REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Atlantic Water Trust:

  We have audited the accompanying consolidated balance sheets of Atlantic
Water Trust (a Delaware statutory business trust) and subsidiaries as of
December 31, 2000 and 1999, and the related consolidated statements of
income (loss), comprehensive income (loss), cash flows and changes in trust
equity for the years ended December 31, 2000 and 1999 and for the period
from November 30, 1998 (Date of Inception) to December 31, 1998.  These
financial statements are the responsibility of Atlantic Water Trust's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

  We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

  In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Atlantic Water
Trust and subsidiaries as of December 31, 2000 and 1999 and the results of
their operations and cash flows for the years ended December 31, 2000 and
1999, and for the period from November 30, 1998 (Date of Inception) to
December 31, 1998, in conformity with accounting principles generally
accepted in the United States.

ARTHUR ANDERSEN LLP

Houston, Texas
March 26, 2001

<PAGE>
<TABLE>
                           ATLANTIC WATER TRUST

                 CONSOLIDATED STATEMENTS OF INCOME (LOSS)
                               (In millions)

<CAPTION>
                                    November 30, 1998
                                   (Date of Inception)
                                     to December 31,     Year Ended December 31,
                                           1998             1999      2000

<S>                                       <C>              <C>     <C>
Operating revenues                        $19.5            $618.0  $  757.3
Operating expenses:
  Operations and maintenance                4.8             224.7     376.2
  General and administrative                3.3             125.3     169.3
  Depreciation and amortization             3.6             104.8     132.3
  Impairment of long-lived assets             -                 -     401.8
  Restructuring charge                        -              34.2         -
     Total operating expenses              11.7             489.0   1,079.6
Operating income (loss)                     7.8             129.0    (322.3)
Other income (expense):
  Equity in earnings (loss) of
   unconsolidated affiliates               (0.1)              2.0       5.6
  Impairment of investment in
   unconsolidated affiliate                   -                 -     (55.0)
Gain on sale of subsidiary common stock       -              31.5         -
Interest income                             0.9              33.8      27.9
Interest expense                           (2.0)            (86.6)   (133.5)
Gain on sale of asset                         -                 -       2.5
Income (loss) before minority interest,
 income taxes and extraordinary loss        6.6             109.7    (474.8)
Minority interest                             -               3.9    (164.5)
Income tax expense                          2.7              21.5      17.6
Income (loss) before extraordinary loss     3.9              84.3    (327.9)
Extraordinary loss, net of income tax
 benefit                                      -               6.8         -
Net income (loss)                         $ 3.9            $ 77.5  $ (327.9)


<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>

<PAGE>
<TABLE>
                           ATLANTIC WATER TRUST

          CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                               (In millions)

<CAPTION>
                                    November 30, 1998
                                   (Date of Inception)
                                     to December 31,     Year Ended December 31,
                                           1998             1999      2000

<S>                                      <C>               <C>      <C>
Net income (loss)                        $  3.9            $ 77.5   $(327.9)
Other comprehensive loss, net of tax:
  Foreign currency translation
   adjustment                             (11.5)            (26.5)    (72.9)
  Unrealized loss on available for
   sale securities                            -              (0.8)     (0.3)
Comprehensive income (loss)              $ (7.6)           $ 50.2   $(401.1)


<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>

<PAGE>
<TABLE>
                           ATLANTIC WATER TRUST
                        CONSOLIDATED BALANCE SHEETS
                               (IN MILLIONS)


<CAPTION>
                                                        December 31,
                                                       1999       2000
                 ASSETS

<S>                                                <C>          <C>
Current assets
  Cash and cash equivalents                        $   27.2     $   30.0
  Restricted cash and cash equivalents (Note 4)       464.2        108.0
  Trade receivables (net of allowance for doubtful
   accounts of $40.7 and $66.9, respectively)         115.7        128.9
  Unbilled receivables                                 32.5         42.0
  Other                                                76.9         75.2
     Total current assets                             716.5        384.1
Property, plant and equipment, at cost              2,559.1      2,691.7
Less accumulated depreciation                         (90.4)      (228.2)
     Property, plant and equipment, net             2,468.7      2,463.5
Investments in unconsolidated affiliates               93.4         60.5
Notes and interest receivable - affiliates            197.1        105.5
Concession intangibles, net                           451.3         86.4
Goodwill, net                                       1,029.6        971.4
Other assets                                           81.1        135.5
     Total Assets                                  $5,037.7     $4,206.9

      LIABILITIES AND TRUST EQUITY

Current liabilities:
  Accounts payable and accruals                    $  236.0     $  275.9
  Deferred income                                      54.6         43.3
  Accrued taxes                                        21.1          9.4
  Short-term debt                                     602.2        298.7
  Current maturities of long-term debt                 35.0         80.7
     Total current liabilities                        948.9        708.0
Long-term debt                                      1,301.9      1,346.1
Long-term debt affiliates                              53.3        103.1
Deferred income taxes                                 443.3        457.8
Other long-term liabilities                            31.2         32.5
     Total liabilities                              2,778.6      2,647.5
Commitments and contingencies (Note 20)
Minority interest                                     643.4        413.5
Trust equity:
  Beneficial Interest - Class A                       958.0        957.8
  Beneficial Interest - Class B                       721.7        325.3
  Beneficial Interest - Class B Accumulated other
   comprehensive loss                                 (64.0)      (137.2)
     Total Trust equity                             1,615.7      1,145.9
     Total Liabilities and Trust Equity            $5,037.7     $4,206.9


<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>

<PAGE>
<TABLE>
                           ATLANTIC WATER TRUST
                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (In millions)

<CAPTION>
                                                November 30, 1998
                                               (Date of Inception)
                                                 to December 31,     Year Ended December 31,
                                                       1998              1999      2000
<S>                                                  <C>             <C>         <C>
Operating Activities:
  Net income (loss)                                  $  3.9          $    77.5   $(327.9)
  Adjustments to reconcile net
   income (loss) to cash provided by
   operating activities:
     Depreciation and amortization                      3.6              104.8     132.3
     Impairment of long-lived assets and
      investment in unconsolidated affiliates              -                 -     456.8
     Accretion and amortization of debt
      expenses and write-off of deferred
      financing costs                                    0.1              12.2       7.3
     Deferred income taxes                               2.0               6.2       9.5
     Equity in (earnings) loss of
      unconsolidated affiliates                          0.1              (2.0)     (5.6)
     Minority interest                                     -               3.9    (164.5)
     Gain on sale of Azurix common stock                   -             (31.5)        -
     Gain on sale of asset                                 -                 -      (2.5)
     Changes in operating assets and
      liabilities:
       (Increase) decrease in trade
        receivables and other
        CURRENT ASSETS                                  (6.2)              7.9     (30.1)
       Increase (decrease) in current
        liabilities, excluding debt                     (9.3)              6.1      24.8
       Increase in other assets                         (0.9)            (19.4)    (15.6)
       Increase (decrease) in other
        long-term liabilities                            0.5              (7.4)      2.0
Net cash provided by (used in)
 operating activities                                   (6.2)            158.3      86.5
Investing Activities:
  Capital expenditures                                 (10.3)           (287.3)   (297.1)
  Investments in and advances to
   unconsolidated affiliates                               -             (34.5)     (3.2)
  Business acquisitions, net of
   cash required                                           -            (698.5)    (15.5)
  Proceeds from sale of assets                             -                 -       5.4
  Other                                                    -             (56.5)    (53.1)
Net cash used in investing activities                  (10.3)         (1,076.8)   (363.5)
Financing Activities:
  Proceeds from long-term borrowings                     8.3           1,176.7     599.2
  Repayments of long-term borrowings                   (12.6)           (254.6)   (573.0)
  Net proceeds from (repayments of)
   short-term borrowings                                25.1              80.7    (183.5)
  Cash acquired in the issuance of
   Class B beneficial interest                           1.0                 -         -
  (Deposit to) withdrawal from
   restricted cash and cash equivalents
   accounts                                                -            (407.7)    394.0
  Advances from affiliates, net of repayments              -              44.4      47.9
  Issuance of subsidiary stock                             -             300.5       1.7
  Contribution to subsidiary from
   minority shareholder                                    -                 -       4.3
Net cash provided by financing activities               21.8             940.0     290.6
Effect of exchange rate changes on cash                    -               0.4     (10.8)
Change on cash and cash equivalents                      5.3              21.9       2.8
Cash and cash equivalents, beginning of period             -               5.3      27.2
Cash and cash equivalents, end of period             $   5.3         $    27.2   $  30.0

<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>

<PAGE>
<TABLE>
                           ATLANTIC WATER TRUST

            CONSOLIDATED STATEMENTS OF CHANGES IN TRUST EQUITY
                               (In millions)

<CAPTION>
                                                                      Beneficial
                                                                       Interest
                                                                       Class B
                                                                     Accumulated
                                          Beneficial   Beneficial       Other
                                           Interest     Interest    Comprehensive
                                           Class A      Class B          Loss         Total

<S>                                       <C>           <C>            <C>          <C>
Balance at November 30, 1998 (Date
 of inception)                            $      -      $     -        $    -       $      -
Issuance of Beneficial Interests           1,149.0        905.8         (25.2)       2,029.6
Foreign currency translation adjustment          -            -         (11.5)         (11.5)
Net income                                     3.3          0.6             -            3.9
Balance at December 31, 1998               1,152.3        906.4         (36.7)       2,022.0
Distributions to Beneficial Interests       (271.4)      (184.5)            -         (455.9)
Foreign currency translation adjustment
 and unrealized loss on available for
 sale securities                                 -            -         (27.3)         (27.3)
Unearned compensation                            -         (0.6)            -           (0.6)
Net income                                    77.1          0.4             -           77.5
Balance at December 31, 1999                 958.0        721.7         (64.0)       1,615.7
Distributions to Beneficial Interests        (69.1)           -             -          (69.1)
Foreign currency translation adjustment
 and unrealized loss on available for
 sale securities                                 -            -         (73.2)         (73.2)
Unearned compensation                            -          0.4             -            0.4
Net income (loss)                             68.9       (396.8)            -         (327.9)
Balance at December 31, 2000              $  957.8      $ 325.3       $(137.2)      $1,145.9


<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>

<PAGE>
                      ATLANTIC WATER TRUST

         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

   Atlantic Water Trust is a statutory business trust established
on November 30, 1998 ("Date of Inception") under the laws of the
State of Delaware pursuant to a trust agreement ("Trust
Agreement").  Enron Corp. ("Enron") and Marlin Water Trust
("Marlin") each hold a 50% voting interest in Atlantic Water
Trust (see Note 2).  Atlantic Water Trust has not conducted any
operations, other than those activities incidental to its
formation and its ownership of all of the beneficial ownership
interest in Bristol Water Trust ("Bristol") and of its subsidiary
Azurix Corp., including the sale of a portion of the shares of
Azurix Corp. it held during 1999 (see Note 2).  Subsequent to
such sale, Atlantic Water Trust holds an approximate 67.1%
interest in Azurix Corp.  Azurix Corp. and its consolidated
subsidiaries (collectively "Azurix") are engaged in the business
of acquiring, owning, operating and managing water and wastewater
assets, providing water and wastewater related services and
managing and developing resources in the global water industry.
Hereafter, Atlantic Water Trust and its consolidated subsidiaries
will be referred to as "Atlantic Water."

