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L

~u x

To:	Files
From:	John L. Garrison
Date:	October 2, 2001
Subject:	Azunx Strategy

Market Opportunity and Industry Structure		
 The world wide opportunity in the Water and Waste Water Industry is tremendous (see excerpts
from SG Equity Research on RWE below)		
Table 35		
Estimates for Infrastructural Investment requirements In water	
MID"	1995-2010.	2006.2015&
Europe	180-220	ISO
North America	75-90	300
Latin America	50-75	200
Middle East	10-20	50
Asia Pacific	130-145	300
Africa	30-45	100
Total	475-595	1,000
Nurr WE err., V.wn.t Cmnnonne l t		

'Thames estimates that the private sector water market, currently worth around
US$100bn, will almost quadruple to US $375bn by 2010_ (taken from page 68 orSG Equity
Research on RWE)

Figure 40
Forecast water international operating profit

  E
`o 0 600-
W
  500"
400
a
  a 300
r 200
I o
f
  loo
a
  a
  96.97 97-98

Saura; Thane:, 50 5analdas esdmatct

i

  04-05 '

  AAFBI-017119
Confidential Treatment Requested Under FOIA

=XH019-00924

GOVERNMENT
EXHIBIT
  823
  Crim. No. H-04-25 (S-2)


.98.99 99-00 00-01 01-02 02-03 03-04


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Azurix Strategy 10121200I Page 2

o The US market alone is estimated to be significantly large as well.

Region	Investment
($billion)	Time Frame
US	1,000	2000-2020

source; American water Works Association, Water Inkastructure Network (WIN)

  Driving forces behind nsuket opportunity
  o Population growth and access to water and waste water service
o Increasing drinking water quality and environmental standards
  o Assets predominantly owned by public sector that requires private sector capital and
management to address the growing needs

 Challenging market forecast on a year to year basis
  o Privatization opportunities are driven by local political process
o Development of regulatory frameworks takes time
  o Mergers and acquisitions approval process receive significant political attention and
regulatory oversight
  o Short term disruption of capital markets and access to capital as a result of developing
market contagion
   Tequila effect with Mexico
   Russia and Turkey economic challenges

   Argentina current economic situ ation

  Significant barriers to entry
  o Cannot bid on privatization opportunities without demonstrated operating and technical
capabilities
  o Mergers and acquisitions candidates want to be acquired by companies that "understand"
the water business
  o Ability to access international capital markets
  o Experience in privatizing and deregulating markets
 Industry Structure
  o Industry market leaden are three European Companies
 Vivendi Environmental
   Ondeo (Suez)
RWE
o Opportunities exist to acquire other water and waste companies to gain scale and broaden
  presence in Europe, American and Far East.
   Market size and comple:aty will allow for a new entrant with global capabilities

  AAFBI-017120
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  Azurix Strategy 102/2001

Page 3

Market Conclusion
   Tremendous opportunity with the size and complexity of the market
   Market will take time to develop and is difficult to forecast on a quarter-to-quaver and on a year-
to-year basis.
   Room for a new market entrant with the qualifications, size, and scale to take advantage of the
opportunities

Azurix & Enron Strnteey
   Focus on acquisition candidates and concession privatization in markets where Enron and Azurix
have in-depth market knowledge
  o Europe, Americas, Far East
   Retain Wessex as a platform to continue to have the world class operating and technical
capabilities that are required to participate in the industry
 Develop, using Azurix and Enron personnel, a small cadre of highly experience executives that
have experience in project development, evaluation, structuring and operational experience.
   Divest Service Business that have provided limited value and return opportunities in the water
industry

o Azurix North America, IASA Mexico, and Brazil

 Divest Concessions that we do not have direct control over or acquirer is willing to pay more than
our reservation price
  o Azurix Cancun and Azurix Mendoza

 Divest high risk projects with significant market and political risk
o Madera Water Bank, E-Business Initiatives

Stratew Conclusion
   Azurix strategy of focusing an acquisitions and concessions requires a long-term outlook in a slow
developing market environment. The initial lack of success was a result of market timing,
execution issues and diffusing the focus to include services, water trading operations and E-
cormmeree initiatives. For the next two to three years, Azurix should monitor the developments in
  the industry and, after that time, be prepared to make select investments.

Economics and Model Development
   Size of the market and dynamic nature of the market requires the development of investment
opportunity templates
  o The proforma templates include key assumptions concerning revenue, margins, capital
requirement and return on capital potential

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  Azurix Strategy 10/212001 Page 4
 Large Project Assumptions
  o Capital Employed 0
o Revenues 0
  o Margins 0
  o Debt to Capital Ratio 0
  o Return on Capital Employed 0
 Medium Project Assumptions
  o Capital Employed 0
  o Reve 0
o Matgias 0
  o Debt to Capital Ratio 0
  o Reoan on Capital Employed 0
 Small Project Assumption
  o Capital Employed [I
o Revenues a
  o Margins a
I o Debt to Capital Ratio 0
  o Return no Capital Employed 0
 Model Assaaiptions
  o Number of projects
o Capital employed
  o Capital Structure I Leverage
o SGitA

  Economic Conclusion
  o Given the size of the market there is significant opportunity to grow at the forecasted
rate without achieving a significant market penetration
  o Retntn assumptions are achievable based on Azurix actual performance of projects like
Cancun
  o See appendix for templates of preliminary macro economic revciw


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  AAFBI-01712:
Confidential Treatment Requested Under FOIA