4. - t 196C-HO-59147 EC000299947 07/24/2000 9:00 a.m. CT KLH:cts - revised 1/11/2006 JS: DE: CC: BH: DE: AM: BK: MB: MK: RN: AR JR: BW: JY: WF: AT: SP: UP UI: UF: 2 3 4 5 UF: 6 UF: 7 8 9 JEFFREY SKILLING DAVID FLEISCHER CAROL COALE BARRY HAIMES DONATO EASSEY ANDRE MEADE BRUCE KNUTSEN MICHAEL BOONYONNER. MARK KOENIG RAYMOND NILES (PH) ANATOL FEYGIN JOHN REDSTONE (PH) BART WEAR JAY YANELLO (PH) WINFRED FRUEHOFF (PH) ANNIE TSAO STEVEN PARLA UNKNOWN FEMALE UNINTELLIGIBLE Monday the 24th of July, 2000, at 9:00 { 4. A I. I 4. I .4. *1 K 4 -. 1~ This is a recording of an ENRON CORPORATION conference S. t S. 'S F call, taking place ~1 p .4 - * a.m. Ce~ntra1 Time.~ Today's moderatoi is Mr. MARX KOENIG and the 5nference title is Second Quarter Earnings. S Release. t Please stand by. Good d~' eVeryone and ivelcome to the ENRON CORPORAtION Second I Quarter Earnings Release conference call. This conference is being r&orded. At* 4 this time, I'd like to turn the call over to thTe Pre~ident and Chief Operating Officer I 1.' Mr. JEFF SKILLING. Please go ahead sir. r GOVERNMENT1 EXHIBIT U Cd a 11 040024 4 I -- 1. I 196C-HO-59147 EC000299947 07/24/2000 9:00 tin. CT KLH:cts - revised 1111/2006 1 JS: Uh thank you very much and good morning tqeveryone. This is JEFF I - 2 SKILLING. I'm President and Chief Operating Officer of ENRON CORP. Uh. I 3 with me here in Houston I've got MARK KOENIG, who is Executive Vice 4 President of Investor Relations, and PAULA RIEKER, who is Managing Director 4 5 of Investor Relations. Uh, thank you very much for joining us on a call m~d our 6 web broadcast this morning. Uh earlier today, we reported our Second Quarter I 7 2000 results and we hope that you've seen the release. Uh we had another 8 outstanding quarter in each of our business units and continue to be very excited 9 about the developments across ihe company. liii this quarter's results, in our 10 opinion, clearly demonstrate ENRON's leadind market positions in wholesale 11 ehergy marketing, retail energy services, and in brohdband services. Uh for the 12 quarter, the numbers look great. Twenty six pdrcent increase in earnings to.34 i 13 cents per diluted share, compared to 27 cents a year ago. Thirty percent increase 14 in net income to 289 million dollars versus 222 million dollars last year. Seventy 15 five percent increase in revenues to 16.9 billion from 9.7 billion a year ago. And a 16 39 percent increase in physical volumes delivered to 46.7 BCF equivalents per { - 17 day. Uh I'll go through each of our individual businesses and ub give you an *1 18 overview. Let me start first with our wholesales energy operations and services. In 19 the second quarter, the wholesale energy bi~sin~ss retorted income before interest I 2. 196C-HO-59147 EC000299947 .1 07/24/2000 9:00 a.m. CT KLH:cts - revised 1/11/2006 4 1 minority interest, and taxes of 437 million dollars, a 23 percent increase over last 2 year. Uh, as you know, we report our wholesale business in two categories. The 3 first is commodity sales and services, and that's where we market energy. 4 commodities and services and manage the associated contract portfolios. And 5 then the second area is assets and investments,' where we invest in, develop, 6 construct, and operate energy and other assets worldwide. Uh let me start first 7 with the commodity sales and services side. Uh second quarter IBIT for the 8 commodity sales and services business was a record 442 million dollars. 9 Volumes delivered total 46.7 BCF equivalents uh per day, compared to 33.7 BCF 10 equivalents per day a year ago. As you all kfioW, our wholesale energy business is. 11 large, extremely well-established and global. Our eamin~s growth has been very I 12 consistent and is sustainable. We have the ability to package more complex, 13 customized natural gas and power products and services ub than any of our 'I 14 competitors. Also important, ENRON ON-LINE, our e-commerce platform, has 15 been an enormous success. ENRON ON-LINE offers a more efficient channel for I 16 customers to transact with ENRON. Uh, it is user-friendly and is the transaction 17 method most prefehed by our customers. In June, almost 60 percent of total 18 wholesale transactions and 45 percent of our volumes were executed on-line. And 19 that's a 92 percent increase over the first quattei of this year. Uh we've been able, 3. i 196C-HO-59147 EC000299947 07/24/2000 9:00 a.m. CT KLH:cts - revised 1/11/2006 - 1 very cost effectively, to execute and deliver on a significantly greater number of 2 transactions. Uh this increase in transactions and volume provides uswith 3 significant additional liquidity which Ill be mentioning later, information and 4 further insight into energy opportunities. So let me go through uh within the I 5 commodity sales and services number....uh some of the components. And let me 6 start first with natural gas. Our total natural gas volumes increased 87 percent in 7 the second quarterto a record 26.6 BCE per day uh from 14.2 BCE per day in 8 1999. Th~ increase was iehd by a 92 percent increase in the U.S., or an increase 9 of approximately 8 BCF per day in the U.S. In North America, we experienced 10 volume increases in every region where we operate. Uh the liquidity provided by 11 ENRON ON-LINE is increasing our activity at many established market hubs and 12 attracting many new customers. Uh to just give you some examples uli in 13 regions....in the west, our volumes ub doubled uh to 2 BCF a day from a year ago; *1 14 in Texas volumes increased to 2.7 BCF a day; in the Central Region, volumes 15 total 4.7 BCE a day - almost three times the volumes marketed during the Second I. 16 Quarter of 1999; in the East volumes, marketed were the largest at 7 BCF a day, a 17 100 percent increase over last year; and in Canada, volumes increased by almost 18 50 percent to 6.6 BCF a day, compared to the same period last year. Across all I 19 areas, ENRON conducts business with a very large, rapidly increasing number of .1 I ¶ -'I 196C-HO~59147 EC000299947 07/24/2000 9:00 a.m. CT * KLH:cts - revised 1/11/2006 1 customers and counterparties. Ub it kind of surprised us, but for example in the 2 East, we experienced the largest increase in th~ number of customers and I 4 3 counterparties uh to over 330 this quarter, froth 230 the same period of 1999. 4 And in the Central Region; the number increased 15 percent to 230. I think these 5 statistics are clear indicators of a very large sc6pe of operation in North America. 6 Uh there's not jutt North American natural gas: our European physical natural gas 7 volumes increased to 3.6 BCF a day in the Second Quarter of 2000, almost triple 8 the volume contracted the same period a year ggo. Uh the majority of this 9 increase related to the United Kingdom with physical natural gas deliveries total 10 3.1 BCF a day. Uh during the quarter, the UK ~natural gas market experienced 11 similar price volatility to the U.S. Uh our well-established, mature UK It 12 organization, uh with its depth of capabilities and our ENRON ON-LINE 4 13 platform, provided a tremendous competitive advantage over there during the I 14 quarter. Uh in addition, natural gas activity on the European continent is ramping I 15 up very quickly. We executed over 1,000 natural gas transactions during the j I 16 Second Quarter. Uli with natural gas prices on the continent linked to the oil 17 index, there's been a significant increase in imports of natural gas from the UK. 18 The majority of ENRON's transactions occurred at the Zabruga (ph) hub, which 19 connects the UK to the continent, but also included an iiicrease in physical - 5 .1 a 196C-HO-59147 EC000299947 1 07/24/2000 9:00 a.m. CT KLH:cts - revised 1/11/2006 I location swaps and activity it the German, Dutch, and Belgian borders. 2 Transactions executed have terms as long as five years and counterparties are 3 comprised mainly of Euiopean producers and Marketers and the incumbent i 4 European utilities. So the natural gas business, uh supposedly our most mature 5 business, as you can ~ee is showing stunning giowth. Let me move to power very 6 quickly. .Uh power physical volumes marketed increased 42 percent during the 7 quarter to 137 million megawatt hours from 97 million megawatt hours a year I S ago. In the U.S., power volumes increased 31 percent to 124 million megawatt - 9 hours. Our volumes increased in both the West and East regions of the U.S. The I 10 number of customers-and counterparties also increased to almost 200. Our 11 European p&wer bus~ness continues to grow vei-y rapidly. During the second 4 12 quarter, our total European power volumes increased to 12 million megawatt 13 hours, more than six times thevolumes delivered in the Second Quarter of 1999. 