Subject: Status report on Enron's investment in EnCom
From: [email-masked]
To: [email-masked], [email-masked]
Cc: [email-masked], [email-masked]
Date: Fri, 17 Nov 2000 11:35:00 -0800 (PST)

John Sherriff has asked me to update you on the status of our relationship 
with EnCom, as well as what I am doing to develop a plan for the way forward 
with our investment.

Background

As you may be aware, Enron made its investment in EnCom in October 1999.  
Bruce Wrobel is President/CEO.  Our current cumulative investment is now 
$34,750,000.  We own 63.80 %, and have the right to put 5 members on a board 
of nine.  There are two other strategic, Japanese investors in the business; 
Orix, primarily known as a leasing firm, and YTC, primarily a parts supplier 
for Toyota.  Enron Japan (EJ) in particular values Orix as a strategic 
partner even beyond the context of EnCom (a fact that was reconfirmed when 
Ken Lay met with their Chairman during his recent week in Tokyo).  

At present, the relationship between EnCom (its vehicle for doing business in 
Japan is E Power; and I will use the two terms interchangeably) and EJ is a 
difficult one.  EnCom entered the Japanese market some months before EJ 
entered, and EnCom was seen in the market as Enron's entry vehicle for 
Japan.  I infer that EnCom has benefited from this association with the Enron 
name, and Enron apparently did not discourage it in the early days.  With the 
arrival of EJ in Tokyo early this year, Enron is working to roll out our 
wholesale/merchant business model in Japan.  EnCom/E Power has and continues 
to receive coverage in the media (much of it self-generated) indicating that 
they intend to sign up customers.  In fact, E Power's COO Mr. Awono, says 
that they will need to sign up retail customers to be able to have load to 
support the large power projects they are planning to do.  (This unlikely 
formula suggests, at least on his part, a degree of naivete, at best, about 
how offtake from plants in deregulated markets can be and should be 
managed.).  Finally, EJ reports meeting with customers, e.g., Sony, who 
indicate that E Power holds itself out as also being a "trader".  This has 
caused some confusion in the marketplace about which "Enron" entity is 
providing wholesale/merchant services.  

There now also is a question as to what EnCom's business model in Japan 
should be.  Conversations between Orix and EJ personnel in Tokyo suggest that 
Orix believed that Enron would be intimately involved in the day-to-day 
management of EnCom (we are not, and Bruce has conceded that prior to EJ's 
reporting relationship into London being established, Enron involvement and 
direction was largely absent).  Moreover, it appears that Orix also believed 
that EnCom would be engaged in the business of "aggregation" of power 
supplies for further resale in the Japanese market (this is essentially 
describing the core Enron merchant business in different terms).  
Conversations between Orix and EJ indicate that Orix now does not see EnCom 
having in place the people and skills to execute on an aggregation business 
strategy.  Rather, Orix sees EnCom as having the skill sets of large-scale 
asset developers, and this is not a business Orix is particularly interested 
in pursuing.  Finally, Orix has an employee secunded to EnCom/E Power, and he 
reports that Orix now even lacks confidence in EnCom's ability to deliver any 
large-scale asset development opportunities.  John and I are tentatively 
scheduled to meet Orix's Chairman in London on 27th November.

To give E Power its due, it is now also frustrated (Wrobel telephone 
conversation with me) because Ken Lay clearly signaled in some of his media 
interviews in Tokyo that we were bringing the full panoply of Enron skills to 
the market, including the possibility of large-scale power projects.  It is 
Wrobel's view that this message in the marketplace now undercuts EnCom, as he 
believes that people will look to a $60 billion market cap company as a 
preferred counterparty for asset development, over a company capitalised at 
present to the tune of about $40 million.  There is also a Business 
Opportunities Agreement between EnCom and EJ addressing how opportunities 
that come to Enron personnel, who are also on EnCom's Board, should be 
handled.    Wrobel believes that we are being a bit narrow in our 
interpretation of the Business Opportunities Agreement, a view I do not 
share. Ken's statements are correct, i.e., we can do large-scale developments 
in JapanIn sum, there is not an agreement as to a clear division of lines of 
business between the two organisations.

At present, frustrations on both sides about confusion in the marketplace and 
in media messages (EnCom has now agreed that Enron will lead all contacts 
with the media, for both firms), have contributed to a situation that is not 
amicable.  Communications in Tokyo between EJ and E Power have virtually 
dried up, though recently EJ has invited E Power to work together on a 
Proposal for Mitsubishi.   

So Where Are We?

John has asked me to lead an effort to evaluate Enron's investment in EnCom.  
This will be fairly comprehensive, including an assessment of the talent on 
the ground in Tokyo, an assessment of the viability of their prospects (both 
in terms of likelihood of permitting, and, to the extent possible, their 
economics), and an assessment of what Enron's stake in this venture ought to 
be going forward.  I will evaluate the full range, from assuming 100% 
control, to a reduced stake (even down to zero), to taking equity in 
particular projects.  As such, I have sent to Wrobel a list of items 
reflecting our initial information requirements for due diligence.  

Second, while this due diligence proceeds, we are also attempting to agree on 
respective roles for EnCom and EJ in the Japanese market.  We remain 
committed to retaining an asset development capability in the market, which 
does not go down well with Wrobel.  We also are sceptical that EnCom has on 
board now, or will acquire, the risk management skills that we believe will 
be necessary to actually manage fuel and offtake along the lines that Enron 
has found highly profitable, e.g., Sutton Bridge tolling.  We have said that 
we respect their talent for being able to develop large-scale assets (though 
our Technical Services Group has already questioned their high staffing 
levels), and that we feel the profit-maximising strategy for both firms is 
for EnCom to develop projects (sites, permits, engineering), with Enron 
holding a tolling agreement and doing the project financing.  We believe E 
Power should be able to develop very bankable deals on this basis.  We do not 
have agreement on this point.  Wrobel seemingly believes that they will be 
able to do the risk management functions, and receive lucrative returns for 
the assets they do develop.  At this early stage we see no evidence that they 
can manage such risks (or that lenders would let them do that), and that it 
is more likely that they will end up with a classic IPP structure with gas 
"in", PPA "out", and reasonable but not rich returns on equity.  Wrobel sees 
our "tolling agreement" proposition as taking too much out of EnCom's deals.  
For our part, we have said we are willing to assure attractive equity returns 
(without saying what that number is), and reward them for their development 
efforts.

Our latest effort is to try to agree a tolling arrangement for a project in 
Tohoku province.  E Power has already met local officials.  As it turns out, 
EJ was approached by national government to do a project at the same 
industrial complex as that which E Power is working on.  By letter from me to 
Wrobel of 15 November, Enron has proposed that we pool or combine our efforts 
(i.e., E Power's engineering and local permitting expertise, with Enron's 
political capital garnered at national level), get the project done together 
rather than competing, and divide our labours as noted above, i.e., Enron 
does fuel and off-take, E Power does development of the asset.  In the phone 
call from me to Wrobel that preceded the sending of the letter, Wrobel 
expressed serious displeasure with Enron's proposal.  He and I are to speak 
again; he is to call me back, and if he does not do so on 17 November, I will 
call him on 20 November.         

I will plan to make progress on my wider review assuming cooperation from 
EnCom on our due diligence information requirements.  John and I are 
committed to moving this forward quickly, but much of the necessary 
information is not in hand. 

Please let me know if you have any further questions.