   Atlantic Water was established on November 30, 1998, and as a
result, the 1998 Consolidated Statement of Income, Consolidated
Statement of Comprehensive Income (Loss), Consolidated Statement
of Cash Flows and Consolidated Statement of Changes in Trust
Equity are from the Date of Inception to December 31, 1998.
However, substantially all of Atlantic Water's 1998 results of
operations, cash flows and capital transactions occurred during
the last 15 days of December 1998 (see Note 2).

   On March 16, 2001, shareholders of Azurix approved and adopted
the Agreement and Plan of Merger by and among Enron, Enron BW
Corp., a wholly owned indirect subsidiary of Enron, and Azurix
dated as of December 15, 2000.  The merger was consummated on
March 16, 2001, at which time Enron BW Corp. was merged into
Azurix with Azurix being the surviving corporation (see Note 2
and 21).

Consolidation Policy and Use of Estimates

   The consolidated financial statements include the accounts of
all majority owned subsidiaries and those affiliates over which
Atlantic Water has the ability to control and are prepared in
accordance with generally accepted accounting principles in the
United States. All significant intercompany balances and
transactions have been eliminated in consolidation. Atlantic
Water uses the equity method of accounting for all investments
where it owns less than a majority of the voting stock, and
cannot control, but is able to exercise significant influence
over the operating and financial policies of the investee.

   The preparation of the financial statements in conformity with
U.S. generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.

Revenue Recognition

   Operating revenues represent income earned in the ordinary
course of business, excluding value added tax. Water and
wastewater revenue for metered customers is recognized based on
actual usage and accrued based on the estimated amount of water
sold but not billed as of the balance sheet date. Water and
wastewater revenue for non-metered customers, who pay an annual
fixed charge based on the ratable value of their property, is
recognized uniformly over the year. Revenue for water and
wastewater related services is recognized as services are
provided. Revenues derived from services provided under fixed-
price contracts are recognized on the percentage-of-completion
basis.

Derivative Financial Instruments

   Atlantic Water utilizes derivative financial instrument
contracts for non-trading purposes to manage exposure to
fluctuations in interest rates and foreign currency exchange
rates. Hedge accounting is utilized in non-trading activities
where there is a high correlation of price movements in the
derivative and the contract is designated as a hedge. In
instances where the anticipated correlation of price movements no
longer exists, hedge accounting is terminated and future changes
in the value of the derivative financial instruments are
recognized as gains or losses to net income.

   Interest rate swaps involve the exchange of amounts based on a
fixed interest rate for amounts based on variable interest rates
over the life of the contract without an exchange of the notional
amount upon which payments are based. The difference to be
received or paid is recognized in income over the life of the
contracts as adjustments to interest expense.

   Currency swap contracts are denominated in one foreign
currency and are to be repaid in another currency. These
contracts are designated as hedges of firm commitments to pay
interest and principal on debt, which would otherwise expose
Atlantic Water to foreign currency risk.

   The fair values of the swap contracts are not recognized in
the financial statements. The income and cash flow impact of
financial instruments is reflected as an adjustment of the hedged
item. Gains and losses on terminations of interest rate and
currency swap contracts are deferred as an adjustment to the
carrying amount of the outstanding obligation and amortized as an
adjustment to interest expense related to the obligation using
the effective interest method over the remaining term of the
original contract life of the hedged item. In the event of early
extinguishment of the obligation, any realized or unrealized gain
or loss from the swap would be recognized in net income at the
time of extinguishment. See Note 1 - Recent Accounting
Pronouncements.

Income Taxes

   Atlantic Water and its wholly owned subsidiary, Bristol, are
not taxable entities for U.S. federal income tax purposes, and
accordingly, no recognition has been given to income taxes
related to their stand-alone activities.  Azurix's operations are
taxable for U.S. federal and certain foreign income tax purposes.
Accordingly, for financial reporting purposes, no recognition has
been given to income taxes related to the operations of Atlantic
Water other than those recorded by Azurix.

   Azurix accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under the asset and liability method of
Statement of Financial Accounting Standards No. 109, deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. For U.S. tax purposes, Azurix was a
member of Enron's consolidated group through June 8, 1999 and
accordingly is included in Enron's consolidated federal income
tax return through that date. Members of the consolidated group
are charged with the amount of income tax expense (benefit)
determined as if they filed separate federal income tax returns.
For periods subsequent to June 9, 1999, Azurix will file its own
consolidated tax return.

Cash Equivalents

   Atlantic Water considers all highly liquid investments with
original maturities of three months or less to be cash
equivalents.

Property, Plant and Equipment

   Property, plant and equipment is stated at cost. Cost of
acquired property, plant and equipment includes an allocation of
the purchase price based on the asset's fair market value. Cost
of property, plant and equipment placed in service includes
direct charges for material, labor and services and indirect
charges related to construction, such as engineering,
supervision, payroll taxes and employee benefits. Additions,
replacements, modifications and enhancements to units of property
are capitalized. Major improvements to leasehold properties are
amortized over the shorter of the asset life or the life of the
respective lease. Repairs, maintenance and minor replacements are
charged to operations and maintenance expense as incurred.
Interest capitalized is based on the average value of
construction work in progress at Atlantic Water's average
borrowing rate during the period. The amount of interest
capitalized during 1998, 1999 and 2000 was approximately $2.3
million, $8.6 million and $13.5 million, respectively.

   Atlantic Water's infrastructure assets comprise a network of
systems of mains and sewers, impounding and pumped raw water
storage reservoirs, dams, sludge pipelines and infrastructure
investigations and studies.

   The cost of property, plant and equipment, excluding land, is
charged to depreciation using the straight-line method over the
estimated useful lives of the assets. Depreciation is computed
based on estimated useful lives as follows:

                                                  Years

   Buildings and operational structures           5 to 80
   Infrastructure                                 5 to 115
   Plant machinery and vehicles                   3 to 30
   Other assets                                   3 to 15

   Atlantic Water's accounting policy for the costs of computer
software (all of which is for internal use only) is to capitalize
direct costs of materials and services consumed in developing or
obtaining software, including payroll and payroll-related costs
for employees who are directly associated with and who devote
time to the software project. Costs begin to be capitalized once
the application development stage has begun. All other costs are
expensed as incurred. Atlantic Water amortizes the costs on a
straight-line basis over the useful life of the software.
Impairment is evaluated based on changes in the expected
usefulness of the software.

Long-Lived Assets

   In accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," long-lived assets held
and used by Atlantic Water are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. For purposes of
evaluating the recoverability, a test is performed comparing the
estimated future undiscounted cash flows associated with the
asset to the asset's carrying amount, including allocated
goodwill, to determine if a write-down to fair value is required.

Goodwill

   Goodwill represents the excess of purchase price and related
costs over the value assigned to the net assets of businesses
acquired (see Note 3) and is presented on the Consolidated
Balance Sheets net of accumulated amortization. Goodwill is
amortized on a straight-line basis over the estimated useful
life, not to exceed 40 years. Accumulated amortization of
goodwill at December 31, 1999 and 2000 was $28.8 million and
$51.9 million, respectively.

Concession Intangibles

   Concession intangible assets represent prepaid amounts for the
rights as the concession holder and operator of public water and
wastewater facilities to provide service and charge a tariff in
the service area subject to the concession and is presented on
the Consolidated Balance Sheets net of accumulated amortization
and accumulated impairments.

   The total costs associated with retaining concession rights,
including prepaid amounts and amounts payable in the future, are
allocated among the service areas awarded by the concession
agreement and amortized on a straight-line basis over the life of
the concession for each service area commencing when access is
attained. Accumulated amortization of concession intangibles at
December 31, 1999 and 2000 was $5.4 million and $13.4 million,
respectively, and accumulated impairments of concession
intangible assets at December 31, 2000 was $357.2 million (see
Note 18).

Other Assets

   Other assets consist primarily of deferred tax assets,
deferred pension assets and deferred charges, such as financing
costs and external costs of acquisition activities. Deferred
financing charges are amortized to interest expense over the
lives of the related debt issuances using the effective interest
method and external acquisition costs are capitalized as a cost
of successful acquisitions or expensed during the period in which
it is determined that the project is unsuccessful or the pursuit
is terminated.

Deferred Income

   Atlantic Water bills certain customers in advance of providing
water and wastewater services and classifies these amounts as
"Deferred income" on the Consolidated Balance Sheets until
earned.

Pension Benefits

   The pension plans maintained by Atlantic Water's indirect
subsidiaries, Wessex, Azurix Buenos Aires and Lurgi Bamag (see
Note 13) are of the defined benefit type, and are valued by an
independent actuary. Current service costs for the plans are
accrued in the period to which they relate. Prior service costs
and actuarial gains and losses, if any, relating to amendments to
the plans, are recognized on a basis designed to spread the costs
over the remaining average service lives of employees.

   Atlantic Water's indirect subsidiary, Azurix North America,
has defined contribution plans for a number of its employees and
makes contributions to a multi-employer pension plan for certain
employees. Atlantic Water's contributions to these plans are
based on various percentages of compensation, years of service
and, in some instances, are based upon the amount of the
employees' contributions to the plans (see Note 13).