14 Uh the proposed structural thanges to the UK ~ower market due to be I 15 implemented in late 2000 are attracting many new entrants and resulting in an 16 increase in overall market activity. Uh the new'marketing arrangements should~ 17 not only level the playing field between generators and marketers, but convert a 18 primarily financial market uh to a phVsical market. Uh but the price transparency S 19 provided by ENRON ON-LINE has significantly increased counterparties 'I * -4 4 196C-HO-59147 4 I -. EC000299947 07/24/2000 9:00 a.m. CT KLH:cts - revised 1/11/2006 I willingness to transact. Contract term over there is generally between six and 18 2 months, although some five year business has been executed. Uh our European 3 continental power activity continues to mature and volumes delivered this quarter A 4 totaled over 11 million megawatt hours - more than 10 times greater than the 5 volumes delivered last year in the same period.' Ub the term of transactions is 6 extending to two to thsee years and we're increasing our portfolio of products to 7 offer more structured transactions uh similar to what we do in the U.S. Ub, for 8 example, we're extending our scale across EurApe at a low capital cost through 9 partnering with straiegic~eneration owners. We gain access to megawatts in I. 10 return for optimizing the utilization of their power plants. So the whole side I 11 commodity of our business was just it stunning uh during the Quarter. I 1 12 think it really reflect....reflects a...an incredibly strong market position, a lot of * r 13 very, very good people, and strong techAology in the form of ENRON ON-LINE. 14 Ub the other portion of our wholesale business uh IBIT attributable to our assets 15 and investments business for the Second Quart& was 55 million dollars. Uh the t 16 quarters results were down substantially from last year, primarily reflecting I I 17 decreased earnings from ENRON's portfolio of energy-related and other I 18 investments and reduced sales of interests in wdrld-wide energy assets. Uh this * I 19 portfolio of merchant assets and investments generates income primarily from 4 - A. 196C-HO-59147 EC 00 02 99 9 4 7 07/24/2000 9:00 a.m. CT KLH:cts - revised 1/11/2006 I equity earnings in both realized and un-realized gains and losses. Uh the way we 2 manage the size of these assets and investments with regard to timing of sales or 3 acquisitions is very dependent on market conditions and our expectations for the I 4 investment's prospects. During the Second Quarter, activity in this area was 5 minimal, uh with significantly less asset sales.' Uh the size of th~ merchant 6 portfolio is now approximately uh one and-a-h'alf billion dollars. Also related to I 7 our wholesale business, let me ubjust mention ENRON ON-LINE. Uh I'd like to Li 8 underscore the importance of ENRON ON-LINE. As of this morning, uh actually 9 as of Friday afternoon, we surpassed notional transaction value of 100 billion p 10 dollars and passed 200,000 trans&ctions. A tremendous accomplishment for*a 11 platform that's only been in 6peration for eight tmonths. You may have also seen 12 that we recently announced a memorandum of understanding to extendENRON 13 ON-LINE pricing to bulletin boards TRUEQUOTE.COM and HOUSTON I' 14 STREET EXCHANGE. Uh we recognize the value of liquidity. And by making 15 our prices more widely available, we will transact with more buyers and sellers. 16 So we're looking for a range of distribution options to get ENRON ON-LINE ~1 17 prices out ihto the marketpla7c& But at the wholesale level, just a, a tremendous 18 quarter. Uh we feel i'ery good about it. Very positive and optimisticabout the 19 outlook for the future. Our market position uh has never been better. Let me t A I 8 196C-HO-59147 EC000299947 07/24/2000 9:00 n.m. CT I KLH:cts - revised 1/11/2006 t I move now to our retail energy business. Uh ENRON ENERGY SERVICES I 2 continues to move forward right on hack with the plans we shared with you 3 earlier this year. Uh, ENRONs ability to provide comprehensive energy I 4 outsourcing on a national scale continues to be a key competitive advantage. And I. 5 now particularly with rising gas anctelectric prices and the volatility that?s I 6 associated with them, ENRON is uniquely positioned to assist customers in 7 managing their price and energy consumption Ab through risk management 8 services. In 5 Second Quarter, we reported ah IBIT of 24 million dollars, I 9 compared to a loss of 26 million dollars.a year ago. And just in case you can't add 10 those up, that9s a 50 million d6llar positive swilkg in earnings between last year II and this year, uh, which I tliitik just confirms the momentum in this business. F 12 Profitability continues to escalate and our vety rapid growth in contracting has .1 13 resulted in a significant revenue increase. Uh for the Second Quarter, retail 14 revenues were up 147 percent to 840 million dollars. Uh, the strong financial I 15 results are attributable to the significant scale aShieved in the U.S. and a continued 16 shift in our contract mix to longdr term, outsourced, contacts. New contracts. 17 total 3.8 billion dollars for the quarter, includin~ a very large ten-year agreement 18 with QUEBECOR (ph) to service 66 facilities in 28 states. Other contracting 19 activity during the quarter included SUNOCO, PRUDENTIAL, and SAFEWAY 9: 1~ 4 ' 196C-HO-59147 I EC000299947 07/24/2000 9:00 a.ni. CT - KLH:cts - revised 1/11/2006 1 STORES. In addition during the quarter we fully integrated the PG&E contracts 2 that we acquired in May into our operation and are focus&d on extending many of 3 these commodity-only contracts to long-term outsourcing relationships. Uh also, 4 our European retail operation is progressing well and we're receiving excellent 5 response to our products and servicei We're actively targeting large commercial 6 customers and expanding our U.S. customer relations to their operations in i .~t 7 Europe. Uh, kind of an interesting twist in Europe, which is different than what 8 we have in North America, we have a pretty sizeable mid-market uh commodity 9 business at the retail level and it continues to experience huge growth. Uh they're 10 signing up approximately 3,000 customers a week in the UK, which has been *1~ 11 a....just a big success for us there. And we believe that that business probably has 12 application on the continent and probably back to the U.S. as well. Uh so that's 13 the retail business.. Transportation and distribution, uh which includes our gas 14 pipeline group and PORThAND GENERAL ELECTRIC ub IBIT increased uh to 15 139 million dollars in the quarter, a nine percent increase over last year. Uh the t 16 gas pipeline group, all our maj or pipelines posted strong results for the recent * 1 17 quarter. FLORIDA GAS TRANSMISSION remaiiisvery competitively 18 positioned as the only major pipeline sewing i«=eninsula Florida, a region with a 19 rapid growth in demand for energy. Plant expahsions are progressing as 10 196C-HO-59147. EC 00 02 9 99 4 7 0 7/24/2000 9:00 a.m. CT KLH:cts - revised 1/11/2006 1 scheduled, with significant increases in capacity to be added in each of the next 2 three years. Our Transwestern pipeline expan~ion which came into service as I 3 scheduled in May, uli increased our capacity on Transwestern by 15 percent. So 4 GPG is just uh continuing..;uh its, its strong performance. Uh PORTLAND 5 GENERAL, PORTLAND GENERAL reported str6ng results for the quarter of uh 6 62 million dollars IBIT, up 11 percent from the same period last year. Uh 7 PORTLAND GENERAL continues to expand its customer base and now setes *1 8 uh 726,000 ret6il customers; The sale for PORTLAND GENERAL remains on 9 schedule, uh, we beli5ve to close ub near the end of the year.So thats our 10 transportation and distribution business. Uh and then uh let me move now to our 11 broadband business. UKI know this is a little bit long and I...Im doing 12 this....doing it as fast as I can but just a lot liafrening during the quarter. But 13 broadband services....ENRON BROADBAND5SERVICES reported an IBIT loss 14 of 8 million dollars and revenues of 151 million for the quarter. Uh the financial 15 results included planned sales of dark fiber. Dxting the quarter, ENRON 16 cohtinued to rapidly advance its network deveiSpment. At June 30th, we had 17 5,325.miles of fiber complete and an additional 9,175 route miles under I 18 construction for completion by year end. We had 525 servers deployed and we 19 have 4 pooling points in operation, including three in the-U.S. and one in London. 11 4.. 