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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)


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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


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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

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Additional information on the securities discussed herein is available upon request.

P 00011

EXH048-00277