Foreign Currency Translation

   The functional currency for Atlantic Water's foreign
operations is the applicable local currency. The translation from
the applicable foreign currencies to U.S. dollars is performed
for balance sheet accounts using the current exchange rates in
effect at the balance sheet date and for revenue and expense
accounts, using the weighted average exchange rate during the
period or, where known or determinable, at the rate on the date
of the transaction for significant items. The resulting
translation adjustments are recorded in accumulated other
comprehensive loss as a component of trust equity and are
included in income only upon the sale or liquidation of the
underlying investments.

Environmental Costs

   Environmental expenditures that relate to current operations
are expensed as incurred. Expenditures providing a future benefit
are capitalized as appropriate. Remediation costs that relate to
an existing condition caused by past operations are accrued when
it is probable that these costs will be incurred and can be
reasonably estimated.

Recent Accounting Pronouncements

   In 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which was
subsequently amended by Statement of Financial Accounting
Standards No. 137 and No. 138. Statement of Financial Accounting
Standards No. 133 must be applied to all derivative instruments
and certain derivative instruments embedded in hybrid instruments
and requires that such instruments be recorded in the balance
sheet either as an asset or liability measured at their fair
value through earnings, with special accounting allowed for
certain qualifying hedges.  Atlantic Water adopted Statement of
Financial Accounting Standards No. 133 as of January 1, 2001.
Due to its adoption, Atlantic Water will recognize an after-tax
non-cash gain of approximately $1.0 million in earnings and an
after-tax non-cash loss in "Accumulated other comprehensive
loss," a component of trust equity, of approximately $0.3
million, both from the cumulative effect of a change in
accounting principle.

Segment Reporting

   Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting information
about operating segments in annual financial statements and
requires selected information about operating segments in interim
financial reports.  Operating segments are defined as components
of an enterprise about which separate financial information is
available and evaluated regularly by the chief operating decision
maker, or decision making group, in deciding how to allocate
resources and in assessing performance.  The operating
subsidiaries of Atlantic Water operated in one segment for all
periods presented in this report and therefore such disclosures
are not applicable.

Reclassifications

   Certain reclassifications have been made to the consolidated
financial statements for prior years to conform with the current
presentation.

NOTE 2 - CAPITAL TRANSACTIONS

   All of the following transactions occurred on December 17,
1998.  The Class B Beneficial Interest was issued by Atlantic
Water to Enron in exchange for Enron's contribution of (i) its
entire interest in Enron Water (Holding) L.L.C. ("Enron Water"),
the former parent of Azurix, (ii) its rights under a United
Kingdom pounds sterling ("U.K. Pounds Sterling" or "GBP") note
receivable from an indirect wholly owned subsidiary of Enron
Water in the amount of GBP73.0 million and (iii) $200.0 million in
the form of a release of indebtedness in such amount owed to
Enron by Enron Water under a $1.1 billion loan.  The Class A
Beneficial Interest was issued by Atlantic Water to Marlin for
$1.149 billion.  Atlantic Water utilized the proceeds from Marlin
to purchase a note receivable from Enron for $249.0 million (see
Note 12) and to repay $900.0 million of debt to Enron that was
held by Enron Water under a $1.1 billion loan.  The proceeds to
be received by Atlantic Water from Marlin on December 17, 1998
were also to be disbursed by Atlantic Water on that same date to
Enron as described above.  In addition, Enron Water was merged
into Azurix, with Azurix being the surviving entity.

   In connection with Azurix's public offering in 1999, Azurix
sold 17.1 million shares and Atlantic Water sold 21.5 million
shares of Azurix.  The net proceeds to Atlantic Water from the
sale of Azurix stock, net of expenses associated with the
offering, was $380.2 million.  The net proceeds were used to make
a return of capital to Enron and Marlin of $184.5 million and
$195.7 million, respectively.

   On March 16, 2001, shareholders of Azurix approved and adopted
the Agreement and Plan of Merger, as a result of the merger, each
issued and outstanding share of Azurix common stock, other than
those shares held by Atlantic Water, Enron, Enron BW Corp.,
Azurix and any of their wholly owned subsidiaries, was cancelled
and converted into the right to receive $8.375 per share.  On the
date of the merger, Enron BW Corp. had $325.9 million of cash
that was used to pay consideration to the public shareholders
whose shares were cancelled.  As a result of the merger and
effective on the merger date, Azurix had three shares of common
stock outstanding, of which Atlantic Water holds two, and Azurix
common stock ceased to be publicly held.  (See Note 21.)

NOTE 3 - BUSINESS ACQUISITIONS

   On October 2, 1998, Azurix, through its indirect wholly owned
subsidiary Azurix Europe Ltd., acquired over 90% of the
outstanding ordinary share capital of Wessex Water Plc. Azurix
completed the acquisition of the ordinary share capital of Wessex
in November 1998. The cost of the Wessex acquisition, including
transaction costs, was $2.4 billion. The purchase method of
accounting was utilized and the results of operations of Wessex
have been included in the consolidated financial statements since
the date of acquisition.

   Azurix entered into an agreement on December 19, 1998 to
purchase 49.9% of an entity whose principal asset is the water
concession for the city of Cancun, Mexico. This agreement was not
binding until specific material conditions were met, and these
conditions were met subsequent to December 31, 1998. As a result,
the Cancun concession is not reflected in Atlantic Water's 1998
financial statements. The purchase price was $13.5 million and
Azurix agreed to provide up to $25.0 million in debt financing.
The balance of the loans outstanding to the Cancun concession at
December 31, 2000 was $20.1 million. The Cancun concession
acquisition closed on March 24, 1999. The results of the Cancun
concession acquisition are reflected in the financial statements
as of the acquisition closing date utilizing the equity method of
accounting.

   On May 18, 1999, Azurix acquired 100% of the stock of Canadian-
incorporated Philip Utilities Management Corporation for $107.4
million, including transaction costs. This business subsequently
was renamed Azurix North America. Azurix North America is a water
and wastewater services company that provides operations and
management, engineering, residuals management and underground
infrastructure development services for municipal water and
wastewater facilities in the U.S. and Canada. Subsequent to its
acquisition by Azurix, Azurix North America has expanded through
the acquisition of several water and wastewater service companies
for an aggregate purchase price of $17.7 million.

   During the second quarter of 1999, Azurix was the successful
bidder in a tender for a 30-year concession to operate the water
and wastewater systems in two regions of the Province of Buenos
Aires, Argentina, previously operated by Administracion General
de Obras Sanitarias Buenos Aires. On June 30, 1999, Azurix,
through Azurix Buenos Aires S.A., an indirect wholly owned
subsidiary, entered into a concession contract with the
provincial government covering the two regions and paid the
government $438.6 million. On July 1, 1999, Azurix assumed
operation of the water and wastewater systems and risk of
ownership of the concession.

   In connection with the funding of this acquisition, Azurix
made an equity investment in Azurix Buenos Aires of $45.0
million, and Azurix Buenos Aires borrowed $394.0 million under a
new credit agreement. This loan was secured by cash and other
short-term liquid investments which Azurix deposited into a cash
collateral account and pledged as security for the loan (see Note
4). Azurix used $230.6 million of the proceeds from its initial
public offering, $208.0 million in funds drawn under the senior
credit facility of its indirect wholly owned subsidiary, Azurix
Europe Ltd., and interest on those funds and other funds of
Azurix, to fund the equity investment in Azurix Buenos Aires and
the deposit into the cash collateral account. Under the
concession contract, a 10% interest in Azurix Buenos Aires was
subsequently transferred to the employees of Azurix Buenos Aires.

   On September 24, 1999, Azurix acquired 49% of the capital
stock of IASA Holdings, S.A. de C.V. for $22.5 million, excluding
transaction costs. IASA Holdings owns 100% of Industrias del
Agua, S.A. de C.V., a water and wastewater services company based
in Mexico City, Mexico that provides metering, billing,
collections, operations and maintenance services for one quarter
of the Federal District within Mexico City, a service area with a
population of approximately two million people. Industrias del
Agua has provided these services since 1993, when it signed a 10-
year contract with the Water Commission of the Federal District.
In addition to holding an interest in Industrias del Agua, Azurix
provides technical services and serves as a technical participant
under the Federal District contract. Contemporaneous with its
purchase of the common stock of IASA Holdings, Azurix entered
into separate agreements that resulted in Azurix having effective
control over IASA Holdings. Accordingly, IASA Holdings is
consolidated for financial statement purposes.

   On September 24, 1999, Azurix acquired from an affiliate of
AMX-Acqua Management Inc. 100% of three Brazilian companies,
Geoplan-Assessoria, Planejamento e Perfuracoes Ltda., Aguacerta-
Sistemas de Abastecimento Ltda. and Aguacerta Saneamento Ltda.,
which provide water drilling, water supply and wastewater
treatment services in Brazil, for $55.6 million in cash,
excluding transaction costs. Azurix has contingent payment
obligations to a former owner under certain negotiated formulas
that depend on the future performance of the business and has
retained a former affiliate as a consultant to its Brazilian
operations.

   On October 4, 1999, Azurix purchased 13,600 acres of property
in Madera County, California, for $31.5 million, excluding
transaction costs, with plans of developing, owning and operating
a ground water storage project in the aquifer beneath it.

   On October 18, 1999, Azurix acquired Lurgi Bamag GmbH, a water
and wastewater engineering services company, for $30.2 million,
excluding transaction costs. Lurgi Bamag and its subsidiaries
have offices in Germany, Brazil, Egypt and the United Kingdom.

   For each 1999 acquisition that is consolidated in Atlantic
Water's financial statements, the purchase method of accounting
was utilized, and accordingly, the assets and liabilities have
been recorded at their estimated fair values on the date of each
acquisition. The excess of the purchase price over the fair
values of the net assets acquired for each acquisition has been
recorded as goodwill, and is being amortized on a straight-line
basis over 40 years. The results of operations of the
acquisitions have been included in the consolidated financial
statements since the date of each acquisition.

NOTE 4 - RESTRICTED CASH AND CASH EQUIVALENTS

   At December 31, 1999, Azurix had restricted cash and cash
equivalents of $407.7 million, on deposit in a cash collateral
account that secured a $394.0 million bank loan to an Azurix
subsidiary that was used to fund the Buenos Aires concession
acquisition (see Note 3). The amount payable under the loan at
December 31, 1999 is included in "Short-term debt" on the
Consolidated Balance Sheets (see Note 7). In April 2000, Azurix
used the proceeds from this account to repay the loan and related
interest.  In addition, at December 31, 1999 and 2000, Azurix had
other restricted cash on deposit of $56.5 million and $108.0
million, respectively, that primarily secured borrowings under
the Azurix Europe credit facility (see Note 7).