1 96C-HO-59 147 EC000299947 07/24/2000 ~. * 9:00 a.m. CT KLH:ets - revised 1/11/2006 r - 1 We have pooling points, and these are the switches that allow us to switch~ V ,6 2 between fiber networks, we have pooling points in~15 additional cities being 3 installed for completion over the next two quarters, ,which ub, just uh to remind 4 you uh brings us to a target of 19 cities uh to have pooling points for this year. 5 And that's uh clearly gonna exceed our year-end target that we shared with you of 6 13, so we're making good progress in getting those deployed. Uh we also recently t. 7 announced our operating presence in Europe. We've established network 8 connectivity between London, Amsterdam, Fr~nkfort and Paris. Were now in the 9 core central cities in uh in Europe and we can begin to uh build off of that. Uli - t I 10 during the quarter we made enonnous advance~ in executing agreements with new 11 broadband distribution partners. We now reach end-users in all U.S. markets and 12 in major cities in Canada and the UK. During the quarter ~&e continued to 13 progress on the development of our Bandwidth Opprating System. The bandwidth 14 trading component is in operation. We're working with SUN and others to enable I 15 third parties to...to uh reserve network capacity, and we're integrating our meta I 16 router to be able to process 10,000 connection requests per minute. Also,kluring 17 the quarter, we delivered 985 DS3 months of bandwidth capacity to our customers 18 and have now scheduled a total of 5470 DS3 months fordeliveiy in the remainder I 19 of the year 2000. We're actively quoting prices for bandwidth betwben 28 cities in * 1- 12i * -I I I. 4, 196C-HO-59147 EC000299947 4 07/24/2000 9:00 a.ni. CT KLH:cts - revised 1/11/2006 j 1 the U.S., Europe, and Asia. Year-to-date transactions on the bandwidth I. - 2 intermediation side total more than 50,with 17 counterparties including 3 marketers, network service providers, and U.S. carriers. Uh, activity continues to -4 4 escalate as more players participate in this newly developed market. In fact I V I, 5 think we have 60 counterparties currently working up the paperwork uh to uh be 6 approved for uh transactions. Ub, in May, we introduced the sale of bahdwidth on C I 7 ENRON ON-LINE and today over 30 bandwidth products are offered on ENRON 8 ON-LINE. 9 Content services. We recently uh have seen bieakout performance in the content 10 services business. The quaiter's total contract value was 19 million dollars, 4 11 primarily executed with new companies positiAning themselves in the broadband 12 market. The recently announced agreementbetween ENRON and 13 BLOCKBUSTER evidences what we believe i a fundamental shift...established 14 companies extending their core business to bro'adband distributions with a huge, IS established core base. We%xecuted an exclusii'e 20-year contract with I 16 BLOCKBUSTER to deliver movies on demand over the ENRON Intelligent 17 Network. Uh this is a first of a kind contract arid we believe the largest broadband 18 agreement ever signed. We will provide all the wholesale conn&tivity and I 19 deliver content to last mile providers at 1.5 megabits per second, greatly 13. A V 196C-HO-59147 EC000299947 07/24/2000 9:00 a.m. CT KLH:cts - revised 1111/2006 I. 1 exceeding standard broadband speeds. We've 'signed major distribution 2 agreements with leadinj DSL providers, SBC; QWEST, VERIZON, TELUS (ph), 3 k COVAD (ph) and REFLEX, to guarantee the quality of service over the last mile. I 4 ENRON will receive a fee for each movie delivered. The potential long-term 5 contract Value or revenues over the life of the contract is expected to exceed well 6 over one billion dollars, but that's obviously not included in this quarter's report of 7 TCV. The contribution to revenues and IBIT during the first four years is V >1 8 expected to be immaterial, but ramps up significantly as the entertainment on 9 demand product is deployed. So, uh in summary, uh we're pleased with another 10 ver«= strong quarter. Our established networks worldwide toge~r with our i I 2 4 11 unique strategy and broad capabilities will provide for continued strong 12 performance and increase shareholder value. lJh but before ~I take any t 13 questions, I'd like to do one other thing. I'd like to briefly describe the plan and 14 activities of our newest business, uh ENRON NETWORKS. I know we ye 15 mentioned this to a, to a number of you, but uh'we believe that ENRON's 16 capabilities and skills include logistics and settlement services related to reliably I 17 delivering commodities, providing price risk ni~indgement and successffilly 18 deploying technology. Uh, for all intents and purposes, we believe we're good at 19 creating markets for commodities. Uh, as demonstrated in the breadth of products XI F 14 A. * I I 196C-HO-59147 EC000299947 07/24/2000 .4 9:00 a.ni. CT KLH:cts - revised 1/1112006 1 that we market in our wholesale operation a core strength is a replication of these i 2 skills from one commodity to another. Uh following careful analysis, were 3 pursuing opportunities at some of the more traditionally structured bommodity & 4 industries. There's little price transparency in many of these markets and, as a 5 consequence, enormous pricing inefficiencies exist. Uh its dli our belief 6 that... .our ability to both identify and enter new markets and quickly win market 7 share through accelerating our proven business model 'uh leverages significant 8 shareholder value. During the quarter, ENRON NETWORKS announced its- 1* 9 acquisition of MG PLC, the leading intematioA~l merchant of copper and 10 aluminum based in the UK. MG buys as principal, sells, stored, and shifts non- .4 11 ferrous metals and manages warehouse operations across the globe. We are in the 12 process of fully integrating MG into our European business. We will use our 13 wholesale expertise to offer MG's customers new products and solutions to 14 address their business n&ds. Uh, these new prbducts include structured bundled 15 products combining ENRON's expertise in energy, finance, and origination, with I 16 MG's global position in non-ferrous metals and longbr term contracts backed by I 17 ENRON's financial strength and the ability to iAcrease liquidity and transact more 18 simply by introducing these metals to ENRON ON-LINE. Uh,heading this new 19 business are experienced members of our executive operating committee. GREG 15 . 4 - 1 I 196C-HO-59147 EC000299947 07124/2000 I 9:00 aim CT KLH:cts - revised 1/11/2006 I WHALLEY, who was formeTly President and Chief Operating Officer of ENRON 2 NORTH AMERICA is now the CEO of the business. Uh, JEFF MCMAHON, 3 who was formerly Executive Vice President of Finance and Treasurer of ENRON 4 4 CORP is uh Vke Chairman and MIKE McCONNELL, uh formerly CEO of .1 5 ENRON's GLOBAL TECHNOLOGY group is, is the Chief Operating Officer. I 6 So we've put a really strong team uh in tostart looking at this opportunity. But I 7 we'll continue to evaluate othei markets which could benefit from 6ur business 8 model and our c-commerce services. Examples might include steel, paper, V 9 lumber, data storage and shipping, and all of these we believe provide some huge I. 10 opportunities for ENRON to ekpand its global position in the wholesale market. 11 So overall, and I've said this before but I'm afraid it just continues to be true, 12 I've....I've been with the company in one..;uh form or another for uh 18 years and 13 it I've never seen the companyin better sijape.' Our core markets are in just 14 absolutely it move from strength to strength. We have very very good growth * I 15 opportunities across the board and it we're real excited about the it prospects for * F 16 the future. So with that, I'll shut up and open itup for it an~ questions it from 17 the audience. t 18 UF: Thank you sir. The question and answer sessioji will be conducted electronically. 19 If you have a question, please press the star key'followed by the digit one on your 16 .4- I S I - 196C-HO-59147 EC000299947 07/24/2000 4 9:00 a.m. CT KLH:cts - revised 1/11/2006 * touch tone telephone at this time. We'll take as many questions as time permits, '~1 2 and we'll take you in the order that you signal us. Once again, if you have a if 3 question foday, please press star one. And our first question coMes from DAVID 1 4 4 FLEISCHER with GOLDMAN SACHS 4 K, 5 DE: Great quarter, JEFF. Ub don't slow up though~ Uh cotiple of thing~ here, ub you, 6 you, you started showing s6me interestingV - real numbers from Europe uh and and, 7 you know, if we go back to (vhat you said a year ago and six months ago, it .1 8 sounds like uh Etirope is just, you kn6w, starting to take off. I guess that's the 9 question here. If you can help its understand, you know, what the slope and 4, 4,. ~ 10 timihg of all this is gonna be and you~know, isthis a business that's gonna be a 4 - 1 t 11 significant driver overall in 2001? Can we, can we continue this type of growth * 2 12 rate uh or is it gonna take a little longer than that? 1 4 I 4' A 13 JS: Uh DAVE I think uh uh 2001 Europe is gonna be a significant contributor. A ~1 14 very significant contributor. The thing that's actually interesting in Europe is that I 15 uh it's a much more fractured market than North America so the...the * 16 opportunities for someone like ENRON are actually better than they are in North 1 17 America. We're seeing fdr example in those, those core central European areas, F. 18 Germany and all the contiguous countries, and the UK and Scandinavia, thats t 4 1 19 gonna tuni' into a very deep liquid traded market for both gas and eldctricity. At 4; .i. 4) '#' 196C-HO-59147 EC000299947 I 07124/2000 9:00 a.m. CT KLH:ets - revised 111112006 1 the exttemities of Europe, you go to uh Spain,Jtaly, Greece, Turke&, oh there are I 2 opportunities fdr asset development to begin building uh some bf those merchant 3 activities. So just, overall I think it's a, it's a gr~eat market. Uh, to be quite honest, 4 we're ahead of where I thought we'd be ub ov&r there. Tbings.are moving much 5 more quickly than I expected. And I'm... .1 would expect to see some very good 6 things in the year 2001 out of Europe. 