------- -------- -------- -------- --------
OPERATING REVENUES
Natural Gas and Other Products 205.7 298.3 564.1 590.3 662.4 816.9 946.0 990.6
Electricity 1,698.9 1,858.9 1,909.5 2,380.3 2,379.0 2,467.3 2,572.3 2,673.8
Transportation 142.5 151.2 167.5 163.1 185.8 191.7 216.4 231.7
Other 5.6 18.4 16.0 27.3 26.0 33.2 30.7 35.3
-------- -------- -------- -------- -------- -------- -------- --------
Total Revenues 2,052.7 2,326.8 2,657.0 3,161.0 3,253.2 3,509.1 3,765.4 3,931.4
COST OF SALES
Cost of Natural Gas and Other Products 56.7 68.0 209.3 246.6 253.2 338.8 420.6 430.3
Cost of Electricity 706.8 764.5 889.3 1,307.5 1,178.0 1,269.5 1,349.7 1,448.3
Cost of Transportation 2.0 9.9 12.0 7.0 10.2 13.1 15.6 16.6
-------- -------- -------- -------- -------- -------- -------- --------
Total Cost of Sales 765.6 842.4 1,110.7 1,561.1 1,441.4 1,621.3 1,785.8 1,895.2
GROSS MARGIN 1,287.1 1,484.4 1,546.4 1,599.9 1,811.8 1,887.8 1,979.5 2,036.2
OPERATING EXPENSES
Operating Expenses 506.5 523.1 619.8 589.6 590.3 616.9 628.8 641.8
Depreciation, depletion & amortization 268.1 308.1 352.2 399.7 478.3 500.9 514.6 509.0
Impairment of long lived assets -- -- 5.9 -- -- -- -- --
Taxes other than income 81.2 86.6 85.0 91.7 91.5 92.4 95.2 97.7
-------- -------- -------- -------- -------- -------- -------- --------
Total 855.8 917.8 1,078.3 1,092.1 1,171.2 1,221.3 1,249.8 1,259.6
OPERATING INCOME 431.4 566.6 468.1 507.9 640.5 666.5 729.8 776.6
Other Income (Deductions)
Equity earnings in unconsolidated
subsidiaries 34.0 107.0 85.2 147.7 171.8 208.7 237.1 291.5
Gain (Loss) on sale of assets (1.3) (1.2) 2.1 -- 29.9 53.9 54.5 41.4
Interest Income 45.4 37.5 27.6 62.5 74.0 76.7 75.0 77.4
Other Income, net 75.2 21.1 35.1 (95.5) (49.4) (14.1) (6.4) (3.6)
-------- -------- -------- -------- -------- -------- -------- --------
Total 153.4 164.4 150.0 114.7 226.4 325.3 360.1 406.7
INCOME BEFORE INTEREST, MINORITY
INTEREST & TAXES 584.8 731.0 618.0 622.6 866.9 991.8 1,089.9 1,183.2
Interest Expense
Interest expense and related charges, net 171.5 117.9 172.5 187.1 201.1 190.2 195.6 194.8
Interco interest expense/(income) -
Capital Charge 0.4 5.0 5.9 (0.2) 2.5 4.0 5.0 5.5
Dividends on company-obligated preferred
securities of subsidiaries -- 5.5 7.8 7.5 7.2 6.8 6.4 5.8
Minority Interest 36.3 37.8 21.9 (12.9) 4.5 4.7 10.4 14.1
-------- -------- -------- -------- -------- -------- -------- --------
Total 208.2 166.2 208.2 181.5 215.2 205.7 217.4 220.2
Preferred Dividends 2.0 2.0 2.3 2.3 2.0 1.9 1.8 1.7
-------- -------- -------- -------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES 374.6 562.8 407.6 438.8 649.6 784.2 870.6 961.3
Income Taxes
Payable currently 114.2 156.2 80.8 147.2 238.3 298.7 339.7 360.1
Payment deferred (54.5) 26.9 85.2 48.6 59.1 35.5 28.4 38.6
-------- -------- -------- -------- -------- -------- -------- --------
Total 59.7 183.0 166.0 195.8 297.4 334.2 368.1 398.7
NET INCOME (BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGES) 314.8 379.8 241.5 242.9 352.2 450.0 502.6 562.6
Cumulative Effect of Accounting Changes -- -- 11.0 -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
NET INCOME 314.8 379.8 252.5 242.9 352.2 450.0 502.6 562.6
======== ======== ======== ======== ======== ======== ======== ========
</Table>
Note: Columns may not foot due to immaterial rounding of numbers.