NOTE 5 - OTHER CURRENT ASSETS

   Other current assets is comprised of the following:

<TABLE>
<CAPTION>
                                            December 31,
                                          1999      2000
                                           (In millions)

   <S>                                    <C>       <C>
   Prepayments                            $20.0     $21.5
   Other receivables                       34.4      23.5
   Other                                   22.5      30.2
                                          $76.9     $75.2
</TABLE>

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT

   Property, plant and equipment is comprised of the following:

<TABLE>
<CAPTION>
                                              December 31,
                                             1999      2000
                                             (In millions)

   <S>                                     <C>        <C>
   Land                                    $   42.7   $   41.4
   Buildings and operational structures       500.4      595.8
   Infrastructure                           1,269.7    1,231.7
   Plant machinery and vehicles               489.2      650.9
   Construction work-in-progress              216.0       84.7
   Other assets                                41.1       87.2
                                            2,559.1    2,691.7
   Less accumulated depreciation              (90.4)    (228.2)
      Property, plant and equipment, net   $2,468.7   $2,463.5
</TABLE>

   Included in accumulated depreciation at December 31, 2000 are
accumulated impairments of $44.6 million which were recorded in
2000 (see Note 18).

NOTE 7 - SHORT-TERM DEBT

   As of December 31, 1999 and 2000, Azurix, through Wessex, had
committed credit facilities with major commercial banks providing
for an aggregate of $121.1 million and $224.3 million,
respectively, of availability for general corporate purposes.
These facilities expire in October 2001 and April 2002.  As of
December 31, 1999, no amounts were outstanding under these credit
facilities. As of December 31, 2000, outstanding borrowings
consisted of $62.8 million under the facilities that expire in
2002.  Borrowings are for a period of less than one year but may
be refinanced through 2002.  Therefore, amounts outstanding at
December 31, 2000 were reclassified to long-term debt.  The
facilities accrue interest at the London interbank offered rate
plus 0.275% to 0.35% per annum.  Wessex pays an annual commitment
fee equal to 0.15% of the unused portion of committed lines of
credit.

   On May 10, 1999, Azurix Europe entered into a credit facility.
At December 31, 1999 and 2000, the maximum capacity of the
facility was $686.4 million and $635.6 million, respectively. At
December 31, 1999 and 2000, $298.8 million and $276.7 million,
respectively, of the facility capacity could be used to refinance
indebtedness of Azurix Europe, $101.3 million and $80.8 million,
respectively, of such capacity was reserved to provide for the
refinancing of outstanding Azurix Europe loan notes. At December
31, 1999, the remaining $387.6 million of capacity could be used
for acquisitions of water and wastewater related assets or
businesses. In February 2000, the facility was amended so that as
of December 31, 2000, Azurix Europe may borrow $358.9 million of
the facility capacity in a manner allowing for its use by Azurix
for general corporate purposes. At December 31, 1999, $474.8
million was outstanding under the facility.  In February 2000,
Azurix issued long-term debt (see Note 8) and used a portion of
the proceeds to repay $386.0 million outstanding under the
portion of this facility that had been borrowed for acquisitions.
Accordingly, this amount was reclassified to long-term at
December 31, 1999.  At December 31, 2000, $156.0 million was
outstanding under that portion of the facility that can be used
by Azurix for general corporate purposes and $95.7 million was
outstanding under that portion of the facility that can be used
to refinance the indebtedness of Azurix Europe.  In January 2001,
Azurix borrowed $40.0 million under its credit agreement with
Enron (see Note 8) and repaid borrowings that were outstanding at
December 31, 2000 under the Azurix Europe credit facility.  In
March 2001, borrowings outstanding under the Enron credit
agreement, including the $40.0 million borrowed and used to repay
borrowings outstanding under the Azurix Europe credit facility,
were retired through the issuance of long-term mandatorily
redeemable preferred stock (see Note 21).  Accordingly, $40
million of the balance outstanding was reclassified as long-term
at December 31, 2000.

   The Azurix Europe credit facility bears interest at the London
interbank offered rate plus 0.75% or 1.0%, depending on the level
of utilization of the borrowing capacity. The weighted average
interest rates on the U.S. dollar and U.K. pound sterling
borrowings outstanding at December 31, 1999 were 6.9% and 6.8%,
respectively, and at December 31, 2000 were 7.5% and 6.8%,
respectively. Azurix incurs commitment fees of 0.375% on the
unused borrowing capacity of this facility. The facility
terminates on May 10, 2002, but contains a clause permitting
banks, with two-thirds or more of the commitments, to terminate
at an earlier time if, in their reasonable opinion, changes have
occurred resulting in a material adverse effect on the borrower's
ability to repay the outstanding debt. Therefore, amounts
outstanding under this facility are classified as short-term
debt, except amounts refinanced subsequent to December 31, 1999
and 2000 through the issuance of long-term debt (see Note 8) and
long-term mandatorily redeemable preferred stock (see Note 21).
The facility contains restrictive covenants that include
limitations on borrowings, maintenance of financial ratios such
as interest coverage and debt to equity and contracts to perform
or refrain from undertaking certain acts. The facility includes
customary events of default, including non-payment, cross-
defaults and insolvency and prohibits Azurix Europe from paying
dividends.

   As of December 31, 1999 and 2000, Azurix, through Wessex, had
$15.8 million and $6.0 million, respectively, outstanding under
credit facilities with major commercial banks on an uncommitted
basis. Interest accrues on the uncommitted facilities based on
the market rate plus a negotiated margin. The interest rate on
the uncommitted bank borrowings outstanding as of December 31,
1999 and 2000 was 5.2% and 5.5%, respectively.

   In connection with the funding of the Buenos Aires concession
acquisition (see Note 3), Azurix, through its indirect wholly
owned subsidiary, Azurix Buenos Aires S.A., entered into a credit
agreement and borrowed $394.0 million in June 1999. The agreement
was between Azurix Buenos Aires and Westdeutsche Landesbank
Girozentrale, a German bank, as the agent and lender. The loan
was secured by cash and other short-term liquid investments in
the aggregate amount of $407.7 million as of December 31, 1999,
which Azurix deposited into a cash collateral account, including
interest earned on amounts deposited, and pledged as security for
the loan (see Note 4). In April 2000, Azurix used proceeds from
the cash collateral account to repay the $394.0 million bank loan
and related interest of $19.7 million (see Note 4).

   On September 29, 1999, Azurix entered into a 364-day $150.0
million unsecured revolving credit facility with a group of
banks. The facility, as subsequently amended, was scheduled to
mature in September 2000. As of December 31, 1999, $150.0 million
was outstanding under the facility and the borrowings were
primarily used to reduce other debt obligations and finance
acquisitions. The weighted average interest rate on borrowings
outstanding under this facility at December 31, 1999 was 7.7%.
Azurix used a portion of the proceeds from the long-term senior
notes issued in February 2000 to repay all amounts outstanding
under this facility (see Note 8). Accordingly, the borrowings
under this facility at December 31, 1999 were reclassified as
long-term. Azurix terminated the facility in March 2000.

   Azurix, through Azurix Europe, had outstanding U.K. pound
sterling denominated loan notes as of December 31, 1999 and 2000
of $101.3 million and $80.8 million, respectively. The loan notes
were issued to Wessex shareholders in lieu of cash consideration
for the ordinary shares purchased in the Wessex acquisition (see
Note 3). The loan notes are redeemable, at the option of the
holder, semiannually beginning September 30, 1999, with final
redemption occurring September 30, 2005. The loan notes may be
redeemed at the holders' option within one year, and therefore,
are potential current obligations. At December 31, 1999 and 2000,
the loan notes are secured by the Azurix Europe credit facility.
As a result of a subjective acceleration clause contained in that
facility as discussed above, the loan notes are classified as
short-term at December 31, 1999 and 2000. Interest on the loan
notes accrues at the London interbank offered rate and is payable
semiannually. The interest rates for the period the loan notes
were outstanding during 1999 and 2000 was 5.9% and 6.3%,
respectively.

   At December 31, 1999 and 2000, Azurix, through various
subsidiaries, had other short-term borrowings outstanding of $2.3
million and $0.2 million, respectively.

NOTE 8 - LONG-TERM DEBT AND LONG-TERM DEBT - AFFILIATES

   The components of long-term debt are as follows:

<TABLE>
<CAPTION>
                                               December 31,
                                              1999      2000
                                               (In millions)

   <S>                                      <C>        <C>
   Amounts reclassified from short-term
    debt (see Note 7)                       $  536.0   $  102.8
   Azurix Corp. senior notes                       -      589.6
   Wessex senior unsecured bonds               479.2      444.3
   Wessex European Investment Bank credit
    facilities                                 223.1      201.7
   Capital lease obligations                    86.3       61.9
   Other                                        12.3       26.5
                                             1,336.9    1,426.8
   Less current maturities                     (35.0)     (80.7)
      Total long-term debt                  $1,301.9   $1,346.1
</TABLE>

   In February 2000, Azurix issued U.S. dollar and U.K. pound
sterling senior notes with a U.S. dollar equivalent face value at
December 31, 2000 of $589.6 million.  The senior notes consisted
of $240.0 million and GBP100.0 million, each due in 2007 and
bearing an interest rate of 10.375%, and $200.0 million due in
2010 and bearing an interest rate of 10.75%.  Net proceeds after
underwriters' discount and other offering costs were $583.1
million.  Of this amount, $150.0 million was used to pay down the
Azurix revolving credit facility, $386.0 million was used to pay
down the Azurix Europe credit facility and $18.1 million was used
to pay down amounts outstanding under the credit agreement with
Enron.  In addition, $11.5 million was used to pay accrued
interest on the three credit facilities.  The remaining proceeds
were made available for general corporate purposes.  The senior
notes were issued under an indenture that contains certain
covenants that limit Azurix's ability to incur additional debt,
pay dividends or make other distributions, incur liens on its
assets, enter into sale/leaseback transactions, enter into
transactions with affiliates, or sell assets to, or merge with,
another entity.

   In March 1999, Azurix, through a wholly owned subsidiary of
Wessex, issued U.K. pound sterling denominated senior unsecured
bonds with a face value of $484.5 million and $448.7 million as
of December 31, 1999 and 2000, respectively. The net proceeds
were primarily used to refinance all short-term bank borrowings
that were outstanding on the date of issue. The bonds mature on
March 30, 2009 and bear interest at a rate of 5.875% payable
annually.