7 DF: - Can you go on with, oh Y0M had indicated the ~tructural changes that are taking 8 place, I'm aware of some of those. But maybe ~'ou can help us understand {vhat's I 9 gonna happen by when and.. .and. . . .therefore, you know, understand a little better I I 10 what your strategy can be in terms of physical assets versus, you know, the trading 11 side. 12 JS: Well the uh....I think at this point, theregulatory changes are pretty much in place, 13 with the exception of France, which, you know, it's just the way the French are. 14 But uh I think at this point, it's just development of the market. The reason why 15 we're seeing the difference between the central European countries and the 4 16 extremities really has more to do with just the interconnectiveness of the grid> Uh 17 there's not real good oh connectivity it betweeh the, the core European countries 18 and the extremities in either gas or electricity. So, those tend to be different kinds t IL. 19 of markets. The biggest structural change that's going on right now really is the 18 -I I- 196C-HO-59147 j EC000299947 9:00 a.m. CT - KLH:cts - revised 1/11/2006 1 rework of the UK power p6oi. Uh....uh....as %u know, there's a lot of concern t 2 that the structure of the power pool was disadQantaging ub certain kinds of 3 generators. We....you know....quite franidy don't think that's....that was a big deal. I 4 But uh the restructuring is a big deal. They're moving to a marketplace that is a .4 5 more bilateral ub marketplace. It looks more like what we've got in North 6 America and Scandinavia and that's uh a market structure that we've been a big 5 7 advocate of so we feel real good about the chaAge in the market over there. 8 DE: Okay, great. And the second question here uhl.on retail uh you had ub, you r 9 know, indicated uh uh that the price spike uh had, you know, was was 10 highlighting the value that you could bring to &ustomers and uh I wanted youto go 11 on with that thought process and just....uh, you know, clearly you've told us in the 12 past that uh, you know, you you are unique and we know tat you are in so many I.. 13 ways in what you can bring to the national customers. Are you finding, in 14 particular, you know more of the big customer~ tat you haven't signed di, you *1 15 know, like an IBM, are more willing to, to talk about, you know, contracts and 16 therefore are we likely to see you substantially exceed, you know, these... .these di 17 revenue or, or contract signing targets this year and maybe next year. 18 JS: Well everything that's happened in the marketplace ub this summer has been good I 19 for us. Uh, you know, you've seen the baffles iA the press di with San Diego and 19. .1 196C-HO-59147 EC000299947 i 7 07/24/2000 1 9:00 a.m. CT KLH:cts - revised 1/11/2006 I I some of the other utilities in the west and some of the sensitivity.towhats 4. 2 happened with price increases, you're seeing that in in private companies as well 3 DAVID. So, we've got a lot more interest in what we can bring to the table and 4 quite frankly when energy prices are higher, uh the savings that we can offer a 5 customer uh loom latger intheirplanning. Sol think uh this is...this is very 6 positive. It's a positive environment for the de~'elopment of the retail business. * 4 7 DF: Can you give u a sense for contracts under ne~otiation. The figure thai we've 8 gotten periodically from-you? 9 JS: You know, DAVID, I d6n't have that off-hand but uh....I'll get back to yo~ on it. 10 DF: Okay. Thank you very much. Great quarter. 11 JS: Thanks. F 12 UF: Thank you sir. I'd like to also inform participants if they'd like to remove 13 themselves from the queue because they have found that their question has been 14 answered, press the pound key. We'll now here from JAY YANELLO (phonetic) 15 from PAINE WEBBER. 16 JY: Good morning JEFF. You guys are known for having a fairly uh deep 17 management team. You have strong heads in most of your divisions but you're 18 growing rapidly. Can you give us a little update on staffing, how many people 19 you're hiring, or uh just overall if you still ~ challenge going forward at -r 20 I 4 V I S 196C-HO-59147 1. EC000299947 . { .. t. . .. t 0712412000 . .[ - 9:00 a.m. CT KLH:cts - revised 1/11/2006 I . I staffing some of the more medium or lower end mhnagement positions throughout 2 the company. I, 3 JS: Well actually I've been a little surprised at our recruiting this year. I was....I was Ii 4 concerned because we heard so much out of the investment banks and consulting 5 firms about the problems they wete having hiring people out of the business 1~ 6 schools. But uh we're ahead of target so far this year. Uh and we'll bring in * I 4. 7 probably our typical 200 MBAs and about the same number of undergraduate V. .~ j 8 students. Uh, so that... .that side of our recrwtxng is going teal well. We're also I 9 seeing a lot of interest ub or more success on experienced uh person hires. Uh, '4. 10 you know, I think at this point it's becibmmg pretty clear to most of the people in * I 11 our industry that this is the place 16 be: And we're... .we re seeing uh improved 12 .1. ability to bring in people from any of our competitive companies uh and so I'm 13 feeling very good there. Th'e one.. .the one piaca that we're having ub some pretty I 14 severe shortages of folks, which I think probably everybody is, is in the software I 15 engin&ring4side. And, you know, just given uh th~ demands we have for * 4 16 ENRON ON-LINE, uh we're....we'r&ext~nding ENRON ON-LINE to the back 17 office for a more integrated, lower cost processing system. Uh this just takes a«= *1 . - 18 incredible number of very highly qualified uh systems engineers and programmers I 19 and they're just they're hard to come by. Although I think, being in Houston, I 44 V .4 . - . 4 - 121-~ .1 I I EC000299947 07/24/2000 9:00 a.m. CT KLH:cts - revised 1/11/2006 1 think we're in prettygood shape because uh, you know, if you wanna live in 2 Houston for whatever reason ub, we're kinda the place to be. And... .and so I think 3 we get to see most of the people. It's just there aren't a whole lot of tern out 4 there. 5 JY: Okay, just a quick foilowup, the BLOCKBUSTER contract uh appears immense. ~1 6 And, my guess is you¶, you'll spend a great deal of resources fulfilling tat. Can I 7 you handle that and work on other big content delivery contracts at the same time? I: 8 JS: Yeah, the thing that's great about it is the BLOCKBUSTER deal is exactly what 4. 9 we uh are targeting. So it is... .it is exactly consistent with the network that we're I 10 putting in place. It's exactly consistent with the products and service offering that I 11 we're putting in place. So if we can get BLOCKBUSTER done, we can get the I 12 other ones done. So this is not in any way ub a diversionor tangent off of the core 13 direction. This is like center of what w&re trying to accomplish. So, if we can get 14 BLOCKBUSTER done and get all the mechanics and the technology in pla~e to 1 15 make it happen, it that platform can be extended to all sorts of other video 4, k 16 applications. So its, its a great contract. Uh, it's a great contract on its own, but 17 just in terms of developing the business and thd direction of the business, it's 18 great. 19 JY: Okaythanks. 4 22 I 6" C I I, 3 >1* 4 .4 196cXHO-59147 EC000299947 07/24/2000 9:00 a.m. CT KLH:cts - revised 1/11/2006 1 1 UF: Thank you sir. We'll now hear from BARRY HAIMES with SAGE ASSET 2 MANAGEMENT. I -" ~1 3 BH: Uh good morning. Uh had a couple questions: Uh one is uh....why not talk a little I 4 bit more about the uh assets and investment section uh where uh, you know, it 5 was amazing the uh. . . .the delta there compared to a year ago. I mean your.. .~your * I 6 IBIT would have been 44 percent higher if you'd ub had the same number as a ~1~ 7 year ago. Ub, you know, which speaks to the great quality of earnings. But could 8 you just talk about uh uli that line assets and investhients uh through the balance -, 9 of the year ahdub, you know, it's always gonna yaW but what would you see as 1 10 normal or do you have any guidance uh for the i,alance of the year there? .Uh, 4 11 second question is, you didn't talk about South America at all. Uh just an update. 