Subject: Goldman, Sachs & Co. Investment Research-Neg. Perceptions HitBottom and Catalysts Appear at Hand; S
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Date: Fri, 5 Oct 2001 07:27:18 -0700 (PDT)

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                 Goldman, Sachs & Co. Investment Research

Neg. Perceptions Hit Bottom and Catalysts Appear at Hand; Strongly Reit. RL

***************************************************************************
* Investors have virtually given up on ENE (down 63% ytd), & its prospects*
* as a long list of extremely neg stories have swirled around about the co*
* and its financial cond; the co's limited transparency to its sources of *
* earnings, its cash flow and financials in gen. has worked against percep*
* as mgmt has declined to be more specific in refuting even outrageous    *
* claims that have assumed a life of their own. We see major catalysts in *
* Q3 reporting and disclosure and more in coming months as credibility is *
* partially restored.  We are strongly reiterating our RL rating, and our *
* conviction in the high and sustained growth prosp at ENE, even as we are*
* cutting our 02 est. to $2.15 and growth expect. and our price tgt to $48*
***************************************************************************

  David Fleischer, CFA (New York) 1 212-902-6018  -  Investment Research
  David Maccarrone, CFA (New York) 1 212-902-0324  -  Investment Research
   Eric W. Mandelblatt (New York) 1 212-357-7547  -  Investment Research

====================  NOTE  7:30 AM  October 03, 2001  ====================

                             Stk  Latest  52 Week  Mkt Cap   YTD Pr    Cur
                             Rtg  Close    Range    (mm)     Change   Yield
                             ---  ------  -------  -------   ------   -----
Enron Corp.                   RL  30.61    87-25   22953.1   -63%      1.6%

                  --------------Earnings Per Share---------------
ENE (US$)          Mar     Jun     Sep     Dec      FY       CY
      2002 FY                                       2.15
      2001 FY      0.47A   0.45A   0.43             1.85
      2000 FY(A)   0.40    0.34    0.34    0.41     1.47

                   -Abs P/E on-   -Rel P/E on--   EV/NxtFY  LT EPS
                    Cur    Nxt     Cur    Nxt     EBITDA    Growth
                   -----  -----   -----  -----   --------   ------
ENE       FY       16.5X  14.2X    0.7X   0.7X        NA        23%

===========================================================================
PERCEPTIONS TOWARD ENRON HAVE TUMBLED FAR BELOW REALITY
Perceptions toward Enron have fallen as dramatically over the past 18
months as we have seen for any major company.  However, the major
disconnect is that unlike many technology and other (former) high growth
companies, Enron continues in our view to be the far-and-away best-in-class
company in its major business segments, and to have company-making growth
prospects, with a high probability of success, in huge new markets.  Only
18 months ago Enron was perceived as a company that could do no wrong.
It's wholesale marketing operation (currently 77% of earnings) was viewed
as having virtually limitless potential and its retail marketing business
was just beginning to emerge as a business that could even surpass
wholesale.  Management presented its telecommunication strategy to Wall
Street in January 2000 to great fanfare.  It was this raising of
expectations to (in hindsight) unreasonable levels and management's failure
to reset expectations for telecommunications when this business clearly was
falling far short of the objectives set by management that set the stage
for investors to lose trust in management and to discount other statements
because disclosure and transparency of information was so limited.

PERCEPTIONS HAVE HIT BOTTOM AND ARE LIKELY TO TURN WITH COMING DISCLOSURES
We believe perceptions have gone to such a negative extreme that a major
uptick is likely in the near and intermediate term given actions we expect
to be taken by management and new disclosures we expect with the Q3 report
and at year end.  We are decreasing our previous price target from $63 to
$48, still representing 57% appreciation, based on an 18 multiple of
forward earnings; we see this target as one that could easily be exceeded.
We view the current period as an extremely rare opportunity to purchase
shares of a company that remains extremely well positioned to grow at a
substantial rate and earn strong returns in the still very young and
evolving energy convergence space.  We do not intend to totally dismiss the
concerns of investors and even certain of the negative stories that are
circulating about Enron.  Some appear to have validity.  However most
appear to us to represent major exaggeration or misinformation to an
extreme; even these are difficult to effectively debunk given Enron's
limited financial disclosure.

