============= Page 1 of 3 ============= EQUITY RESEARCH JUNE 26, 2001 Prudential ENE:RECENT 1:1 MEETING WITH MGMT LEAVES US WITH MORE POSITIVE OUTLOOK, BUT WE ARE LOWERING PRICE TARGET TO $55 ON REVISED SUM-OF-PARTS MODEL EXH048-00275 Enron Target: Industry: Moderate The senior analyst(s) d oes not have a material position In EN E. FY EPS WE IQ 2Q 3Q 40 Actttal , ° . .12100 ' ` ::' .. °. $1:A7A 30,5X :::$0.40A $0.34A $0.34A $0.41A Cu ent , :, 12101, ..:; :, . $1.80E . 24.9X ' .. 1`40.47A . 7777$0.44E Prior $1.80E 24.9X $0.47A $0.44E Current' : :.12/02? :: ;-7 '...gym $2.10E' 21.4X Prior $2.10E 21.4X I Avg.. volume: 4,800,000 Div/Yetd: 0.5011..11% Fps Growth: 12.00% Market Cap: $337,485 m 52w Range: 00.80.4240 PIE/ Growth: Z.1x Enron Corp (ENE), headquartered in Houston. TX; produces electricity and natural gar, develops. construcir. and operates energy fadiities xvrldwide and delivers both physical commodities and financial and risk management services to customer,. The company it also developing an intelligent network platform to facilitate an online business. HIGHLIGHTS • In our view, ENE's stock performance has been hampered 1) EPS quality; 2) management credibility; 3) CA operational and political exposure; 4) international portfolio risk; 5) excessive insider selling., • In a 1:1 meeting with CEO, Jeff Shilling, management plans to discontinue the use of its affiliated partnership to monetize significant assets/investments and limit the sale of pre-registered stock under safe harbor requirements. • While CA has singled out ENE as the villain in the state's energy crisis, we believe this is centered on the close relationship between ENE Chairman Ken Lay and the Bush administration making ENE the symbolic target of Democrat-Republican warfare. • Regarding the $9B of refunds of "overcharges" sought by Gov. Davis against the power suppliers, ENE's exposure is minimal about S39 million, reflecting low volumes of physical power sales. • Also, ENE has little earnings exposure to natural gas prices, except for the impact on marketing margins, and should meet/beat 2Q01 EPS estimates. • Despite the more positive outlook, we are lowering our price target to S55 on more conservative sum- of-parts valuation. DISCUSSION In a brief meeting with Enron Corp.'s CEO, Jeff Shilling, on Monday, 6/25/01, our takeaways were: 1. The company has little direct earnings exposure in California, as evidenced by the recent allegations of energy overcharges by California governor, Gray Davis, which estimates Enron's exposure at $39 million out of a total of $9 billion. 2. Enron is addressing earnings quality concerns regarding the use of its affiliated limited partnership, LJM Cayman, as the "cover" for significant asset and investment monctizations by discontinuing future transactions through this financing vehicle. EXHIBIT WIT: d ®~, DATE: ;3c.) P 0010409 A. NEUSTIFTER GOVERNMENT EXHIBIT 3735 Crim. No. H-04-25 (S-2) ============= Page 2 of 3 ============= r 3. Management sold a surprising number of shares/options in the first half of 2001, which it claims were pre-registered sales in advance of the stock price decline. Skilling claims to have halted the sale of his pre-registered sales. 4. Sporting a cut on his forehead related to a recent "pie" incident in California, Skilling believes that Enron has been a political target in that state because of its friendship with the Bush administration. From an earnings standpoint, however, Enron was not the largest profiteer in the inefficient market that persisted in California over the past year. (For those interested, the pie thrown at Skilling was a blueberry pie, crammed into his face by a radical protester in San Francisco). 5. Enron's "asset-lite" strategy appears to be advantageous in an environment of falling commodity prices as several of its peers may be facing asset write downs of power plants that were purchased at above-market prices over the past few years. 