30
CONFIDENTIAL
Combined Pro Forma Balance Sheet
(Millions of Dollars)
<Table>
<Caption>
1999 2000 2001 2002 2003 2004 2005 2006
-------- -------- -------- -------- -------- -------- -------- --------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents 31.6 166.8 114.3 452.4 945.5 1,479.1 1,941.5 2,261.3
Trade Receivables (net of allowance
for doubtful accounts) 320.8 288.6 584.1 564.0 544.6 563.4 583.5 600.9
Other Receivables 538.1 852.6 347.7 236.7 222.6 217.5 208.3 198.5
Assets from Price Risk Management -- 279.0 170.0 43.8 44.9 49.0 53.0 57.0
Inventories 48.5 43.0 91.8 89.2 84.4 84.6 85.2 86.0
Deposits 0.5 0.4 90.1 1.1 1.1 1.1 1.1 1.1
Other 360.9 302.8 479.7 476.0 444.8 391.7 376.4 365.3
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL CURRENT ASSETS 1,300.4 1,933.2 1,877.7 1,863.1 2,287.9 2,786.4 3,249.0 3,570.0
INVESTMENTS AND OTHER ASSETS
Investments in and advances to
unconsolidated equity affiliates 1,133.4 1,613.7 1,637.7 1,794.7 1,830.8 1,857.8 1,982.3 2,217.3
Assets from Price Risk Management -- -- -- 144.3 121.0 91.9 56.1 12.3
Goodwill -- -- 172.6 172.6 172.6 172.6 172.6 172.6
Other 1,162.2 1,003.6 1,364.9 1,280.7 1,206.7 1,165.1 1,120.3 1,117.5
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL INVESTMENTS AND OTHER ASSETS 2,295.6 2,617.3 3,175.2 3,392.3 3,331.1 3,287.5 3,331.4 3,519.8
PROPERTY, PLANT AND EQUIPMENT
Natural Gas Transmission 923.0 958.2 1,050.4 1,098.7 1,113.1 1,218.9 1,297.0 1,317.5
Electric Generation and Distribution 4,441.5 4,530.3 5,080.4 5,242.9 5,415.1 5,606.3 5,803.7 6,004.3
Exploration and Production 434.4 532.0 641.7 689.6 793.9 934.4 1,082.7 1,226.2
Construction in Progress 171.2 232.2 183.7 205.6 237.8 204.2 199.2 201.3
Other 6.6 37.0 625.7 646.8 665.1 674.8 684.6 693.1
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL PROPERTY, PLANT AND EQUIPMENT 5,976.7 6,289.7 7,581.8 7,883.6 8,224.9 8,638.6 9,067.3 9,442.4
Less accumulated depreciation,
depletion and amortization 1,860.3 2,071.0 2,724.1 3,090.5 3,481.6 3,898.6 4,341.1 4,805.4
-------- -------- -------- -------- -------- -------- -------- --------
NET PROPERTY PLANT AND EQUIPMENT 4,116.4 4,218.7 4,857.8 4,793.1 4,743.4 4,739.9 4,726.1 4,637.1
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL ASSETS 7,712.5 8,769.2 9,910.6 10,048.4 10,362.4 10,813.8 11,306.5 11,726.8
======== ======== ======== ======== ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable 360.7 732.0 685.4 673.1 668.3 660.3 667.6 667.5
Liabilities from Price Risk Management -- 266.0 196.0 11.0 -- -- -- --
Short-term debt 430.9 65.4 942.1 357.0 325.8 287.3 299.9 332.6
Advances (to)/from OpCo -- -- 0.0 0.1 0.1 0.4 0.4 0.2
Other 157.8 154.1 205.6 201.8 199.5 189.0 169.8 149.5
-------- -------- -------- -------- -------- -------- -------- --------
Total Current Liabilities 949.4 1,217.6 2,029.2 1,243.0 1,193.8 1,136.9 1,137.6 1,149.8
Long-Term Debt 1,131.3 1,460.8 2,151.8 2,420.1 2,404.0 2,429.7 2,403.2 2,207.1
Deferred Credits and Other Liabilities
Deferred Income Taxes 707.0 817.2 542.1 565.3 627.2 672.5 706.0 750.0
Liabilities from Price Risk Management -- -- -- -- -- -- -- --
Other 586.9 460.1 513.0 445.9 418.4 404.8 385.8 378.6
-------- -------- -------- -------- -------- -------- -------- --------
Total 1,293.9 1,277.4 1,055.1 1,011.2 1,045.7 1,077.3 1,091.7 1,128.5
Minority Interests 529.6 531.5 586.1 573.2 577.6 579.6 588.6 600.3
Company-Obligated Preferred Securities
of Subsidiaries -- 97.5 97.5 94.0 88.5 85.1 77.0 70.7
SHAREHOLDERS' EQUITY
Preferred Stock 30.0 30.0 28.5 27.0 25.5 24.0 22.5 21.0
Common Stock 2,224.3 2,293.6 2,775.4 3,437.2 3,437.2 3,437.2 3,437.2 3,437.2
Retained Earnings 1,634.3 1,884.0 1,253.6 1,497.1 1,850.0 2,299.8 2,802.2 3,365.1
Accumulated other comprehensive income (529.0) (625.3) (749.7) (913.5) (978.8) (1,005.7) (1,031.6) (1,056.5)
Common Stock held in Treasury -- -- -- -- -- -- -- --
Restricted Stock and Other 449.0 602.3 682.8 659.4 718.3 749.1 777.3 803.0
-------- -------- -------- -------- -------- -------- -------- --------
Total Shareholders' Equity 3,808.6 4,184.6 3,990.6 4,707.3 5,052.2 5,504.5 6,007.7 6,569.8
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 7,712.7 8,769.3 9,910.3 10,048.8 10,361.7 10,813.1 11,305.8 11,726.2
======== ======== ======== ======== ======== ======== ======== ========
</Table>
Note: Columns may not foot due to immaterial rounding of numbers.
