Message-ID: <8072761.1075840210338.JavaMail.evans@thyme>
Date: Thu, 21 Sep 2000 10:18:00 -0700 (PDT)
From: larry.izzo@enron.com
Subject: EECC INSIDE ENRON
Cc: joseph.sutton@enron.com, david.haug@enron.com
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Jeff, I understand at last week's PRC you asked Dick what the difference was 
between EECC, and, say, Brown and Root.  Let me try and answer that and at 
the same time provide my recommendations on how EECC should evolve inside the 
new Enron.

a. Enron does not "need" EECC; however, Enron has realized extra value from 
the EECC model since 1990.

b. EECC has taken an Enron liability (construction risk) and turned it into 
an asset (net income).  The risk was incurred by Enron's decision to build 
assets around the world.

c. Enron could have out-sourced most or all of its engineering and 
construction management since 1990; but for about the same market price and 
contract value, EECC has performed this work and accumulated over $250MM of 
net income for Enron.

d. In addition, EECC has performed the work generally in a manner superior to 
the rest of the industry.  We have avoided disasters experienced by Brown and 
Root, Black and Veatch, Snamprogetti, Raytheon, and Stone and Webster, which 
presumably could have occurred while performing Enron's work.  We've out 
performed them because we had better risk management skills.  

e. Cost avoidance:  In addition to performing this work at market price and 
at the same time making $250MM net income, as Jack Urquhart pointed out at 
the last Board meeting, we have avoided tens and tens of millions of dollars 
of extra cost during execution.  The Enron portfolio of construction risks 
averages in billions of dollars, so even 1 or 2 percent in nuisance-type 
change orders from outside contractors would have added up to substantial 
extra costs. 

f. ROIC:  as we recognized the Enron deal flow was decreasing, we were asked 
in the last two to three budget cycles to maintain or grow our net income.  
Therefore, we embarked on non-Enron third-party construction business.  This 
marginal income has increased our use of working capital.  Still, this year's 
return on all our working capital will be about $22%, down from 29% last 
year, but still a 25% average over two years which is not unreasonable.  You 
asked about the details of our working capital; I'm scheduled to brief you on 
2 Oct.
 
g. Internal flexibility:  there have been many instances over the years where 
having an internal contractor has enhanced the ability of an Enron developer 
to close the deal.  For example, on the 1999 Peakers, although other 
companies have out-sourced the same type of work, I assure you that because 
of the late start getting going by the Enron developers, having to out-source 
would of easily cost us four to six weeks of summer revenues on the 
schedule.  On our current Dabhol LNG project, an outside turnkey contractor 
would never be motivated to try and maintain the current schedule, given the 
weaknesses in the Owners' contractual positions, including quarry suitability 
and subsea surface rock surprises, etc.  Many other examples abound.

h. Downsizing risks:  I think the risk to Enron of what happens to a large 
EECC in the event of downsizing during a market cycle is misconceived.  EECC 
in Houston has about 350 employees, many of whom are accountants, lawyers, 
contract specialists, program managers,  all of whom have skill sets which 
are in demand in other Enron business units.  Therefore, any downsizing of 
EECC, if done over a reasonable period of time should be able to avoid a 
significant severance cost risk.

Nevertheless, as Enron changes to a less-asset dependent company, and because 
of the current value in monetizing assets, the need for change is necessary.  
I think it is important to agree on a clear plan and brief our employees, all 
of whom are stressed by the uncertainty of where they're going.  This will 
have a negative impact on the company's performance, unless addressed.

My recommendations for evolving EECC is as follows:

a. Sell NEPCO and phase out other non-Enron third-party lump sum work 
(already on-going).

b. Define a "slice" of EECC in Houston as "NEPCO-Houston," and package this 
with the NEPCO sell.  A buyer might value the EECC-Houston expertise in 
cogeneration and gas-related services.

c. Finish the Enron work now under contract, which will take from one to two 
years.

d. Continue to self-perform any new Enron work in the future which I see 
centered in North America, Europe and possibly Brazil where assets may be 
required to enhance the Enron networks being developed for trading purposes.  
I think it would be a mistake to allow the decentralized business units to 
attempt to manage outside EPC contractors without a residual Center of 
Excellence (EECC).

e. Move EECC inside EES, allowing EES to take advantage of a continued income 
stream from EECC.  A subsequent step would be to merge the infrastructure 
between EES' Global Services and EECC.

f. Slowly downsize the company as the current work evolves and the work load 
permits.

g. Continue to develop engineering services for customers, without taking 
construction risks, but taking advantage of our reputation for due diligence 
and risk mitigation.  I think this effort could fit well inside EES as 
another service provided by Enron.

h. Continue EECC's initiative to develop an E-commerce revenue stream, 
currently being undertaken in coordination with Enron Networks, but relying 
on EECC's intellectual capital, lessons learned and contacts in the 
industry.  I think we have good potential for this opportunity, which is 
actively underway.

In summary, EECC's assets are the intellectual capital of its people and the 
collective systems and procedures it has developed.  Both can continue to 
provide value to Enron inside EES.  I've been discussing details with Lou and 
Joe, but I strongly recommend we agree on a clearly defined plan and allow me 
to communicate it to our employees.


LI43200