   The European Investment Bank credit facilities consist of four
separate loans. The U.S. dollar denominated loan has a floating
interest rate based on the London interbank offered rate less 0.25%,
is due October 2001 and had an outstanding balance of $48.5
million and $44.9 million at December 31, 1999 and 2000,
respectively. The weighted average interest rate on the U.S.
dollar loan was 5.1% and 6.2% for the years ended December 31,
1999 and 2000, respectively. The Italian lire denominated loan
bears interest at 11.6% per annum, is payable in semiannual
installments through June 2002 and had an outstanding balance of
$13.1 million and $7.3 million at December 31, 1999 and 2000,
respectively. The other two obligations are U.K. pound sterling
denominated and were entered into in 1999. Interest on one of the
U.K. pound sterling denominated obligations is based on the
London interbank offered rate less 0.13%, is payable in full in
December 2005 and had an outstanding balance of $126.6 million
and $117.2 million at December 31, 1999 and 2000, respectively.
Interest on this loan was 5.9% for the period outstanding in 1999
and 6.0% in 2000.  The other U.K. pound sterling denominated
obligation bears interest based on the London interbank offered
rate less 0.10%, is payable in full in December 2009 and had an
outstanding balance of $34.9 million and $32.3 million at
December 31, 1999 and 2000, respectively. The interest rate on
this loan was 5.9% for the period outstanding in 1999 and 6.1% in
2000.

   At December 31, 2000, future minimum lease payments under
capital leases total $69.4 million, including $7.5 million
representing interest. At December 31, 2000, $150.7 million of
historical cost and $26.5 million of related accumulated
depreciation are recorded under capital leases and included in
property, plant and equipment.

   At December 31, 1999 and 2000, Azurix, through various
subsidiaries, had other long-term debt outstanding of $12.3
million and $26.5 million, respectively.

   Each of these financing agreements contains certain
restrictive covenants, including among other things, limitations
on borrowings, the maintenance of certain financial ratios such
as interest coverage, net worth and debt to equity and contracts
to perform or refrain from undertaking certain acts. The
financing contracts include standard events of default, including
non-payment, cross-defaults and insolvency. Azurix is currently
in compliance with these covenants.

   At December 31, 2000, long-term debt and capital lease
obligation maturities over the next five years were $80.7 million
in 2001, $101.8 million in 2002, $4.7 million in 2003, $3.7
million in 2004 and $120.1 million in 2005.

   Azurix has entered into interest rate and currency swap
contracts related to certain outstanding debt instruments (see
Note 9).

   Effective May 1, 1999, Azurix entered into a credit agreement
with Enron, which was amended as of January 24, 2000. Under this
agreement, Enron loaned funds to Azurix for general,
administrative and operating expenses. As of December 31, 1999
and 2000, $53.3 million and $103.1 million, respectively, was
outstanding under this credit agreement. The credit agreement
originally terminated on the earlier of December 15, 2001 or 90
days following the date that Enron does not own or have the power
to vote at least one-third of Azurix's capital stock ordinarily
entitled to vote for the election of directors and fewer than one-
third of Azurix's directors are officers, directors or employees
of Enron. The total commitment under the credit agreement would
not exceed $60 million, $120 million and $180 million at any time
during calendars years 1999, 2000 and 2001, respectively.
Advances under the credit agreement bare interest at the federal
funds rate plus 1.50%. The effective interest rate on these
borrowings in 1999 and 2000 was 6.8% and 8.1%, respectively. In
January 2001, Azurix borrowed $40.0 million under the Enron
credit agreement and paid down that portion of the Azurix Europe
credit facility that can be used by Azurix for general corporate
purposes.  Interest expense recorded for 1999 and 2000 was $2.2
million and $7.6 million, respectively. In addition, on March 16,
2001, the then outstanding balance of the Enron credit agreement
of $180 million was retired through the issuance to Enron of
mandatorily redeemable preferred stock and the credit agreement
was terminated.  As a result, the balance outstanding at December
31, 2000 under the credit agreement was classified as long-term
debt - affiliates and not as current maturities of long-term debt -
affiliates.

NOTE 9 - FINANCIAL INSTRUMENTS

   Atlantic Water and Azurix use derivative financial instruments
in the normal course of their businesses for purposes other than
trading. These financial instruments include interest rate,
currency swap and forward foreign exchange contracts. At December
31, 2000, Azurix had U.K. pound sterling interest rate swap
contracts having a total notional principal amount of $272.4
million. Interest rate swap contracts relating to notional
principal amounts of $179.4 million and $93.0 million terminate
in 2001 and 2002 through 2009, respectively. At December 31,
2000, Azurix had cross-currency swap contracts to exchange U.S.
dollars of $51.0 million to U.K. pound sterling of GBP30.0 million,
which expires in 2001, and Italian lire of 10.7 billion to U.K.
pound sterling of GBP4.9 million, which expires in 2002. At
December 31, 2000, Azurix had forward foreign exchange contracts
having a total notional principal amount of $5.5 million which
terminate in 2001. In addition, Atlantic Water also has a
currency option agreement with Enron whereby Atlantic Water can
exchange U.K. pounds sterling up to GBP73.0 million for U.S.
dollars at an exchange rate of $1.71233 to GBP1.00.  This agreement
expires in 2001.

   The carrying amount of cash and cash equivalents, trade
accounts receivable (net of an allowance for doubtful accounts),
affiliate notes and interest receivable, accounts payable and
accruals and short-term debt approximates their fair value due to
their short-term nature. The fair value of long-term debt and
affiliate long-term debt is based on the quoted market prices for
the same or similar issues or on the current rates offered to
Azurix for debt of the same remaining maturities. The fair value
of currency swap, forward exchange and interest rate swap
contracts shown below was determined based on a model which
estimates the fair value of these contracts using market rates in
effect at each respective date or was based on quoted market
prices for similar instruments with similar maturities. Judgment
is necessarily required in interpreting market data and the use
of different market assumptions or estimation methodologies may
affect the estimated fair value amounts. The comparison of
estimated fair value and carrying amount are as follows:

<TABLE>
<CAPTION>
                                                 December 31,
                                                1999      2000
                                                 (In millions)

   <S>                                        <C>        <C>
   Long-term debt (including current
    maturities)(1)
        Estimated fair value                  $1,219.8   $1,136.6
        Carrying amount                        1,338.1    1,430.9
   Long-term debt - affiliates
    (including current maturities)
        Estimated fair value                      54.6      103.5
        Carrying amount                           53.3      103.1
   Derivatives:
      Interest rate swap contracts
        Estimated fair value                       7.2        2.7
        Carrying amount                              -          -
      Currency swap contracts(1)
        Estimated fair value                      (2.8)       2.9
        Carrying amount                           (1.2)      (4.1)
      Forward exchange contracts
        Estimated fair value                      (0.8)      (0.3)
        Carrying amount                              -          -
      Currency option agreement - affiliate
        Estimated fair value                       7.1        0.2
        Carrying amount                            7.1        0.2

<FN>
(1) The sum of the carrying amount for long-term debt and the
    currency swaps, as indicated above, equals long-term debt
    including current maturities (see Note 8).
</TABLE>

   Atlantic Water and Azurix are exposed to certain risks due to
the nature of derivative financial instruments. In the event of
non-performance by third parties, the amounts of interest rate,
forward exchange and currency swap contracts are potentially
subject to credit risk. Third parties to these contracts are
major commercial banks with high-quality credit ratings.
Accordingly, Atlantic Water does not anticipate non-performance
by any of these counterparties on these financial instruments.
Atlantic Water is exposed to market risk in the form of foreign
exchange rate and interest rate risks. Several variable and fixed
rate loans in foreign currencies are hedged through a combination
of cross-currency swaps, forward exchange contracts and interest
rate swaps.

NOTE 10 - INCOME TAXES

   As discussed in Note 1, Atlantic Water and its wholly owned
subsidiary, Bristol, are not taxable entities for U.S. federal
income tax purposes.  The following information relates to
Azurix's activities.

   The components of income before minority interest and income
taxes are as follows:

<TABLE>
<CAPTION>

                                November 30,
                                    1998
                                  (Date of
                                 Inception)
                              to December 31,   Year Ended December 31,
                                    1998             1999     2000
                                        (In millions)

   <S>                             <C>             <C>      <C>
   United States                   $(2.0)          $(86.5)  $(121.6)
   United States trust income
    not subject to tax               0.9             43.7      (1.4)
   Foreign                           7.7            152.5    (351.8)
                                   $ 6.6           $109.7   $(474.8)
</TABLE>

<TABLE>
<CAPTION>
                                November 30,
                                    1998
                                  (Date of
                                 Inception)
                              to December 31,   Year Ended December 31,
                                    1998             1999     2000
                                        (In millions)

   <S>                              <C>            <C>       <C>
   Current tax expense:
      Federal                       $  -           $  0.9    $    -
      State                            -              0.3       0.2
      Foreign                        0.7             14.1       7.9
                                     0.7             15.3       8.1

   Deferred tax expense (benefit):
      Federal                          -            (33.1)    (39.3)
      State                            -              0.1         -
      Foreign                        2.0             39.2      48.8
                                     2.0              6.2       9.5
        Total income tax expense    $2.7           $ 21.5    $ 17.6
</TABLE>

   Income tax benefit for the components of other comprehensive
loss was $0.3 million and $0.1 million for the years ended
December 31, 1999 and 2000, respectively.