31
CONFIDENTIAL
Combined Pro Forma Statement of Cash Flows
(Millions of Dollars)
<Table>
<Caption>
1999 2000 2001 2002 2003 2004 2005 2006
-------- -------- -------- -------- -------- -------- -------- --------
CASH FLOW FROM OPERATING ACTIVITIES
NET INCOME 314.8 379.8 252.5 242.9 352.2 450.0 502.6 562.6
Cumulative Effect of Accounting Changes -- -- (11.0) -- -- -- -- --
Depreciation, depletion & amortization 268.1 308.1 352.2 399.7 478.3 500.9 514.6 509.0
Impairment of long lived assets -- -- 5.9 -- -- -- -- --
Deferred income taxes (54.5) 26.9 85.2 48.6 59.1 35.5 28.4 38.6
Gains on Sales of Non-merchant Assets 1.3 1.2 (2.5) -- (29.9) (53.9) (54.5) (41.4)
Changes in components of working capital -- -- -- -- -- -- -- --
Receivables (174.8) (151.3) (136.4) 2.1 39.4 (11.2) (10.4) (7.2)
Inventories (8.7) 9.8 (19.6) 0.6 3.1 0.1 (0.4) (0.7)
Payables (67.4) 371.5 (148.3) (2.9) 3.1 (11.9) 2.6 0.1
Other 108.1 (114.5) (187.4) 89.3 17.3 34.7 7.0 (7.3)
Net Assets from Price Risk Management
Activities -- (13.0) 62.6 0.3 11.1 24.9 31.8 39.8
Merchant Activities -- -- -- -- -- -- -- --
Realized (Gains) / Losses on Sales -- 3.1 (0.1) -- -- -- -- --
Proceeds from Sales -- -- -- -- -- -- -- --
Additions -- -- -- -- -- -- -- --
Unrealized (Gains)/ Losses -- -- -- -- -- -- -- --
Equity Earnings of Unconsolidated
Affiliates, net of dividends received (43.5) (89.3) (62.5) (27.8) (29.5) (6.9) (25.3) (42.4)
Other Operating Activities (53.4) 134.3 883.9 (35.3) (6.5) (13.3) (13.6) (7.0)
CASH FROM OPERATING ACTIVITIES 290.0 866.5 1,074.6 717.4 897.7 948.8 982.9 1,044.2
-------- -------- -------- -------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (418.1) (497.6) (526.6) (461.0) (410.2) (495.4) (472.8) (422.9)
Equity Investments (112.7) (448.2) (152.1) (111.1) (2.2) (1.2) (92.6) (186.3)
Return of investment in unconsolidated
affiliates -- 33.9 8.8 -- -- -- -- --
Proceeds from Sale of Investments
(non-merchant) 9.3 59.2 117.8 45.0 39.6 74.7 61.7 48.3
Acquisition of Subsidiary Stock -- -- -- -- -- -- -- --
Cash paid for Business Acquisitions -- -- (343.3) -- -- -- -- --
Other Investing Activity (106.7) (147.4) 43.0 (31.3) (15.0) (9.3) (18.4) (5.5)
-------- -------- -------- -------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES (628.3) (1,000.2) (852.4) (558.4) (387.8) (431.2) (522.2) (566.4)
-------- -------- -------- -------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Long-term Debt 233.3 462.8 1,337.5 755.4 248.4 85.5 68.6 69.1
(Repayment) of Long-term Debt (174.9) (139.7) (685.5) (143.7) (292.0) (59.8) (95.1) (265.2)
Net Increase (Decrease) in Short-term
Borrowings 146.3 (315.7) 737.6 (585.1) (30.8) (38.5) 12.6 33.6
Net Issuance (Redemption) of company-
obligated pref securities of subs. -- -- -- -- -- -- (11.2) (18.2)
Issuance of Common Stock 101.2 59.4 56.7 19.5 -- -- -- --
Net Advance Activity with OpCo -- -- (0.0) (0.0) (0.0) 0.0 (0.0) 0.0
Dividends Paid (94.0) (134.4) (963.1) (0.2) (0.2) (0.2) (0.2) (0.3)
Net (acquisition) disposition of
Treasury Stock -- -- -- -- -- -- -- --
Other Financing Activity 119.8 336.7 (757.8) 133.6 57.6 29.4 26.8 23.3
-------- -------- -------- -------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES 331.8 269.1 (274.5) 179.5 (16.9) 16.5 1.4 (157.7)
-------- -------- -------- -------- -------- -------- -------- --------
NET CASH FLOW (After Financing Activities) (6.6) 135.3 (52.2) 338.5 493.0 534.1 462.2 320.1
-------- -------- -------- -------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 31.6 166.8 114.3 452.4 945.5 1,479.1 1,941.5
======== ======== ======== ======== ======== ======== ========
CASH AND CASH EQUIVALENTS, END OF YEAR 166.8 114.3 452.4 945.5 1,479.1 1,941.5 2,261.3