12 comment there would be ippreciated. Uh and third comment uh, just tax rate....uh I 13 what you're looking for fdr tax rates for the year? Thanks. -~ I ~½, 4 14 JS: Uh sure BARRY. Uh....the asset and investment ub category uh involves you 1 t I 15 know sale of assets primarily. And uh as you can imagine there's some discretion 16 in the timing of when we actually transact some of those so....uh...just given the 6 j 17 strength we have in the commodities'side, fo be quite honest, we've probablyuh 1~ 18 slowed down or kinda eased off s6me df the aggressivenehs on, on some of the 19 sales or monetization of some of our assets. So, my guess isas you look to the - I ~6 23 I' S A 4. I I 196C-HO-59147 EC000299947 07/24/2000 9:00 a.m. CT KLH:cts - revised 1/11/2006 I 1 rest of the year and in subsequent years, I think the* asset and investment line is 2 gonna look kinda the way it has historically looked. UK. ..uh....that's great 3 business for us and it's something that uh uh isis part and parcel of what we I 4 provide to customers. So I guess it would look pretty similar going forward. Uh I i 5 would guess that the commodity uh side of the busin~s probably is gonna....is It 6 gonna tone down. I mean the... .the uh market environment in the second quarter 7 was just awesome. Uli so you'll probably see a~ little tone down there and you'll 8 see a pickup on the asset and investment side. But overall the wholesale numbers 9 uh are, are doitig just what we expected them to do. Uh actually doing a little just 10 better than we expected them to do. Uh and think uh..Xuh....more ofthe 11 same going forward. On South America....in South America, uh....you know we 12 don't....don't talk about it a lot but uh uh a large portion of our position in South 4 ~1 13 America is in Brazil and for those of you that have been following the economy in 14 Brazil, the news is unbelievably positive. Uh so I, you know, I'm feeling real 4 15 good about our position in South America. I am... .I'm a little disappointed at the 16 speed uh of adoption of the merchant services ~nd I think a large portion of that is / 17 a function of the regulatory system uh..I think uh it's, it's just harder to create the I. 18 sort of markets that we create in North Americd and in Europe in South America. * 19 It's been a little harder than we expected it to b~. But I think the underlying 24 4 -4 C 4. 3 I - 196C-HO-59147 EC000299947 - 07/24/2000 9:110 tin. CT - KLH:cts - revised 1/1112006 4 1 dynamics of the economy are better than we expected. So overall it't $ 2 doing....doing pretty good.. Uh on the tax rate....tax rate ub we expect it to just I 3 contihue in kind of the 18 to 20 percent range and we feel real good about that 4 looking out over the next couple of years. So uh, I think you can just keep 5 factoring that same number in going forward -. *1 6 BH: Great thaAks. I I-... 7 UF: Thank you. Hearing next from DONATO EASSEY (phonetic) with MERRILL 1- 8 LYNCH. f i 4i 9 DE: Good morning and congratulations as well on a very nice continued ~rowth rate ..~ 4,-' 10 there J?FF. And, with 'respect to broadband, I've got two questions here 4 *1 11 predominantly. One is...why ENRON with uhBLOCKLBUSTER at all given the 4 , .-~ 12 limited capacity that you have today versus others that have much more out there. 13 That's one.. .the other is. know, you '4+ ..you mentioned on here tat you've got uh I 14 executed more than 50 on and off network transactions with uh 17 counterparties 15 this year. Is that in line with your growth or, you know, below your. ..your 16 projected estimates or, you know, on par or better? Thanks. 4 1 17 JS: Okay on tbe...bn the second question first, it's ahead of where I expected to be. 18 , - Uh there's a lot of interestihthis....the uh...the number of. typically 19 counterparties...when...when we start off on these markets we spend 4 ~ - - 4.- 25 I .. I 4 * 4 t 4+ ( k 4 S '4 IL S - S 4 A 196C-HO-59147 - - 4 EC000299947 7 07/24/2000 9:00 a.m. CT KLH:cts - revised 1/11/2006 .1 I some time looking atju~t the counterparties and how quickly the/re growing. 4- I 2 We're seeing very, very strong growth. Uh..xthat uh...uh has frankly surprised 3 me. I mean I'm all...as you know i've always been a big, been v&y bullish on the 4 growth in the intermediation side of this business but We're ahead of.. .ahead of I' . 4 5 where I expected to be. On the it ~ih BLOCKBUSTER deal....why ENRON? Uh I 6 DONATO, we just have a different business model. You know this thing that we 4 1 7 talked about which was...which is on-demand bandwidth with uh,...uh television I 8 quality video capability i6 something that our ehtire network is devSted to. Uh. .. .it -I- 9 is-an end-to-end system wfth our software that can control the signal and ensure 44 r 10 the signal is delivered with quality ftom the coAtent provider all th~ way to the I 4 11 end user. We believe at this point we're the only people that can provide this 4 4 12 comprehensive service to BLOCKBUSTER or anybody for that matter that has a 13 technically sophisticated video application. Uh' we b~lieve that that's kind of our 1 4. 14 space and that's the one that we want hi dominate. ½n&we thihk at this point -4 1- 15 we've got ~apabilities that no one else in the marketplace has. ~1-~~ 4 16 DE: Great. And if I could trouble you fdr one mo~e.' There was....there was some 4 *44~ 17 discussion about a master agreement on the trading of it broadband and I was - / ".4 t v' 18 wondering whAt the status of that was between the parties dr....or where we st~nd.* 4 4'- 4 I 4 4. 4 19 JS: Well there....there are a couple of committees working on the standards and I 4 A $4. V 26 1: I 4'" 'A I--I... .4. t I 196C-HO-59147 EC000299947 07/24/2000 9:00 a.m. CT j KLH:cts - revised 1/11/2006 t I think that's moving forward. Uh as you kriow w&ve gone ahead and put a stake I 2 in the sand and we've said.. .here.. .here are our standards. (Laughs) Here's what .1 3 we're transacting on. Now if...if those committees 9Ome up with a standard that's I 4 better, or one that's more accepted by the ind~stry, we'll offer that as well. So, A 5 we're not waiting on it bdt it is making progress. Everybody knows we need it 6 and uh....people are working real hard to do that. 7 DE: ThanksalotJEFF. i. 8 UF: Thank you sir. Hearing next from NATIONAL BANK FINANCIALS WINFRED I I 9 FRUEHOFF (ph). - 4' 10 WF: I have a couple of questions one relates to uh your broadband business and I'm I 11 wondering it what contribution towards revenues and IBIT the sale of dark fiber r 12 made in the second quarter. And what 9our outlook is fot the sale of more dark 13 fiber for the balance of this year. I 4 14 JS: IJh....WINFRED the uh....the it total for the second quarter was about 50 million. . a I 15 dollars of dark fiber sales and that was right in line with our plan uh....I don't ~1 16 know off-hand....for the rest of the year MARK? V 'A 4 17 MK: Well, for the rest of the year there's likely to be uh some others but bottom line in*~ 18 terms of earnings expectations or IBIT tar the lkoadband group, we're still on 19 track with a....a likely loss or IBIT loss bf 60 to 65 million for the grouj,. So these 8 27'' A 1.). I .~ I -t -~ * At 196C-HO-59147 EC000299947 07/24/2000 9:00 a.m. CT KLH:cts - revised 111112006 1 fiber sales that you saw in the second quarter 5d some more in the third and 2 fourth are really consistent with the plan we laid out in uh January. I 3 WE: Yeah. And what did they contribute in the second quarter towards IBIT? I 4 JS: Well about 50 million. * 5 WE: Oh that....I thought it was revenue. Okay. 6 IS: Well this is....it's the same thing. . . 7 WE: Okay fine. Uh the other question relates to uh assets and investments and I was 8 wondering if you had a breakdown between th~ uh reduction and the contribution I - 9 between decreases, in sales of interests in power projects and the decline in the 10 value of your merchant investments. I 1' 11 IS: Uh. . . .well horseshoes and hand grenade~. WeWe kinda got an even split I 12 uh. . .climbing a little bit more and just iii oh th6 oh reduction in the asset values 13 but it kinda....kinda about the same. f I 14 WE: There are any significant reason oh why the ub value of some of your merchant 15 investments has changed? 16 JS: Ub no just market conditions in the markets that we're in and....we feel that the the I 17 uh current portfolio's marked very well and should offer opportunities for the 18 fliture. . 19 WE: What do you expect for the balance of the year? Do you expect a reversal or oh 28 '*1 196C-HO-59147 EC000299947 07/24/2000 9:00 tin. CT KLH:cts - revised 1/11/2006 1 more of the same? 2 JS: Uh we'd expect the performance going forward in time to look pretty much like 3 the performance has been the last couple of years. 4 WE: Okay. Thanks very much. 5 JS: Thank you. 6 UF: Thank you. Moving on to ANATOL FEYGIN with J.P. MORGAN. 