   The differences between taxes computed at the U.S. federal statutory tax
rate and Atlantic Water's effective income tax rate are as follows (dollars
in millions):

<TABLE>
<CAPTION>
                                  November 30, 1998
                                 (Date of Inception)
                                    to December 31,         Year Ended December 31,
                                         1998               1999               2000
                                  Amount     Percent   Amount   Percent   Amount   Percent

<S>                                <C>        <C>      <C>       <C>     <C>       <C>
Statutory federal income tax
 provision                         $2.3       35.0%    $ 38.4    35.0%   $(166.2)  (35.0)%
U.S. loss not benefited
 (valuation allowance reversal)     0.7       10.4       (5.1)   (4.6)         -       -
Trust income not subject to tax    (0.3)      (4.5)     (15.3)  (13.9)       0.5     0.1
Foreign subsidiary company
 losses not benefited                 -          -          -       -      166.9    35.1
Nondeductible goodwill
 amortization                       0.3        4.5        6.3     5.7        7.1     1.5
Consolidated foreign earnings
 taxes at other than the U.S.
 rate                              (0.3)      (4.5)      (2.5)   (2.3)      (7.1)   (1.5)
Equity income (loss) of foreign
 investment                           -          -       (0.5)   (0.5)      13.6     2.9
Minority interest                     -          -       (0.3)   (0.3)      (1.1)   (0.2)
Other                                 -          -        0.5     0.5        3.9     0.8
  Total income tax expense        $ 2.7       40.9%    $ 21.5    19.6%   $  17.6     3.7%
</TABLE>

   The principal components of Azurix's net deferred income tax
liability are as follows:

<TABLE>
<CAPTION>
                                                    December 31,
                                                   1999      2000
                                                    (In millions)

   <S>                                           <C>       <C>
   Deferred income tax assets:
     U.K. Advance Corporation Tax (ACT)
      carryforward                               $  67.8   $  23.2
     U.S. tax loss and start-up expenditure
      carryforwards                                 36.3      80.6
     Foreign net operating loss carryforwards       13.0       9.7
     Tax credits in foreign jurisdictions            2.8       7.4
     Basis differences in concession intangibles,
      property, plant and equipment and Other        7.9     163.4
     Valuation allowance                            (4.8)   (180.5)
      Total deferred tax assets                    123.0     103.8
   Deferred income tax liabilities:
     Basis differences in property, plant
      and equipment                               (515.1)   (466.8)
     Liabilities not recognized for tax
      purposes and Other                            (1.6)     (6.0)
      Total deferred tax liabilities              (516.7)   (472.8)
      Net deferred tax liabilities               $(393.7)  $(369.0)
</TABLE>

   Atlantic Water's results of operations for the year ended
December 31, 2000 included the impairment of the equity method
investment of the Mendoza concession company of $55.0 million and
the impairment of long-lived assets at the Buenos Aires
concession of $389.5 million.  Due to the significant uncertainty
regarding the Argentine investments (see Note 18), no deferred
tax benefits were recorded for these impairments.  In addition,
at December 31, 2000, Azurix determined that a valuation
allowance on its prior and current year Argentine deferred tax
assets was required, resulting in a fourth quarter 2000 tax
expense of $18.5 million.

   Azurix had U.K. Advance Corporation Tax credit carryforwards
at December 31, 2000 of approximately $23.2 million that can be
used to offset U.K. taxes payable in future years. At December
31, 2000, the U.K. ACT credit had an indefinite carryforward
period. At December 31, 2000, Azurix had foreign subsidiary
company loss carryforwards of approximately $27.6 million. Due to
restrictions on the use of such loss carryforwards and
uncertainty as to their ultimate usage, the related tax benefits
have not been reflected in Atlantic Water's results of
operations.

   At December 31, 2000, Azurix had carryforwards of U.S. tax
losses and start-up expenditures of approximately $230.2 million
that will begin to expire in 2019. During 1998, Azurix recorded a
valuation allowance on a deferred tax asset of approximately $5.1
million related to losses incurred in the United States. During
the second quarter of 1999, Azurix determined that the available
evidence attributable to the increased level of 1999 business
activities (including consideration of the proceeds generated
from the initial public offering and available U.S. tax planning
strategies) indicated that it is more likely than not that the
deferred tax asset associated with the 1998 U.S. losses will be
realized. Accordingly, the valuation allowance of approximately
$5.1 million was reversed in the second quarter of 1999.
Management has determined that no valuation allowance is
necessary for the U.S. losses generated through the year ended
December 31, 2000 due to expected future income and available tax
planning strategies.

   U.S. and foreign income taxes have been provided for earnings
of foreign subsidiary and affiliate companies that are expected
to be remitted to the U.S. Foreign subsidiaries' and affiliates'
cumulative undistributed earnings of approximately $277.7 million
are considered to be indefinitely reinvested outside the United
States and, accordingly, no U.S. income taxes have been provided
thereon. In the event of a distribution of those earnings in the
form of dividends, Azurix may be subject to both foreign
withholding taxes and U.S. income taxes net of allowable foreign
tax credits.

NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION

   Cash paid for income taxes and interest expense is as follows:

<TABLE>
<CAPTION>
                                November 30,
                                    1998
                                  (Date of
                                 Inception)
                              to December 31,   Year Ended December 31,
                                    1998             1999     2000
                                        (In millions)

   <S>                              <C>             <C>      <C>
   Income taxes                     $  -            $29.6    $  7.8
   Interest expense (net of
    amounts capitalized)             9.6             47.7     115.7
</TABLE>

Non-cash Transactions

   The capital transactions, equity distributions and sale of
Azurix stock described in Note 2, and principal repayments on a
note receivable from Enron described in Note 12 were non-cash
transactions.  The related receipts and disbursements were made
through a trustee in accordance with the Trust Agreement.  During
2000, Azurix acquired assets by entering into capital leases
totaling $5.4 million.

NOTE 12 - RELATED PARTY TRANSACTIONS

   On December 17, 1998, Atlantic Water entered into two
unsecured loan agreements with Enron whereby Enron will pay to
Atlantic Water an aggregate of $249.0 million in six semi-annual
installments beginning in June 1999.  Each of the loan agreements
accrues interest on the unpaid principal portion at 6.0% per
annum.  During 1999 and 2000, respectively, Enron funded to the
trustee in accordance with the Trust Agreement, $83.0 million and
$83.0 million in principal payments.  These notes receivable are
classified as non-current assets as the proceeds are not expected
to be available to meet working capital requirements (see Note
17).  The balance outstanding at December 31, 1999 and 2000 was
$166.0 million and $83.0 million, respectively.  Interest income
of $0.6 million, $13.5 million and $8.5 million was recorded
during 1998, 1999 and 2000, respectively.

   In accordance with the terms of the Trust Agreement, Atlantic
Water incurred general and administrative expenses of $7.3
million and $13.8 million related to administrative services
provided by Enron during 1999 and 2000, respectively.

   Enron and Azurix have entered into an agreement that limits
the scope of Azurix's business and provides that Enron and its
affiliates may engage in water related businesses, even if those
businesses have a competitive impact on Azurix. In general, Enron
is permitted to engage in any business whatsoever, including
water, wastewater and other businesses competing with Azurix,
provided the business is conducted and opportunities are
identified and developed through Enron's own personnel and not
through those of Azurix. If an opportunity in the water industry
is presented to a person who is an officer or director of both
Enron and Azurix, the opportunity must first be offered to
Azurix, unless water constitutes a minority of the fair market
value of the opportunity, as determined by that officer or
director in good faith based on information available at the
time.

   During 1998, 1999 and 2000, Enron provided various services to
Azurix. In 1999, Azurix signed agreements with Enron pursuant to
which Enron will continue to provide such services which include
among other things, information technology, office space,
building maintenance, security and other office services as well
as employee development, training, maintenance of compensation
and other benefits programs and the use of Enron-owned aircraft.
Azurix may utilize Enron's regulatory affairs, marketing affairs,
treasury and risk assessment and control departments. In
addition, Azurix may continue to participate in Enron's corporate
insurance program. The agreement provides that Azurix may use the
international offices of Enron and its affiliates for projects,
subject to mutual agreement with Enron or its affiliates on a
project-by-project basis. The agreement provides that Azurix will
reimburse Enron for direct charges related to Enron services and
facilities that it utilizes. Azurix is also allocated an amount
for overhead charges related to Enron corporate staff and support
services which it utilizes. This overhead charge is allocated
based upon factors such as employee headcount, payroll and square
footage. The agreement is for an indefinite term, but either
party may terminate the agreement on 180 days' notice. During
1998, 1999 and 2000, the expense recorded for these services was
approximately $1.5 million, $6.6 million and $2.9 million,
respectively.

   Employees of Azurix are covered by various employee benefit
plans of Enron such as medical, dental, life insurance and other
benefit plans. These costs are allocated to Azurix based upon
Enron's costs of administering and providing the benefit plans.
During 1998, 1999 and 2000, the expense recorded under the plan
arrangements was approximately $1.4 million, $2.3 million and
$1.4 million, respectively.

   Management believes the above allocation methods and costs are
reasonable.

   During 1998 and 1999, Enron advanced to Azurix $17.7 million
and $53.4 million, respectively, related to office space and
other services provided by Enron and the cost of various benefit
plans for certain employees, each described above, and to fund
Azurix's investment in and advances to its Cancun affiliate. The
entire amount of the advances were repaid in June 1999 with the
proceeds from Azurix's initial public offering of its common
stock.

   A former director of a subsidiary of Wessex owns certain
assets utilized in the subsidiary's operations. The subsidiary
was charged $0.1 million and $0.2 million for the use of those
assets during 1998 and the period in 1999 while serving as a
director, respectively.

   Enron has made available letters of credit on behalf of
Azurix's subsidiaries in the aggregate amount of approximately
$16 million as of December 31, 1999. Azurix paid, or reimbursed
Enron for, the fees associated with these letters of credit.
There were no letters of credit made available by Enron on behalf
of Azurix as of December 31, 2000.

   During 1999 and through March 31, 2000, Enron guaranteed debt
and letter of credit obligations of up to $25 million on behalf
of Azurix North America to a bank under terms of the bank credit
facilities in exchange for, among other things, the elimination
of requirements for various assets to be pledged. As of December
31, 1999, $16.4 million of letter of credit obligations were
outstanding under this credit facility, and thus guaranteed by
Enron. While the guarantee was outstanding, Azurix paid a fee to
Enron of $0.3 million per annum.

   During 2000, Azurix provided certain services that included
arranging, negotiating and structuring water supply arrangements
for a project being developed by an Enron subsidiary.  Revenues
earned and received during 2000 related to these services were
$1.1 million.  Under a separate agreement with the Enron
subsidiary, Azurix has agreed to provide future water supply and
water management services to the project for a period of
approximately 25 years.  Future services to be provided under
this agreement are contingent upon the Enron subsidiary receiving
certain government approvals to proceed with its project.

   Azurix has long-term debt with affiliates (see Note 8).

NOTE 13 - PENSION AND OTHER POSTRETIREMENT BENEFITS

   Azurix has various pension plans through its subsidiaries
which include both defined benefit and defined contribution
plans.