======== ======== ======== ======== ======== ======== ========
</Table>
Note: Columns may not foot due to immaterial rounding of numbers.
32
CONFIDENTIAL
EQUITY INVESTMENTS - SUPPLEMENTAL INFORMATION
Principal financial metrics applicable to unconsolidated affiliates for
the year ending December 31, 2002 are:
o Net income $0.23 billion
o EBITDA $1.41 billion
o Debt $6.29 billion
The following table depicts the pro forma financial information for each of the
assets that OpCo accounts for using the equity method of accounting. EBITDA, Net
Income and Total Debt of each individual OpCo asset reflect 100% of the relevant
investee financials. The amount actually included in OpCo financials for these
assets are as follows:
o Income Statement: Ownership percentage multiplied by net income, plus
100% of any fees or interest paid directly from the asset to OpCo for
operations/management services or intercompany debt service.
o Balance Sheet: Investment in assets included in "Investments in and
advances to unconsolidated equity affiliates." No debt in unconsolidated
equity affiliates is included in the OpCo financial statements.
Additional investments by OpCo into these assets increase the balance
sheet account, while dividends received reduce the amount on the balance
sheet.
o Cash Flow Statement: Equity earnings, net of actual cash dividends
received, are deducted from OpCo net income to arrive at cash from
operating activities. Additional investment in these assets are shown as
a negative amount in Cash Flows from Investing Activities.
33
** CONFIDENTIAL INFORMATION OMITTED **
34
CONFIDENTIAL
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with "Basis of
Presentation", "Appendix A - Projection Assumptions and Combining Pro
Forma Financial Statements" and "Risk Factors" sections of this
business plan.
The following review of the results of operations and financial condition
of OpCo and its subsidiaries and affiliates should be read in conjunction
with the Combined Pro Forma Financial Statements.
OpCo's business is divided into the three segments: Transportation
Services, Power Distribution and Generation and Production. A more
detailed discussion of segment results of operations and financial
condition can be found in the "Management's Discussion & Analysis of
Financial Condition & Results of Operations" section of each of the
respective segment business plans.
Transportation Services. Transportation Services primarily consists of
OpCo's natural gas pipelines consisting of Transwestern Pipeline Company
(Transwestern), OpCo's 50% interest in Citrus, that in turn owns Florida
Gas Transmission Company (FGT), OpCo's approximately 9% interest in
Northern Border Partners, L.P. (Northern Border Partners), OpCo's 25%
interest in Transredes S.A. and an interest in Gas TransBoliviano S.A.
(GTB) and Transportadora Brasilera Gasoduto Bolivia-Brasil S.A. (TGB),
which together comprise the Boliva to Brazil Pipeline (BBPL).
Power Distribution. Power Distribution consists of Portland General
Electric (PGE) and Elektro. These electric utilities provide power to
residential, commercial and industrial customers within each company's
franchise service area.
Generation and Production. Generation and Production consists of OpCo's
investments in independent power generation, gas production and related
services. Generation and Production is a business that focuses on niche
market opportunities in the Americas (North, Central and South America).
RESULTS OF OPERATIONS
CONSOLIDATED NET INCOME. OpCo's net income for 2001 was $252.5 million
compared to $379.8 million in 2000 and $314.8 million in 1999. The
reasons for these changes are described in the discussion below.