7 AF: Good morning JEFF. Uh a quick question. It ub came across the tape that you uh 8 were basically saying that you would look to mbnetize certain. ...certain assets and 9 investments. Obviously that's kind of core to ENRON's strategy uh overall but 10 more particularly we've talked often about uh geffin~ the return capital up and 11 getting out of the more asset intensive businesses just uh....want~d to hear 12 some.. ..some comments on the direction you're heading in... .whether there s 13 anything to....to be read into that comment or if that's just uh kind of reiteration of 14 this uh strategy. L IS JS: Well ANATOL, (stutters) a couple of... .1 think the comment you~re referring to is 16 something came out of th~ uh....uh I think on Bloomberg this Morning based on an * 17 interview with CNBC this morning, where I think it said something like ENRON 18 anticipates selling its broadband... .bus. I... .1 haven't seen the exact quote. 19 Uh. . . .what I said is exactly consistent. We hav~ always said related to our 29 1<. * 196C-HO-59147 EC000299947 V -. 07/24/2000 9:00 a.m. CT KLH:cts - revised 1/1112006 .1 1 broadband business that we believe that there are linkages between that business 1 4. 2 and our other businesses uh because we're creating markets and we think its I 3 important to have that. ...that skill base transferred from ENRON into the it 4 broadband business uh....but that if we ar~ not getting th&value from that business Ii. t 5 in ENRON stock price We\vill do what... .whatever's necessary to get that yalue in 'I ;~.* 1.. 6 the stock price. And if that involves a spin-off or a sale, uh we will do that. Now, .4 4.. 7 to date, uh we think tat we've ~ot the value in the stock price and thats the best 8 of all worlds 'cause we're getting thevalue for our shareholdeis and we're also * 9 able to capture what we think are some pretty importaiit linkages uh between the I 10 two businesses. Now on a more general basis, I have s«=oken in the past a lot I 4 11 about the impbrtance that we ascribe to increasing our return on invested capital~ t - - 12 and I can tell you I am spending an incredible amounf of tim~ on that. Probably 13 more time on that than anything el~e that we do aroimd this place. (Laughs). I. 14 AR ,Right. 4; ¼ 15 JS: Uh...and it is critical ahd I can tell you that on the margin, we have alre2dy made * ., I 16 tremendous progress. On the margin, our return on uh incremental invested * .4 17 capital is....is stunning right now. And uh what we're doing right now is just 1~ .4 18 making sure that we go through our portfolio of iiivestments to uh....uh figure out 19 exadly what we can... .what we can monetize and Ii4uidate uh so that we can bring .4 .4 * - * - 4 20 - - t I 1 F 196C-HO-59147. .1 EC000299947 07/24/2000 4 9:00 a.ni. CT KLH:cts - revised 1/11/2006 - 1 more cash home arid uh have that cash available for reinvestment in these very I 2 high return sorts of businesses. So I can....I can absolutely guarantee you it is a I 3 key priority around this place and we're spendihg a lot of time on it. 4 AF: JEFF, but nothing....nothing definite. And thist..this ub quote was kind of taken 5 out of context uh with regards to the bandwidth... .to the broadband side that 6 you've discussed before and not to be uh... .not to be confused with kind of a uh 7 large shift in terms of the energy side of the house. 8 JS: That'sm.that's exactly right. . 9 AF: Thanks JEFF. 10 UF: Thank you sir. We'll now hear from ALLIANCE CAPITAL's ANNIE TSAO. 11 AT: Good morning JEFF. Hello? 12 JS: HiANNLE,howareyou? 13 AT: I'm fine thanks. I just have a couple questioris.~ Uh....can you explain a little bit 14 more detail in terms of your corporate and othe'r why it's changed from a negative 15 nine million to a positive for 17 million? Whats in it? * I 16 MK: ANNIE, this is MARK..Uh....part of that is we alwa~s have a little bit of I 17 fluctuation in corporate and other. This quarter we also had some positive I 18 contribution from some of our clean fuels business which uh, you know, includes 19 some methanol and MTB, which is a very small business for us -and it's in the - - 4. - I 31 I '4 - t - 4.-. V 196C-HO-59147 EC000299947 07/24/2000 9:00 a.ni. CT KLH:cts - revised 1/11/2006 I 1 corporate and other category. Last year that .uh.. ..that Letivity as it has been for a 2 while was uh....uh was close to zero. So that x~'as uh....that was probably the 4 1 3 biggest portion of tat. I 4 .JS: Yeah you get lucky every once in a while ANNIE. (Laughs.) .41 5 AT: Uh....your AZURD( is in there too, right? The water. 4.1 ¶ 6 MK: Yes AZURIX has not announced their earnings yet sb we it. $4 '4 I I, 7 AT: But it's....it's in there. 4 8 MK: But that is a small part uh....and you can look at their expectations. It's a small 9 part of our overall ub contribution. .1 F 10 AT: Okay. Next question I....I just uh....uh JEFF,tcan you explain wh3' your stocks I 'tj -, 1- 11 since the last analysts' meeting has been trading at avery narrow rang6betv('een I I4 4 44 12 think68to78? '4 1 4 4 13 JS: Uh....gee ANNIE, I dont kn6w. You tell me. (Laughs). Uh....well L...you know I 4 14 guess my feeling is that iih, youicnow, we....we had a lot of things underway. And '4.., 1~ 15 we....we dumped a loi on you all in a very short period of time. And I think it it's .......4. 16 taken a little whileto digest it*Thd Ithink p~o~le want to see us put points on the .~- - 1, 4 17 board. I thinkthis earnings4reiaas~ shows we air putting the points on the bdard. 18 And I'm hoping that we break out of that trading range because uh....I think we 19 deserve to break out offfie trading range. 4 A.' j 4, 4 4 44 .4 I -1: 1~ 1 196C-HO-59147 EC000299947 07/2412000 1 9:00 aan. CT KLH:cts - revised 1/11/2006 I AT: Thank you. 2 UF: Thank you. Hearing now from STEVEN PARLA of CS FIRST BOSTON. 3 SP: Uh good morhing JEFF. My sympathies for hAving had to deal with the press this 4 morning. UK.. .1 have two questions and they have to do first with uh ~1 5 sustainability in the wholesale business on the ~onimodity side. i think a lot of 6 people were just standing in the right place during the second quarter. Could you 7 talk about sustainability for you and maybe oth'er industry people or other types of. 8 players without being too specific? And then second on the margin issue....uh we 9 talked in the past about ENRON ON-LINE coffling on and big, big increases in 10 volwne andless of an increase in margin. Youhad talked about how that activity, .4 11 much like a brokerage business, will translate ihto higher margin business like our I 12 trading does to investment banking. Could yoU address those issues for us? 13 JS: Uh....STE YE, I really don't know what the oth6r players have seen about 14 sustaiAability. I mean my guess is. tat uh secoAd quarter is about as good as it 15 gets. I mean, there was just a lot of volatility iA the rnaikdtplace Uh....and I 16 and....virtually everybody in the industry is...is long volatility. I mean .1 4 17 that...uh....we have the ability through liquidity and assets to provide dampeningr 18 services to the industry. So effectively we're long volatility. So high volatility is 19 good for everybody. UK ...in our particular case and wheh I look at the overall 33 -.4 I -- t 1. 196C-HO-59147 EC000299947 07/24/2000 t ; 9:00 a.m. CT KLH:cts - revised 1(11/2006 t V.. 1 wholesale numbers, uh. . . .1 mean I... .1 feel extremely good about the sustainability 1. 1 2 of the perforinancethat we posted in the uh.'...in the wholesale business over the 3 last ten years. And Ithink that that....that is likely to continue. Uh....now if you I- 4 look at....in the....kind of relates to your second part of your question on the I S margin on ENRON ON-LINE, ub, there is no doubt in my mind that the liquidity .4' 6 and capabilities in-terms of information and the ability to app 7 (1'ape goes blank for several seconds) 3 1 . 1. 4. -4 8 JS: . . . .on line has had a very significant positive impact on our business development -I 9 . activities. I don't think there's ahyone in the industiy that can provide the level of ¶ 10 service to customers that ENRON can. And a big piece of that is ENRON ON- '-I 11 LINE. So I think we'ie already seeing maybe even earlier than I would have & I 12 expected, we're starting to see high value opportunities coming outof it the it k 4 13 ENRON ON-LINE volumes. Uhso what....I would encourage you to look at the 14 volume numbers because the volume numbers.). the physical.. growth in physical 4 1. 15 volume numbers has historically been a pretty good predictor of profitability in 4±. 1' 16 the wholesale business and uh my sense just looking at the numbers and seeing 'A V 17 how its playing out is that that ought to be a pretty good indicator going forward 18 in time. ~.- ~*1 I I & . ±1 19 SP: Thanks JEFF. And the increase in U.S. gas, is that physically possible at this *1 A * A ~1 4. 4 - *1 196C-HO-59147 EC000299947 07/24/2000 9:00 san. CT 4.. KLH:cts - revised 1/11/2006 1 1 point for you? *1 2 JS: (Laughs). We did it. Yeah, I'll tell you..it's..!. it's..., it's amazitig. It is really 3 amazing. Uh:...yep, we did it. 1$ 4 SP: Thanks JEFF. . 5 UF: Thank you. We'll now take a question from ANDRE MEADE with 6 COMMERZBANK 7 AM: Hi JEFF. Actually, all my question~ have been answered except you mentioned I 8 uh effective tax rate and I missed it so if you'd just repeat that, it would be great. 