   During 1999, Wessex maintained three defined benefit pension
plans that covered substantially all of its employees. On January
1, 2000, these plans were merged into a single plan.  The plan
assets are held in separate trustee administered funds and
consist primarily of equity and debt securities. Wessex's funding
policy is to contribute to the plan sufficient to satisfy legal
funding requirements. Azurix Buenos Aires maintains a defined
benefit plan and Lurgi Bamag maintains a defined benefit plan and
a postretirement benefit plan. These plans have no assets because
Azurix Buenos Aires and Lurgi Bamag have not previously provided
funding. The pension costs for these plans charged to the
Consolidated Statements of Income (Loss) have been determined on
the advice of independent qualified actuaries and are accrued
over the service lives of the employees expected to be eligible
to receive such benefits.

   The weighted average assumptions used in the actuarial
computations for the defined benefit plans of Wessex, Azurix
Buenos Aires and Lurgi Bamag and the postretirement plan of Lurgi
Bamag are shown below:

<TABLE>
<CAPTION>
                                      Pension Benefits       Postretirement Benefits
                                   Year Ended December 31,   Year Ended December 31,
                                       1999      2000            1999      2000
                                                   (In millions)

   <S>                                 <C>       <C>             <C>       <C>
   Discount rate                       5.8%      5.8%            6.0%      6.5%
   Expected long-term rate of
    return on plan assets              6.5       6.8               -         -
   Rate of compensation increase       4.3       3.5             3.0       3.0
</TABLE>

   For the measurement purposes of postretirement benefits, a 4.0% annual
rate of increase in healthcare costs was assumed for the years ended
December 31, 1999 and 2000.

   The following represents the obligations, plan assets and funded status
for the defined benefit pension plans and postretirement plan:

<TABLE>
<CAPTION>
                                       Pension Benefits       Postretirement Benefits
                                    Year Ended December 31,   Year Ended December 31,
                                        1999      2000             1999      2000
                                                    (In millions)
<S>                                    <C>       <C>              <C>       <C>
Change in benefit obligation:
 Benefit obligation at beginning
  of period                            $246.2    $289.3           $   -     $ 0.7
   Obligation acquired from
    business acquisitions                11.9         -             0.7         -
   Service cost                           7.8       6.9               -         -
   Past service cost                     13.9         -               -         -
   Interest cost                         13.2      16.1               -         -
   Plan participants'
    contributions                         3.5       3.8               -         -
   Actuarial loss (gain)                  8.4       7.4               -      (0.1)
   Benefits paid                         (7.7)    (12.1)              -         -
   Exchange difference                   (7.9)    (21.6)              -         -
 Benefit obligation at end of
  period                               $289.3    $289.8           $ 0.7     $ 0.6
Change in plan assets:
 Fair value of plan assets at
  beginning of period                  $259.2    $290.2           $   -     $   -
   Actual return on plan assets          40.4       1.0               -         -
   Employer contribution                  1.9      15.8               -         -
   Plan participants'
    contributions                         3.6       3.8               -         -
   Benefits paid                         (7.6)    (11.5)              -         -
   Exchange difference                   (7.3)    (21.6)              -         -
 Fair value of plan assets at
  end of period                        $290.2    $277.7           $   -     $   -
 Funded status:
   Fair value of plan assets           $290.2    $277.7           $   -     $   -
   Projected benefit obligation         289.3     289.8             0.7       0.6
   Funded status                          0.9     (12.1)           (0.7)     (0.6)
   Unrecognized past service cost        13.8      11.8               -         -
   Unrecognized net actuarial
    gain (loss)                         (22.5)      4.2               -      (0.1)
 Prepaid benefit cost (accrued
  benefit liability)                   $ (7.8)   $  3.9           $(0.7)    $(0.7)
</TABLE>

   Net periodic benefit cost includes the following components:

<TABLE>
<CAPTION>
                                    Pension Benefits       Postretirement Benefits
                                 Year Ended December 31,   Year Ended December 31,
                                     1999      2000            1999      2000
                                                 (In millions)

<S>                                 <C>       <C>              <C>       <C>
Service cost                        $  7.8    $  6.9           $  -      $  -
Interest cost                         13.2      16.1              -         -
Amortization of prior service
 costs                                   -       0.9              -         -
Expected return on plan assets       (16.3)    (18.9)             -         -
Net periodic benefit cost           $  4.7    $  5.0           $  -      $  -
</TABLE>

   A 1% change in assumed healthcare cost trend rates would have
the following effects for the year ended December 31, 2000:

<TABLE>
<CAPTION>
                                     1% Increase   1% Decrease
                                          (In millions)

<S>                                    <C>            <C>
Effect on total service and
 interest cost components              $  -           $  -
Effect on post retirement
 benefit obligation                     0.1            0.1
</TABLE>

   Azurix North America contributes to defined contribution plans
for a number of its employees in the U.S. and Canada.
Contributions to these plans totaled $0.4 million during the
period in 1999 that Azurix owned Azurix North America and $0.3
million in 2000. Contributions to the defined contribution plans
are based on percentages of compensation varying from 1% to 15%
of compensation, and in some instances are based upon the amount
of the employees' contributions to the plans. In any event,
contributions are limited to $3,000 per employee per annum.

   Azurix North America also contributes to a multi-employer
union pension plan for certain union employees. These
contributions are based on amounts negotiated between the union
and the participating employers. There were no contributions
related to the multi-employer plan during 1999 or 2000 because
the plan is currently over funded.

NOTE 14 - STOCK PLANS

   In February 1999, Azurix established a stock plan that
provides for the granting or awarding of stock options and
restricted stock to directors, officers and key employees of
Azurix and members of the Azurix Board of Directors. Options
granted may be either incentive stock options or non-qualified
stock options and are granted at not less than the fair market
value of the stock on the date of grant. At any particular time,
the number of shares of common stock issued under the plan may
not exceed 15% of the total number of shares of common stock
outstanding. These stock options generally vest over three to
five years and will be exercisable for 10 years after the date of
grant.  On March 16, 2001, all options and unvested restricted
stock outstanding under the stock plan were cancelled (see Note
21).

   Azurix applies Accounting Principles Board Opinion No. 25,
"Accounting For Stock Issued To Employees," and related
interpretations in accounting for stock options issued under the
plan. Accordingly, no compensation expense has been recognized
for the stock options granted. Had compensation cost been
recognized based on the fair value of options granted at the
grant dates for awards under the plan, Atlantic Water's net
income (loss) for the years ended 1999 and 2000 would have been
$62.2 million and $(325.2) million, respectively.

   The fair value of options granted in 1999 and 2000 was
estimated on the date of grant using the Black-Scholes option
pricing model assuming no expected dividend yield, weighted
average expected life of 3.8 years and 4.2 years, respectively,
expected volatility of 82.5% and 57.4%, respectively, and a
weighted average risk-free interest rate of 5.4% and 6.4%,
respectively.

   Summarized information for Azurix's stock option plan is as
follows:

<TABLE>
<CAPTION>
                                               1999                 2000
                                                   Weighted             Weighted
                                                   Average              Average
                                                   Exercise             Exercise
                                         Options    Price     Options    Price
(Options in Thousands)

<S>                                      <C>        <C>         <C>        <C>
Options outstanding, beginning of year        -          -     10,253    $13.79
Granted                                  12,374     $14.31      2,016      7.49
Exercised                                     -          -       (251)     6.94
Forfeited                                (2,121)     16.81     (4,917)    14.42
Options outstanding, end of year         10,253      13.79      7,101     11.82

Weighted average fair value of
 options granted                                      8.58                 3.85
</TABLE>

   The following table summarizes information about stock options
outstanding at December 31, 2000 (options in thousands):

<TABLE>
<CAPTION>
                                        Weighted
                                         Average     Weighted
                                        Remaining    Average
     Range of Exercise     Options     Contractual   Exercise
           Prices        Outstanding      Life        Price

     <C>                    <C>        <C>            <C>
     $ 4.00 to $ 7.63       3,742      9.4 years      $ 7.17
      14.25 to  21.56       3,359      8.1 years       16.99
</TABLE>

NOTE 15 - EXTRAORDINARY LOSS

   In May 1999, Azurix Europe retired borrowings under its former
senior credit facility and terminated the facility prior to its
maturity. Unamortized deferred financing fees related to this
facility of $9.8 million ($6.8 million net of tax benefit) were
charged to income as an extraordinary loss.

NOTE 16 - RESTRUCTURING CHARGE

   In 1998, Azurix adopted a business strategy focused on growth
through acquisitions and development projects around the world.
During the fourth quarter of 1998 and the first half of 1999,
Azurix initiated a business development effort requiring
increased personnel to pursue and support acquisition and
privatization activities worldwide. The initiative was based on
Azurix's expectations as to the size, number, location and timing
of privatization projects that would be awarded in 1999, 2000 and
beyond. During the second half of 1999, several large
privatization projects were postponed or cancelled. In the fourth
quarter of 1999, Azurix reevaluated its cost structure in
relation to its business development efforts. As a result, Azurix
announced a plan to restructure its operations, which resulted in
Azurix recording a one-time, pre-tax expense totaling $34.2
million in the fourth quarter of 1999. The restructuring plan
included reducing personnel, reducing leased office space and
eliminating other costs relating to the pursuit of concessions in
certain regions.

   The restructuring plan was completed in the fourth quarter of
2000 and involved the elimination of 213 employee positions
working in the concession acquisition effort.  Certain employee
contracts allowed Azurix to make payments for up to five years.
The restructuring liability of $5.4 million at December 31, 2000
is related to these long-term severance agreements and $2.7
million has been classified in "Accounts payable and accruals"
and $2.7 million has been classified in "Other long-term
liabilities" on the Consolidated Balance Sheet. There were no
adjustments necessary to the restructuring liability during the
year ended December 31, 2000.

NOTE 17 - TRUST EQUITY

Beneficial Interest

   During 1998, Atlantic Water issued both Class A and Class B
Beneficial Interests (see Note 2).

Equity Allocations and Distributions

   In accordance with the terms of the Trust Agreement, the
holders of the Class A and Class B Beneficial Interests share
disproportionately in cash distributions during the life of the
Trust, or upon liquidation rather than based upon the respective
voting ownership percentages in Atlantic Water.  The holder of
the Class A Beneficial Interest will receive distributions on a
priority basis or pro rata with the Class B Beneficial Interest,
based on various factors described in the Trust Agreement.