OPERATING REVENUES. Total Revenues increased by $330.2 million and $274.1
million to $2.66 billion and $2.33 billion for the years ending December
31, 2001 and 2000, respectively. The increase in revenue in 2001 as
compared to 2000 primarily relates to the acquisition of a newsprint mill
in North America in March 2001 (Stadacona) and higher realized prices on
energy sales that were partially offset by devaluations in the Brazilian
Real and the Venezuelan Bolivar. The increase in revenue in 2000 as
compared 1999 primarily relates to an increase in tariff rates for
Elektro, an increase in electricity prices and increased demand from
consumers in Portland General's service area and increased production and
realized sales prices related to natural gas production.
COST AND EXPENSES. Total Costs and Expenses increased by $268.3 and $76.8
million to $1.11 billion and $.84 billion for the years ending December
31, 2001 and 2000, respectively. The increase in cost and expenses in
2001 as compared to 2000 was primarily due to the acquisition of
Stadacona as well as higher commodity prices related to PGE. These
increases were partially offset by Elektro's deferral of power costs and
the decline of the Brazilian Real. The increase in cost and expenses in
2000 as compared to 1999 was primarily due to increased natural gas
production costs, increased electricity production costs at two
international power plants and legal encumbrances and higher cost of
electricity related to Elektro.
35
CONFIDENTIAL
OPERATING EXPENSES. Total Operating Expenses increased by $160.5 and $62.0
million to $1.08 billion and $0.92 billion for the years ending December 31,
2001 and 2000, respectively. The increase in operating expenses in 2001 as
compared to 2000 was primarily due to the acquisition of Stadacona and higher
energy efficiency expenditures and customer support activities related to PGE.
The increase in cost and expenses in 2000 as compared to 1999 was primarily due
to increased administrative, customer support and fixed plan and delivery system
costs related to PGE along with operations beginning at peaking power plants in
1999 and 2000. Operating expense increases in 2000 were offset as a result
Elektro's non-recurring reversal of certain accounts payable accruals in 2000.
OTHER INCOME (DEDUCTIONS). Other Income (Deductions) decreased by $14.4 million
to $150.0 million during 2001 and increased by $11.0 million to $164.4 million
during 2000. The decrease in other income (deductions) in 2001 as compared to
2000 is primarily due to lower equity in earnings of unconsolidated affiliates
related to power plant investments in Puerto Rico (EcoElectrica) and Turkey
(Trakya), upstream oil and gas development investments and lower earnings from
OpCo's interest in Citrus. These amounts were partially offset by foreign
currency fluctuations related to Elektro. The increase in other income
(deductions) in 2000 as compared to 1999 was primarily due to increased equity
in earnings of unconsolidated equity affiliates as a result of a one-time
distribution from the investment in EcoElectrica in excess of OpCo's investment
basis, increased earnings from upstream oil and gas development investments and
lower financing costs related to OpCo's interest in Citrus. These increases were
partially offset by foreign currency fluctuations related to Elektro.
CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES. Cash Flows from Operating Activities
increased $208.1 million and $576.5 million to $1,074.6.0 million and $866.5
million for the years ending December 31, 2001 and 2000, respectively. The
increase in Cash Flows From Operating Activities for 2001 was primarily due to
Transwestern's reduction in a receivable from Enron that was offset by a
dividend paid to Enron. The receivable reduction had no effect to net income
since it was reflected as a reduction of Enron's equity in Transwestern. These
amounts were partially offset by PGE's change in margin deposit requirements
related to energy trading activities, deferral of retail power costs for future
collection from customers and other working capital changes. The increase in
Cash Flows From Operating Activities for 2000 was primarily due to higher net
income, faster collection time of receivable balances and PGE's change in margin
deposit requirements related to energy trading activities.
CASH FLOWS USED IN INVESTING ACTIVITIES. Cash Flows Used In Investing Activities
decreased by $147.8 million in 2001 to $852.4 million and increased by $371.9
million in 2000 to $1.0 billion. The decrease in Cash Flows Used In Investing
Activities in 2001 is primarily the result of a decrease in the amount invested
in unconsolidated equity affiliates as compared to 2000, along with Mariner's
sale of oil and gas properties. These amounts were partially offset by OpCo's
acquisition of Stadacona. The increase in Cash Flows Used in Investing
Activities in 2000 is primarily related to increased capital expenditures and
additional investments in unconsolidated equity affiliates including
EcoElectrica and an investment in Bridgeline.
CASH FLOWS FROM FINANCING ACTIVITIES. Cash Flows From Financing Activities
decreased by $543.6 million and $62.7 million to ($274.5) million and $269.1
million in 2001 and 2000, respectively. The decrease in Cash Flows From
Financing Activities in 2001 is primarily related to an amount reflected by
Transwestern as a dividend paid to OpCo resulting from a reduction in a
receivable from Enron, which was partially offset by net issuances of short term
and long term borrowings. The decrease in Cash Flows From Financing Activities
in 2000 is primarily the result of a decrease in the amount of short-term
borrowings by PGE.