9 Uh going forwardfortheyer.; I 10 JS: Yeah we're....we're projecting iSto 20 percent tax Yate and we're feeling real good 11 about tat for the next couple of years. 12 AM: Okay. Okay. - Thanks. I A 13 UF: Thank you. Once again if you find thafyour questions have been answered today, *1 14 press the pound key to remove 5/ourself from the queue. We'll now hear from t 4 15 BART WEAR with WINSLOW CAPITAL (ph). 16 8W: Yeah, I just wanted to follow up a little bit more on the broadband side. .Uh....you 17 talked about loss of 65 million for the year but, you know, ub the first quarter was ~* 18 fl....was zero and this quarter's eight million. You know, why....why the step up 19 so much substantially in the back half because it would seem as you complete the 35 4. 4 I It it.. EC000299947 196C-HO-59147 i ii;: 07/24/2000 9:00 aan. CT I KLH:ets - revised 1/11/2006 I network data that would continue to sell mote uh dark fiber there. And then can 4- , 2 you also follow up with what....what's the CAPX iii looking out on that business? 3 JS: Yeah BART, uh in our original plans we had a higher uh portion of uh fiber sales jr 4 in the early part of the year. And the reason for tat is....when we put in the fiber, 1, 5 uh in a lot of cases we have more than we need in certain routes and so we're 6 going through a process uh which happens particularly earlier this year... .gorng It 7 through a process of figuring out exactly what capacity we need a~ teach portion of S the network and that leads to sales of some that we don't need. And I'd expect that .4 9> 9 those dark fiber sales will detline as the year goes on. So that.. ..1 think that's the ~ 10 reason... .1 mean we're right on plan. We're doiAg everything that we expected I 11 right now. Uh so I....I thinlwe're just kind of.2.it's playing out the way we I, 12 expected it to play out. Uh also, as far as CAPX is concerned, we've....we told 14~ I. 13 everyone we'd be in the kind of the 600....650 million a jear range and that's 14 where we are. So we feel pretty good about that number too. 15 BW: Okay. And obviously on theretail side you've been very successful in signing up - C. 16 contracts and it looks like.. .you±. . . .you know, your momentum if anything there is 17 accelerating. So is the 16 uh billidn number thUt you talked about....is that aL..a 18 low number now or what... .whai's the update on that? t - I 1 I '~*- 19 JS: Well we're gonna sUck with the 16 numb~r but uh....uh we're feeling....feeling r~al 36 1 it 4 Ii t 196C-HO-59147 EC000299947 07124/2000 9:00 tnt CT KLH:cts - revised 1/11/2006 1 good about it right now. 2 BW: Okay. Congratulations. 3 JS: Thankyou. 4 UF: Thank you. Moving on to CAROL COALE with PRUDENTIAL SECURITIES. -a 5 CC: Hi: Believe it or not I do still have some questions after all these questions have 6 been asked. Uh....a few clarifications First of all uh....and I have three questions 7 and I'll....I'1l make these brief. Your agreement with uh BLOCKBUSTER....is that 8 proprietary or can BLOCKBUSTER sign up at~other agreement like what they've I. 9 signed with you with some other uh internet provider? That's one question. Uh I 10 second question is on your asset portfolio. Yodrinternational asset portfolio. 11 With the decline I know thM you hedge that portfolio to the market. I was t 12 wondering if the decline was related to the ub relatively flat performance in the 13 S&P 500 in addition to the decline in the teleco~n sector. And if tracking those 14 two uh factors would give us a little bit....a littl6 bit of visibility going forward as 15 to how that portfolio will perform. And then third, I want....I was....I'd like for* 16 you to clarii~ a little bit more of DAVID FLEISCHER's question In the UK uh it 17 we follow a company called INDEPENDENT ENERGY which is a re....a very 18 small retail power and gas provider over there that has been growing at a rate * .. 4 19 that's twice your rate and they've been experiencing billing issues. I wondered if a 4 '.37 -.4 A. -. 1 4 1 .4 4. 9 2 196C-HO-59147 EC000299947 b. 07/24/2000 it ~. 4~ 9:00 a.m. CT 1~, 4 KLH:cts - revised 1/11/2006 t 1 you had sensed any billihg issues where yoU're getting uh behind on. collecting A. ~1 2 versus paying in the pooi and then to see restructuiing of the market over there. 3 Does that provide an advantage of the incumbint 'regional electric companies V 4 versus ENRON? And so does that actually cr&ate competition or how is it a I 5 benefit to you. I really wasn't clear on that. So there's three questions please. I 6 iS: Okay uh let me start with BLOCKBUSTER. Ub we have an exclusive 7 relationship with BLOCKBUSTER on movies on dgmand. Uh so any movie on .~' It ' 8 demand that BLOCKBUSTER does, if'll go across the ENRON network. Uh....on 4 ~.- 'U - 9 the uh.. ..decline in the uh assets and investments and the...related to the hedging, :1 10 uh. . ..we did have uh....uh. ...kind of some inefficient hedges be&ause the market t 11 was kinda trading sideways and so that... .that l~ad a little bit to do with it CAROl) 12 But I... .1 don't think it's significant enough that it could be tracked uh using 1 4 13 external numbers. It was....it was not a bi~ deal. Uh....and the last one, the I 4 -~ - 14 UK...Aah INDEPENDENT ENERGY uh....I believe has lost their certification due .4 -. 15 to some of those billing problems eAd it... .its kind of interesting... .the way we got ...; . .4 1 2 16 in this busifiess is we....we actualij originally purchased a billing system. That '4 - I -~ - 17 was kind of the (UI)....the entry point that we used to create that business over A , 18 there. So that's ptobably%ur stran....strongest uh....uhi..tool. 'Or sttoh~est 1' V 19 weapon in...in the business. ~Uh we are certified. That system is certified. And - '1 38 '4 1 4 4 I I 196C-HO-59147 EC000299947 0712412000 9:00 aSn. CT KLH:cts - revised 1/11/2006' 1' t right now we're picking up customers that INDEPENDENT ENERGY lost.: I 2 Uh....so it's uh....I think it's a pretty good story.' Ifs a small business, but uh....1 1 4, 3 think it....it's kind of opened our eyes to some opportunities in this mid market uh 4 and uh there are other places for example, we're trying to roll this out right now 5 in Spain. And I think that could be a....a real good opportunity in Spain. So it's I 4 6 just one more add-on that, I guess, it, to be quite honest, I v~asn't really expecting. 7 Just...it....it's just kid ofa nice business. ~~1 8 CC: And..and the deregulation or the restructuring I gue~s is a better word for I 9 it. ...Does that create more competition from the RECs or does it....does it beheflt 10 - - you? I just am not really clear on. ..on exactly how that works. 11 JS: Well the....the thing that allows you to do....We....w~'ve always been opposed'to 4 12 power pool structures. You know in California we led thebattle against putting in 13 a pool sfructur~ and....and originally the pool tl~at they were putting in was almost, 14 identical to the UK pool. We had some real big problems with that. Because it's 15 not a very good pooi. It...it. ...it limits significantly the ability to differentiate the 16 product that you're offering to customers, which we think has reduced the 17 attractiveness of the market for a lot ofplayersA As they restructure the poor in the I 18 UK and move toward a more bilateral market, it allo~'s buyer~ and sellers to get 19 together and structure their own custom designed transactions. And - .' - I -'I 39 t I 4 4 I t t 196C-HO-59147 I EC000299947 9:00 san. CT I KLH:cts - revised 1/11/2006 uh....that's....that's good for us. That's....that's a positive because....that's where the 2 marketplace that we uh....iih....we grew up with in North America and uh... .and I 3 we're very comfortable with it. So we're looking forward to that restructuring as it 4 occurs. * 5 CC: Okay. And on your return on invested capital, it's my understanding that your 6 goal is to improve that by a hundred basis points a year. And is your target... .just I 7 to clarif~t...is it 13 percent for year end 2000? As a kind of an ROE benchmark? 8 Or are you disclosing thatat this point. I 9 JS: Well, we're not:...you know...sit's all dependent on. ...I think on what we can do to 10 uh...uh....monetize uh some of our assets. I....I!..I sure hope we can do better than 11 a hundred basis points a year, CAROL. 12 CC: Okay. All right. Well uh let Me also join the others in congratulating you. Great 13 quarter. 