6. Although Enron is likely to meet or beat consensus expectations for 2Q01 EPS of $0.42, we are lowering our price target to $55 from $74 based on more conservative assumptions in our sum- of-the-parts valuation. Our estimate of $0.44 is above consensus but is modeled independently of management guidance. We are assessing a lower multiple of lOx EBITDA from wholesale operations (excluding an estimated $300 contribution from international activities), down from our previous multiple of 15x. This is based on the decline in premium valuation for the merchant power providers, the increased operational risk in the power sector in and outside of California, and the potential negative impact of the weak U.S. economy on overall energy trading patterns. We are maintaining our Buy rating on the Enron as it is trading at the bottom of its 52-week range although our view of the entire natural gas/power sector continues to be cautious. Political uncertainty surrounding the California situation and the current status of electricity deregulation across the U.S. could hamper near-term stock performance, although Enron and its peers are among the few companies in the S&P 500 that are likely to post 20% earning growth this year and in 2002. Unfortunately, these strong underlying fundamentals have. been outweighed by fears of deregulation and government intervention, although we believe that once the smoke clears, Enron will afford a tremendous buying opportunity. The bad news is that the smoke may not clear for another year or so until the California gubernatorial elections commence in November 2002. pntdcotial securities Incorporated (or one of its affiliates or subsidiaries) or its officers. diroctorr, anarysas, employees, agents, independent contractors, or eoasntlants may have positions in seeasities or commodities refuted to herein and may, a principal or agent, buy and sell such securities or commodities. Prudential Securities Incorporated and/or its atitiatea or its subsidiaries have managed or comasaged a public offering of securities for ENS. P 0021'• 'l EXH048-00276 ============= Page 3 of 3 ============= A1y OTC-1tad.d switills or non.U.S.. mmpaNes mentioned in this report msy null be dearsd for sale in all stases. "MM.rial' is d fm.d as an agWty or equity daMdlva post ion greater then $10.000 In any al die senior analysis or household members aeourn(s) Securities products and services are offr.d through Prudential Securities Incorporated, a Prudential company. PPnsd.ntlal Securities incorporated, 2001, all rights reserved. One Seaport Plaxa, New York, NY 10292 Prodot FU atda I se .inro mrb d Pndrisl. No.a w. w b atlifab< Idam.im eaetteire Mains trout on data oabi, ban rOtupiad aatlatkel aervieaa, deer npna a nnvru*al rr, or eew source.. believed lob* reliable. Nar.w. aunt idatm01 a has rot bOM varyied by w. rtl w do ido mesa any npaarbtiem r a b amp' a aumpi lansn. Any aoimria rmN.md in notue coeaasY os aerra ophbrr, vetelt an tNrejad b rrtartpa. Pnrdrala Bee+eloe lnetrpdra.d (d an d b aesata. or OEAad;oew) or Tair than, tlo,dariL rtatyra. ampbyas, atone. bdpevrdari mireaon, or earmAwas may Nave pa ib'. InseaallW or aormrdlir nuns b been rtl may, r prkrJpel tar egad, buy and eel run 5,0.116+. a is iuia .a M employ.,. rrtyt , dsor, aped. brdsprUenl mar,tbr. a d..ua, a a eaa,t.a d Pr, iiiI S.u.rb. lnrsrporaed b reib.. a b wAadwiae m y suns a a d'rga for aomprnr o nbmed in lie npe . Meow Ta bioyarlon roe any epWdoa arpmaaad alas canrilua n arler b me ore ooWation d n Offer b buy.ny seaabbn a ommoddis rMiaad trash Turn way be i WiIas.Mn hrd.arti.L tadalvl,.rtd gsrdiatlra opirien. may rot d in amen. This firm (rare d b ,folios r i "dodr) may born tbm to tbm Adam iereObss.--.1 taba aetr s.niaw roc a saiel bs earntori E.rtiirtp a alrr series ham any ampry mantbrrd hUis mpmt ThatW w red it4rari h Imamlenaliarastntrg. order may crake Ouch {seamen tamable tar omindsda. The" ir:bde, la saampl., aarnntlq polkaL prraney avlrttpa rsl. Wdulsra. ad lnIsd nabbSSy d Inlormrisn on iarmOaa saetaaiM. Prtalydiel Smartia brapaatad is iliids., end b wbe6on.. mMa no m ace leas Ta ce stadt sum asariiom vadeh we h sueod d 9teir taaardt spats an in Mrtpirta with tartan adarrleinrta npronp raeOa roma iryoaad brtle a.aa dad adfnp. Act at 1974.8.. d awrein mvar.d by rids reps m y b. m.ea ady h an.. jucl. ainm ahem th. sowsy s 4+a~sd br ale T . mdri d gds- fuu6loB-- b.an append M daln~tlnn bJ! Pnd.MW Aogs b/.mUaW Llmse4 slid s MpA"d by The S.arline nd Fubrae Auhoriy lJmYed. Additional information on the securities discussed herein is available upon request. P 00011 EXH048-00277