36
CONFIDENTIAL
SECTION IV - LITIGATION
Litigation attributable to OpCo should be manageable:
o Litigation relating to Enron collapse expected to stay with Estate
o Ordinary course litigation not expected to have a materially
adverse effect on OpCo
Various of the entities that will be owned directly or indirectly by OpCo are
defendants or parties in various lawsuits, and are subject to a variety of
claims that have arisen in the ordinary course of their businesses. While the
results of all such litigation and claims cannot be predicted with certainty,
management believes that the entities have adequate defenses, insurance coverage
or recourse to third parties such that it does not believe that these matters,
individually or in the aggregate, will have a material adverse effect on the
results of operations or the consolidated financial position of OpCo.
SECTION V - RISK FACTORS
The reader should carefully consider the risks described below for each of the
Company's segments as well as those related to the Company's businesses
generally. The businesses may also be adversely affected by risks and
uncertainties not presently known or that the Company currently believes to be
immaterial.
RISK FACTORS RELATED TO ENRON BANKRUPTCY
Several risk factors arise from, or are made worse by the bankruptcy:
o The Section 363 sale process will not eliminate operational or
joint and several liabilities
o OpCo's success depends on separating reputationally from Enron
o Creditors or partners may attempt to take control of certain OpCo
operations
o Brazilian regulators could impose conditions or revoke
authorizations and/or concessions.
o Assets in financing structures may not successfully be transferred
to OpCo.
THE SECTION 363 SALE PROCESS WILL NOT ELIMINATE OPERATIONAL LIABILITIES OR JOINT
AND SEVERAL LIABILITY FOR ENRON TAX RETURNS AND CERTAIN EMPLOYEE BENEFITS.
37
CONFIDENTIAL
By obtaining a Section 363 order from the bankruptcy court, the sale of the OpCo
businesses can be made "free and clear" of many liabilities relating to the
Enron Estate. However, given that the OpCo transactions will be effected as
stock sales, liabilities relating to the OpCo companies themselves will not be
eliminated or reduced. In addition, certain of the OpCo companies will remain
liable for any Enron consolidated tax return liabilities for years in which they
were members of the relevant consolidated reporting group. Management does not
believe that such tax liabilities, if any, will have a material adverse effect
on OpCo. Certain of the OpCo companies will also retain liabilities relating to
Enron's Cash Balance Plan, an employee retirement plan. If the Cash Balance Plan
terminates in 2002, the estimated underfunding liability ranges between $85
million and $100 million. The failure to pay required minimum funding
contributions, or termination liability, can result in fines and liens
applicable jointly and severally to each member of the Enron control group for
ERISA purposes (including among others, PGE and Transwestern). The potential for
such fines and liens could have a material adverse effect on OpCo. The
liabilities described above would also be applicable to buyers of the stock of
individual OpCo companies in a liquidation context.
THE SUCCESS OF OPCO AS A GOING CONCERN WILL DEPEND ON ITS ABILITY TO SEPARATE
REPUTATIONALLY FROM ENRON.
The OpCo businesses are currently impaired in their ability to deal with
partners, suppliers, customers and regulators due to the liquidity issues and
reputational cloud resulting from the Enron collapse. Management believes that
the ability to show these parties an OpCo investment grade credit rating and
balance sheet will facilitate the ability of the OpCo businesses to continue as
successful enterprises. Any failure to obtain an investment grade rating will
materially and adversely affect these efforts. In addition, there can be no
assurance that counterparties and regulators will be adequately comforted to
accept OpCo - which will initially be under common control with Enron - as a new
and truly independent entity. Similarly, OpCo's ability eventually to become a
publicly traded entity and/or raise outside equity will be impaired if the
market and applicable regulatory authorities do not accept OpCo as a separate
entity.
CREDITORS OR PARTNERS MAY ATTEMPT TO TAKE CONTROL OF CERTAIN OPCO OPERATIONS.
Several OpCo businesses are currently encumbered by credit facilities or other
indebtedness, some of which are in default. **Confidential Information Omitted**
Certain other OpCo businesses are subject to partner agreements granting such
partner a "right of first refusal" or consent on the transfer of Enron's
interest, or, in certain cases, the ability to purchase Enron's interest or take
over operations in the event of a "change in control." The most significant
affected businesses include Citrus and Cuiaba (among others). The OpCo
transactions are not intended to trigger these partner rights while OpCo remains
under common control with Enron. However, there can be no assurance that
partners will not attempt to challenge the OpCo transactions. Such rights of
first refusal, consents and change in control provisions will clearly be
triggered in the event of a sale of the affected OpCo businesses to a third
party not affiliated with Enron, in a liquidation or otherwise, unless
negotiations with applicable partners can be successfully completed.