14 JS: Thanks. I 15 CC: Uhhuh. - I 16 UF: Thank you. SOLOMON SMITH BARNEY's RAY NILES will take our next 17 question. I 18 RN: Yes uh....Good morning. Uh....cofiple questions uh....lot of mine have been 19 answered as well but uh I'm wondering if' you can give us uh....some flavor on 40 * I .4 196C-HO-59147 EC000299947 07/24/2000 9:00 san. CT KLH:cts - revised 1/11/2006 1 what's going on with San Diego. Uh....is there a r6al commercial opportunity 2 there? SAN DIEGO GAS AND ELECTRIC or is this uh....Well maybe you can 3 just describe it. And maybe give a sense of how important that is...Mh the energy 4 outsourcing or hedging services for utilities. Especially as they sell off their 5 generating assets and they still have a supply obligation to their customers. And, 6 then I have two other questions uh after that. Well, I'll just mention, one is uh 7 Japan... .if you can give an update on that. Hoi' that market is opening up and S how it looks too. And the third is just the timing on ENRON NET 9 WORKS....when you think uh.. ..you know we could see that heat 4. And what 10 you're sort of....sort of uh dream expectation is for that business compared to the t 11 other uh busines~es. Thank you. 12 JS: Okay let...I'll start first with SAN DIEGO GAS AND ELECTRIC. What RAY is 13 referring to here is that uh power prices in the v'est have really shot up and its 14 created kind of a political uh brouhaha, uh, in California because San Diego is 15 totally unhedged in all of that it price increase is b~ing transferred to the 16 customers. And....and RAY's question is tat acommercial opportunity? It is a I 17 hugecommercial opportunity. Uh....we made the points in California early on I I 18 that the way the structure was set up there was zero incexitive for the utilities to 19 hedge a power cost and I think they've seen where that's gotten them. And so 41 .4 4. a. I 196C-HO-59147 EC000299947 07/24/2000 9:00 a.m. CT KLH:cts - revised 1/11/2006 I ther&s a move afoot to make it possible for tbdutilities tobegin hedging power 2 costs. Thats a huge market. I think it will also make clear to all the other states 1: 3 in the United States tat uh hedging is an important function that the utility can 4 provide for their customers and they better get on with it. Which, I think is gonna 5 lead to a... .a significant increase in the marketplace for hedge structures for power. 6 Uh....all across the country. So it's a great market opportunity. Uh Japan, we 7 actually uh ojiened the office it this quarter in Tokyo. Uh we have people on the 8 ground and they're working and....and RAY, ijustaon't know offhand it jf there 9 are any it tangible indicators of performance but i'm expecting good things out of 10 Japan in the future. Uh timing on networks uh....I'm hoping that each of these k 11 verticals that we get into offers us the opportunity to create market value. And 12 then, we'll have to figure out how we monetize or get that market value to our 1. 13 shareholdets but it if we can create it one or two verticals every year, and if we A; 14 can create two or three billion dollars of value for each of those verticals every 15 year, I think that's kinda hitting a grand slam home run for our customer....or for 16 our shareholders and that's kinda how I'm thinking about it. I'm not... .no promises 17 at this point but....but it has that kind of potentiM for us. I 18 RN: I see. Well it sounds pretty promising. Just one last thing on the utilities hedging. 19 1 mean, are.. ..I mean what peicentage of them do you think are act... .actively * a * I. 42 * * 4., ¾-' I 196C-HO-59147 EC000299947 07/24/2000 9:00 a.m. CT KLH:cts - revised 1/11/2006 1 hedging uh right now or is it pretty much untapped at this point? 2 JS: Uh the percentage is extremely low. I....I think about the only real hedging 3 activity that's going on in the utility sector rigli't now is when they were uh....uh 4 contracting for power from asss that they wefe selling. But those were typically I 5 relatively short-term contractK They'll be rolling off uh in three to five years. 6 And uh....beyond that, there's almost no hedging going on. i 7 RN: Okay, thank you. - 4 8 UF: Thank you sir. We'll now hear fr6m JOHN REDSTONE with ASCOSTIA I 9 CAPITAL.. 10 JR: Yes. Good morning gentlemen. I wonder if you could tell us a little bit more 1. 11 about your holding in MO, specifically going forward. Where you see your 12 relationship with the LONDON METAL EXCHANGE. 13 JS: Uh well we're....we're still in discussion but uh....uh MG is....is being fully I- 14 integrated into our....uh our systems. We will offer an on-line ub metals 15 transaction service. In fact, we're in the process right now of moving the people 16 into the ENRON uh building in London. Uh so it will be uh....it will be fully 17 integrated within the next uh couple of months. Uh....ag far as the exchange is 18 concerned, uh we see enormous value in havin4 a liquid exchange available. 19 Uh....but we also believe that uh there are services that can be provided that are I - 43.. I. 44 * I.' t 196C-HO-59147 I ' EC000299947 .4. 07/24/2000 4 9:00 a.m. CT - KLH:cts - revised 1/11/2006 1 14 1 complementary to exchange-based services. We've always believed that and 1-' 2 we've worked with the exchanges closely. But there are things the exchanges can't .4 3 do ub in tenns of customized transactions that we believe that ENRON could 4 provide .... .or ENRON has a role in providing to the customer. So, we see it as ~l 5 . kind of a symbiotic relationship and.. ..and uh we expect to have good relationship I 6 witlithemastimegoeson. *. 7 JR: Thanks very much. I >4 4,- 4 4 4 S UF: Thank you Sir. We'll noW hear from BRUCE KNUTSEN with FIRST. 9 AMERICAN ASSETS. - I 1' 10 BK: Good morning. Looks like a great operational quarter. Ijust wanted to get a 11 little....if you could give me some color on maybe uh....the...the volatiuity....I'm 1~ 12 assuming ydu had to uh....hold back some because of the risk management '.4. 13 uh....and..~..I...I am also looking for guidance in the working capital and maybe the 14 interest expense line. Thanks. I 4. I 15 JS: Okay uh. ...yeah, the way the system works uh. . !when there's a high volatility -1 t 16 number there's a uh. . . .there's a calculation that's done that creates something called 4 4 ~44 4 . 4 17 a prudence ub reserve and, essentially what it's doing is it's saying when you have .4'.. 18 such high volatility, it's difficult tb exactly determine what the current market 4, 44 . .4 4* - r 19 price is for rnarkii~g your portfolio of uh contracts. And so what you do is -~. -, 4 4 V .44 1 0 4 .4 I: I 196C-HO-59147 EC000299947 07/24/2000 9:00 g.m. CT KLH:cts - revised 111112006 1. 1 you....you....uh based on how much volatility there is, you create a reserve uh for 2 uh inaccuracies tat occur in determining what .te market price is. So, yes, 3 uh....in periods of high volatility our prudence reserve grows and ten as that 4 volatility goes away that... .that prudence reserve shrinks. Uh.... 5 MK: BRUCE, on working capital, we don't have a balance sheet and cash flow 6 statement, its....it's not done yef But uh....and then lastly on interest expense,I I 7 would uh....I'd use maybe 185 or 190 milliondollars a quarter uh going forward. 8 So roughly the level that we uh.. . .that prevailed during te third quarter. 9 BK: Thanks. 10 JS: Uh....why dtn't we take just one more question and then we'll....we'll call it quits. 11 UF: And that question will come from MICHAEL BOONYONNER (PH) with SAGE 12 ASSET MANAGEMENT. 13 MB: Yes, good morning. Uh....in your presentation'you mentioned that your 14 incremental return on dapital has been it extremely satis~ing. Uh....are you I 15 ready to quanti1~ what tat is or uh just give us any... .any additional color on that? 16 JS: Uh..no I don't think we're I don't think we're ready to...to publish that number. 17 But I can tell you that...that it if you....if you look at kinda the it portfol....or te 18 uh....uh... .the business as it existed three or fou~ yearsigo, we were making some I 19 very significant investments in it acquisitions and development of assets uh to 45 I A - i- 'I t 196C=HO=5914T K: 07/24/2000 it. 2 - 9:00 a.m. CT .9 KLH:cts - revised 1/11/2006 *1 1 support our business and today uh that that number has dropped very very I. 2 significantly at a... .at the same time tat our net income has increased significantly 3 from those activities so....uh....I mean the number is becoming very good. 1. 4 UK. ..yeah~ I....I would like to sit down at some point. I don't think we're ready to 4 5 right now. But I would lil& to sit down ajid show you uh uh pretty....pretty 4> 6 tangibly and quantifiably uh what our traditional return on equity has been and 7 what our inctemental return on ~quity looks like it's going to be in the future 8 ~because it's a it's pretty....pretty startling. 9 MB: That's terrific. Congratulations on uh great results. I -~ . 1~ 10 JS: Thank you very much. Well with that, I think ~we'll call it uh quits forte believe i~1, 11 morning. Thank you very much for calling .....~...., we i... great quarter I 1. 12 for the company. Uh....very very pleased by uh what we're seeing in the I V. 13 marketplace and te performance of all of our businesses and uh we c&rtainly C ~1' 14 thank you for spending the time with us today. Uh....I look forward to seeing y'all I 15 individually as time goes on. 'I 16 UF: And that concludes today's confeance call. Thank you for your participation. I- 17 (End of Recording) S 46~ 1. I.. 12 * . V t * I I I *1 ~1 - A- s-I #2