WE SPOKE RECENTLY WITH MOST OF TOP MANAGEMENT; OUR CONFIDENCE LEVEL IS HIGH
We spoke recently with top management including the CEO, CFO, Chief
Accounting Officer and the head of Wholesale Services.  We challenged top
management on the wide range of accusations and concerns that have been
repeatedly bandied around by investors and have weighed heavily on the
shares.  We are convinced that the great bulk of the negative stories being
told about Enron are false or without substantial merit.  Most others
appear exaggerated in their claims.  We strongly believe that ENE shares
have fallen to discount these worst fears of investors and that as they are
debunked in coming months, as we fully expect, that the shares will rise
substantially.  We will review the major concerns that investors have
expressed and present our response/conclusions:

Market Speculation:  Enron uses fair value accounting and has 'created' the
bulk of its earnings in recent years by writing up assets to market (and
above market in today's world) and now faces huge charges as it attempts to
sell these assets.
Response:  Enron does use fair value accounting, but only in its merchant
investment portfolio.  This portfolio totaled as much as $2 billion at its
peak and is currently valued at approximately $1 billion.  Earnings and
losses from this portfolio have appeared in the asset and investment
category of Wholesale Services, the (by far) smallest piece of Wholesale's
earnings in recent years.  Any net gains in our view have been a modest
portion of earnings over the years and a negative in 2001.  This criticism
of Enron's past earnings, which some have used to discount past and current
levels of earnings as proper numbers to use to value the company, appears
to be totally off base.  We believe that some small portion of past
earnings can be categorized by investors as non-recurring, but that the
great bulk of past earnings are real and recurring and the proper starting
point in forecasting future earnings.

Market Speculation:  Enron has indicated that many billions of dollars of
assets that earn low returns are for sale and investors are concerned about
major write-offs that some believe could run in the billions of dollars.
Response:  Management does not deny that certain assets when sold could
incur losses.  However, others are likely to be sold at gains.  No assets
on the balance sheet are classified by accountants as impaired, which would
require that write-offs be taken.  Rumors of an $850 million charge at the
company's Dabhol, India power project appear far off base and we expect
Enron to suffer no loss given its strong contract position.  Although
certain Brazilian assets could be sold at losses, Enron does not have the
problem of having financed the Brazilian assets with U.S. debt; all were
financed with local currency.  We doubt that major charges are likely on
any assets to be sold and expect management will better define this issue
on October 18th with its earnings release.  Concerns of multi-billion
dollar charges in telecommunications and elsewhere also appear grossly
inaccurate.  The sale of various assets including the long awaited sale of
Portland General will likely create substantial cash proceeds (close to
$1.5 billion of net cash proceeds from the PGN sale alone) which will be
accretive to earnings almost regardless of how the proceeds are used (we
expect debt paydown and share repurchases).  Enron is committed to selling
some billion of dollars of assets over the next two years.

Market Speculation:  Capital requirements are substantial in the company's
marketing operations and both customers and competitors are concerned about
credit exposure to Enron.
Response:  Moody's upgraded Enron's credit earlier this year to BAA1 and
rating agency discussions have been routine according to management, given
Enron's best ever funds flow ratios.  Management indicated that speculation
of certain counterparties not extending credit are 'absolutely false.'

Market Speculation:  Cash flow from operations has lagged earnings and the
company has been a consumer of cash.
Response:  Management indicates that it will be cash positive in the second
half of 2001 and in future years.  This is perhaps the most difficult or
inpossible claim to confirm.  Management claims that margin activity
distorted cash flow in 1H01; in 2000 there was $1.8 billion of customer
inflows to cover margin requirements and in 1H01 $2 billion of deposits
were returned.  Enron has made many billion of dollars of investment in
past years as it sought to build its various businesses.  Financial
discipline did not appear in the past to be a top priority as the company
spent whatever it took to rapidly build its industry leading capabilities.
It now appears that financial discipline is dramatically improved at Enron.

Market Speculation:  A. California generated huge profits for Enron.
               B. California represents substantial potential liabilities.
Response:  This is another difficult topic to prove or disprove.
Detractors can (and have) made many unsubstantiated claims.  The recent
agreement for SoCalEdison to avoid bankruptcy appears to confirm the
validity of contracts and likelihood of Enron being paid for past power
sales.  Enron earlier identified nearly $600 million of receivables and has
indicated, similar to other convergence companies, that it has recognized
limited profits in California and has created substantial reserves.

Market Speculation:  Disclosure is sketchy.  The company must be hiding
something.
Response:  Enron had substantially more complete disclosure a decade ago
when it was forming its natural gas business and found that competition
intensified and margins were held down as competitors took advantage of the
information.  Management has steadily reduced the disclosure of information
even as the company's businesses and its products have become dramatically
more complex.  Investors have begun to call Enron's earnings a 'black box'
as they began to doubt their ability to analyze and predict future
earnings.  When management began to lose credibility with investors this
turned into a total loss in confidence in reported and potential future
results, a very high price to be paid.  Enron management is now committed
to improving disclosure, even at the expense of competitive issues.  (The
number of true competitors has already declined dramatically).  We expect
some additional disclosure with the Q3 report, but substantially more
beginning at year-end as management now recognizes the cost in ENE share
price of the limited disclosure and loss of confidence.

Market Speculation:  Recent 10K and 10Q disclosure of transactions may
require substantial new share issuance, given the current weak share price,
that will appear in fully diluted shares.
Response:  These shares represent collateral to backstop off-balance
transactions.  Net exposure and the transactions themselves are not well
defined and disclosed.  Management has indicated to us that the company is
working to restructure these transactions and that investors will see
results on this score 'fairly soon.'

      (continued...)
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