38
CONFIDENTIAL
BRAZILIAN REGULATORS COULD IMPOSE CONDITIONS ON BRAZILIAN ENTITIES OR REVOKE
AUTHORIZATIONS AND/OR CONCESSIONS.
It is anticipated that OpCo will have significant operations in Brazil, with
2002 revenues constituting approximately 25% of OpCo's revenues on a
consolidated basis. Brazilian regulatory authorities in the gas and electricity
sectors impose significant regulations and have significant authority over the
Brazilian entities that will be included in OpCo's business. Maintenance of
technical and operational capacity with respect to these Brazilian entities is
required under the terms of concessions and/or authorizations granted by the
applicable Brazilian governmental authority. The failure of these Brazilian
entities to maintain the requirements of the granted concessions and/or
authorizations could result in fines, impairment of the concession or revocation
of the concession by the applicable Brazilian governmental authority.
**Confidential Information Omitted** The revocation of the relevant concessions
and authorizations in Brazil would have a material adverse effect on OpCo and
the ability to sell such operations to a third party in a liquidation or
otherwise. Management further believes that extended operation of these assets
in the chapter 11 process will also increase the likelihood of regulatory
intervention that could have a material adverse effect on the Enron Estate.
SEVERAL OF OPCO'S BUSINESSES HELD, IN WHOLE OR IN PART, IN FINANCING STRUCTURES
FORMED BY ENRON AND ITS AFFILIATES, MAY NOT SUCCESSFULLY BE TRANSFERRED TO OPCO.
Certain of OpCo's business are held, in whole or in part, by or through one or
more financing structures formed by Enron and its affiliates. The financing
structures raised capital through both private and public issuances of debt and
equity. The financing structures generally used the capital raised by them to
acquire debt and equity interests in various businesses and assets owned by
Enron and its subsidiaries.
Any sale or other disposition of an OpCo business in which a financing structure
holds a debt or equity interest may be subject to various rights in favor of the
investors in the structure, including:
o security interests in the assets held by the structure;
o the right to prevent dispositions of many of the assets for less
than the structure's purchase price of the asset minus any return
on capital;
o upon the occurrence of specified events of default, the right to
foreclose on interests held by the structure and cause the
liquidation and sale of the assets held by the structure; and,
o upon the occurrence of specified events of default, the right to
terminate management rights held by Enron and its subsidiaries in
respect of many of the assets held by the structures.
39
CONFIDENTIAL
As a result of Enron's bankruptcy and related events, many of the debt and
equity investments in the financing structures are in default. OpCo's ability to
acquire any of the interests held by or through a structure may be subject to
the rights described above. Accordingly, some or all of the OpCo businesses held
in financing structures, including those reflected in the financial statements
contained herein, may not ultimately be sold to OpCo. In management's opinion,
the inability to include these businesses would not materially impact the
financial condition or overall strategy of OpCo.
RISK FACTORS RELATED TO THE COMPANY'S BUSINESSES GENERALLY
General risk factors include:
o International operations pose additional risks
o Historical financial results may not be representative of results
as a separate company.
o The Company needs access to the capital markets
o The Company must attract and retain qualified personnel
o Business growth requires the Company to capitalize on market
opportunities
o Certain OpCo businesses are subject to significant rights of third
party partners and investors.
THE COMPANY'S OPERATIONS OUTSIDE OF THE UNITED STATES EXPOSE IT TO RISKS RELATED
TO LAWS OF OTHER COUNTRIES, TAXES, ECONOMIC CONDITIONS, FLUCTUATIONS IN CURRENCY
RATES, LABOR SUPPLY AND LABOR RELATIONS. THESE RISKS MAY DELAY OR REDUCE THE
COMPANY'S REALIZATION OF VALUE FROM ITS INTERNATIONAL OPERATIONS.
The Company currently has numerous gas and power operations across South and
Central America and a power generation facility in Turkey. These assets are
particularly concentrated in Brazil, which represents approximately 25% of
projected 2002 total Company revenues. The Company's strategy includes (1)
potential expansion around its regional asset base in Central and South America
and (2) potential acquisition of additional energy assets in these locations.
Owning energy assets in foreign jurisdictions subjects the Company to
significant political and financial risks that vary by country, including:
o changes in foreign laws and regulations, including tax laws and
industry regulations;
o changes in U.S. laws and regulations, including tax laws and
regulations, related to foreign operations;
o changes in general economic conditions affecting each country;
o fluctuations in inflation;
o actions by government regulators in response to political and
industry pressures;
o changes in government policies or personnel; and, o changes in
labor supply and labor relations.
40
CONFIDENTIAL
The occurrence of any of these events could substantially reduce the value of
the impacted businesses or assets. In certain countries where the Company has
operations, government regulators have substantial discretion to impose
conditions and reduce or revoke concessions and/or authorizations granted in the
gas and electricity sectors. Enron's bankruptcy and related events could
adversely impact these concessions and result in the imposition of restrictions
or the revocation of concessions and/or authorizations in these jurisdictions.
The Company is also subject to foreign currency risks, which can arise for
certain of its foreign assets. While the Company does frequently monitor its
exposure to foreign currencies, it does not completely hedge its foreign
currency exposure.
THE COMPANY'S HISTORICAL COMBINED PRO FORMA FINANCIAL RESULTS MAY NOT BE
REPRESENTATIVE OF ITS RESULTS AS A SEPARATE COMPANY.
The historical combined pro forma financial information the Company has included
in this business plan does not necessarily reflect what its financial position,
results of operations and cash flows would have been had the Company been a
separate, stand-alone entity during the periods presented. The Company's costs
and expenses reflect only certain charges from Enron for centralized corporate
services and infrastructure costs including:
o finance, accounting and cash management;
o information technology;
o payroll and employee benefits; and,
o insurance
These pro forma allocations have been determined based on what the Company and
Enron considered to be reasonable reflections of the utilization of services
provided to the Company or for the benefits received by it. The historical
financial information is not necessarily indicative of what OpCo's results of
operations, financial position and cash flows will be in the future. The Company
may experience significant changes in its cost structure, funding and operations
as a result of the separation from the Enron Estate, including increased costs
associated with reduced economies of scale as a stand-alone company.
THE COMPANY MUST HAVE ACCESS TO THE CAPITAL MARKETS TO EXECUTE ITS BUSINESS
STRATEGY.
Part of the Company's business strategy includes refinancings and building
businesses that will allow it to pursue its focused, regional growth strategy
with the optimal capital structure. Tightened credit markets or more expensive
capital could impair the Company's ability to grow. Credit and capital markets
can be impacted by company-specific, industry-wide, and general market events
and conditions. Along with the conditions of the market, the Company believes a
strong, investment grade credit rating for the Company will be a critical factor
impacting its ability to access the capital markets cost effectively.
IF THE COMPANY FAILS TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, THE COMPANY'S
BUSINESS WILL BE NEGATIVELY EFFECTED.
The Company will depend to a significant degree on the intellectual capital of
its employees. Their knowledge of the energy markets and their skills and
experience are a crucial element to the success of its business activities.
Qualified personnel are in great demand throughout the energy industry, and if
OpCo fails to attract and retain qualified personnel, the business will be
adversely affected.
41
CONFIDENTIAL
IF THE COMPANY DOES NOT CAPITALIZE ON MARKET OPPORTUNITIES, IT MAY NOT BE ABLE
TO GROW ITS BUSINESS.
The Company believes that, to grow its business, it must capitalize on market
opportunities. These market opportunities are expected to arise around the
Company's existing regional asset base, both in terms of reinvestment
opportunities as well as strategic acquisitions. If any of the Company's efforts
to capitalize on market opportunities fails, if the Company fails to pursue any
market opportunities or if any of the Company's key regions fails to develop
further, the growth of the Company could be impaired.
OPCO WILL NOT CONTROL CERTAIN OF ITS BUSINESSES THAT ARE SUBJECT TO THE RIGHTS
OF THIRD PARTY PARTNERS AND INVESTORS.
Most of OpCo's businesses are not wholly owned by OpCo. With respect to its
non-wholly owned businesses, OpCo's ability to operate or control these
businesses may be constrained by the rights of third party partners and
investors (for example, OpCo may not be permitted to cause these businesses to
pay dividends to OpCo). In addition, OpCo holds less than a majority interest in
certain investments -- most notably Citrus (50%), Transredes (25%), GTB (30%)
and TBG (7%), among others. This lack of majority control creates the risk that
OpCo will not be able to cause these ventures to operate in a manner that
implements OpCo's business plan. In fact, the partners in these ventures could
cause the venture to operate in a manner that does not maximize value to OpCo,
within the constraints imposed by applicable partnership agreements and law.
FOR ADDITIONAL RISK FACTORS APPLICABLE TO THE SPECIFIC SEGMENTS OF THE COMPANY,
PLEASE REFER TO THE INDIVIDUAL SEGMENT PLANS. ALSO SEE "APPENDIX C - OPCO
Section 363 TRANSFER PLAN" FOR A DISCUSSION OF THE COMPLEXITIES INHERENT IN THE
FORMATION OF OPCO.
42