   Atlantic Water is required to make an equity distribution to
Marlin semi-annually. Payments of the equity distributions
totaled $75.7 million and $69.1 million in 1999 and 2000,
respectively.

NOTE 18 - ASSET IMPAIRMENTS

   In 1999, Azurix, through its subsidiary Azurix Buenos Aires
S.A., was awarded and assumed operations of a water and
wastewater concession in the Province of Buenos Aires, Argentina.
In addition to the $438.6 million paid to the provincial
government to acquire the concession contract, under the terms of
the concession contract, Azurix is required to complete an
investment program which it began in 1999.  Azurix currently owns
90% of Azurix Buenos Aires.

   Azurix believes that the provincial government has violated
the terms of the concession contract through such acts as
limiting the amount Azurix can charge customers to levels below
those specified in the concession contract and failing to
complete and deliver infrastructure and other assets, including
algae treatment works at Bahia Blanca.  Azurix notified the
provincial government of these and other violations in 2000.
These violations have negatively impacted concession cash flows,
ability to raise capital to fund the investment program of the
concession and ability to provide services to the concession
customers.

   Failure by the provincial government to comply with the terms
of the concession contract, lack of progress in reaching
resolution on these issues, despite oral assurances from
provincial officials to reach resolution by year-end 2000, and
prominent government officials publicly stating that Azurix
should be removed as operator of the concession during the last
week of 2000, resulted in Azurix evaluating its investment in the
concession and related property, plant and equipment for
impairment. Based on this review, in the fourth quarter of 2000,
Azurix adjusted the carrying values of the concession intangible
and related property, plant and equipment to their fair value by
recording an impairment of $389.5 million (pre-tax and after-tax)
which is included in "Impairment of long-lived assets" in the
Consolidated Statements of Income (Loss).  Fair value was
determined based on the present value of expected future cash
flows from the concession, discounted using a risk-adjusted rate.

   During 2000, there were water supply and quality problems
experienced by areas within the concession, which Azurix
attributes to failure of the Province to meet the terms of the
concession agreement. In addition, there was negative publicity
generated from growing political opposition as discussed above.
Azurix recorded an additional charge of $11.0 million (pre-tax
and after-tax) in the fourth quarter of 2000 to reflect the
impact of these items on accounts receivable collections.  This
amount is included in "Operations and maintenance" expense in the
Consolidated Statements of Income (Loss).

   As a result of the review of future cash flows discussed
above, Azurix believes that sufficient uncertainty exists
regarding the realizability of Argentine tax loss carryforwards
such that a valuation allowance was appropriate at December 31,
2000 (see Note 10).  This resulted in an additional tax
expense of $18.5 million in the fourth quarter of 2000.

   Azurix has a 32.1% equity method investment in Obras
Sanitarias Mendoza S.A., which owns a water and wastewater
concession in the Province of Mendoza, Argentina.  As a result of
events related to its investment in the concession in the
Province of Buenos Aires, Argentina discussed above, Azurix
evaluated the fair value of its investment in the Mendoza
concession.  Fair value was determined based on the present value
of expected future cash flows from the concession, discounted
using a risk-adjusted rate.  The resulting fair value was less
than Azurix's carrying value and this loss in value was
determined to be other than a temporary decline.  Accordingly,
Azurix recorded an impairment of $55.0 million (pre-tax and after-
tax) in the fourth quarter of 2000.  This amount is included in
"Impairment of investment in unconsolidated affiliate" in the
Consolidated Statements of Income (Loss).

   During 2000, Azurix decided to sell its investment in its e-
business marketplace WaterDesk.comTM .  An initial attempt to
sell WaterDesk as a public marketplace solution for the water and
wastewater industry was terminated in the fourth quarter of 2000.
Azurix is currently attempting to sell WaterDesk as a private
marketplace or an internal procurement tool for one or several
companies to conduct inter-company commerce.  Azurix believes the
fair market value of WaterDesk used in this latter capacity has a
lower value than if it were utilized as a public marketplace
solution for the entire water and wastewater industry.  As a
result, Azurix recorded in the fourth quarter of 2000, a $12.3
million pre-tax impairment of its long-lived assets that comprise
WaterDesk. This amount is included in "Impairment of long-lived
assets" in the Consolidated Statements of Income (Loss).

NOTE 19 - RESTRICTED NET ASSETS OF SUBSIDIARIES

   Certain subsidiaries of Atlantic Water have governmental and
regulatory restrictions or approvals required in order to pay
dividends or to make intercompany loans and advances to it. The
amount of restricted net assets of Atlantic Water subsidiaries at
December 31, 1999 and 2000 is approximately $1.6 billion.

NOTE 20 - COMMITMENTS AND CONTINGENCIES

Commitments

   Azurix leases office space from Enron (see Note 12). Azurix
has no contractual obligation under these office lease agreements
but pays to Enron the amount determined in the lease or the
contract rate applied to square footage occupied. Azurix incurred
rent expense to Enron for office space totaling $0.3 million,
$1.7 million and $1.8 million in 1998, 1999 and 2000,
respectively.

   Azurix leases property under various operating leases. Rental
expense related to these leases for the years ended December 31,
1998, 1999 and 2000 were $0.2 million, $2.1 million and $7.4
million, respectively. Future minimum operating lease payments as
of December 31, 2000, in the aggregate and for each of the five
succeeding fiscal years, are as follows:

<TABLE>
<CAPTION>
                                           (In millions)
          <S>                                  <C>
          2001                                 $ 4.7
          2002                                   4.0
          2003                                   3.1
          2004                                   1.7
          2005                                   0.3
          2006 and beyond                        0.2
            Total minimum lease payments       $14.0
</TABLE>

   Azurix, through Wessex and Azurix Buenos Aires, as owner of
government regulated water and wastewater concessions, is
required to undertake a significant capital investment program to
meet statutory water quality and environmental standards. It is
currently estimated that the capital expenditure programs at
Wessex and Azurix Buenos Aires, along with the capital
expenditure commitments of other Azurix subsidiaries, will
require expenditures over the next five years of approximately
$1.4 billion.

   The former parent of Lurgi Bamag had guaranteed reimbursement
obligations for approximately $27 million of letters of credit
issued on behalf of Lurgi Bamag. Azurix has agreed to indemnify
the former parent of any payments under that guarantee.

   Azurix has contingent payment obligations to former owners of
acquired entities under certain negotiated formulas. Currently,
Azurix cannot assess the likelihood that payments under these
obligations will occur.

Litigation

   Azurix is involved in various claims and lawsuits, the
significant items of which are discussed below.  Although no
assurances can be given, Azurix believes, after considering
appropriate reserves that have been established and except where
noted below, that the ultimate resolution of such items will not
have a material adverse effect on its financial position or
results of operations.

   As previous reported in Azurix's Annual Report on Form 10-K
for the year ended December 31, 1999 and other filings, on
November 1, 1999, Synagro filed a lawsuit against Azurix styled
Synagro Technologies, Inc. v. Azurix Corp., in the 270th Judicial
District Court of Harris County, Texas. The lawsuit relates to
various agreements between the parties regarding potential
business transactions and the possible acquisition by Azurix of
two subsidiaries of Waste Management, Inc., commonly called
BioGro. On May 9, 2000, Synagro filed its First Amended Petition
in the District Court seeking (i) damages in excess of $57
million resulting from the alleged breach by Azurix to purchase
up to $23 million of Synagro convertible preferred stock and (ii)
unspecified damages resulting from Azurix's alleged breach of
confidentiality and standstill agreements.  On August 4, 2000,
Azurix filed its First Amended Answer and Counterclaim (i)
denying all of the material allegations contained in Synagro's
First Amended Petition and (ii) seeking damages in excess of $175
million for misrepresentations by Synagro that induced Azurix to
agree to restrictions on its ability to purchase BioGro and to
enter into negotiations with Synagro and Synagro's interference
with Azurix's acquisition of BioGro.  Azurix intends to continue
to vigorously defend itself against Synagro's claims and to
continue to pursue its claims for damages resulting from
Synagro's conduct regarding BioGro. The parties have agreed to a
trial date in September 2001. Although no assurances can be
given, Azurix believes that the ultimate resolution of this
litigation will not have a material adverse effect on its
financial position or results of operations.

  On October 6, 2000, a lawsuit was filed in the United States
District Court for the Southern District of Texas, Houston
Division, by Irving Rosenzweig, on behalf of himself and others
similarly situated, against Azurix Corp., Enron Corp. and certain
of their officers and directors.  The suit is a purported class
action filed on behalf of those persons who purchased the common
stock of Azurix during the period from June 9, 1999, the date of
Azurix's initial public offering, through and including August 8,
2000.  The suit generally alleges that the defendants violated
Sections 11, 12(a) and 15 of the Securities Act of 1933, Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5.  The plaintiff contends that the defendants issued and
disseminated materially false and misleading information to the
plaintiff and the investing public in connection with Azurix's
initial public offering and during the class period.  The
plaintiff seeks rescissory and/or compensatory damages, interest
and costs, including attorneys and experts fees.  The plaintiff
also seeks extraordinary and/or injunctive relief, including
attaching, impounding, imposing a constructive trust upon or
otherwise restricting the proceeds of defendants' trading
activities or their other assets so as to assure that plaintiffs
have an effective remedy. Several similar actions have been filed
in the United States District Court for the Southern District of
Texas and have been consolidated.  These lawsuits are subject to
the Private Securities Litigations Reform Act of 1995 and in each
case the plaintiff seeks to have the action certified as a class
action with plaintiff as the class representative. Azurix intends
to deny the allegations in each complaint and defend these cases
vigorously.  At this early stage of the litigation, it is not
possible to estimate potential damages, if any. If liability were
established, an unfavorable judgment or settlement could have a
material adverse effect on Azurix's financial position and
results of operations.

   On October 27, 2000, a lawsuit was filed in the Court of
Chancery in the State of Delaware, New Castle County, by Thomas
Turberg against Azurix Corp., Enron Corp., and certain of their
officers and directors.  The suit is a purported class action
filed on behalf of Azurix's public shareholders for the purpose
of enjoining a transaction proposed by Enron for taking Azurix
private at a price of $7.00 for each of Azurix's publicly held
shares. The letter from Enron making this proposal and the
related press release issued by Azurix were filed with the
Securities and Exchange Commission on October 27, 2000, as
exhibits to Azurix's Current Report on Form 8-K.  The suit
generally alleged that the buy-out price of $7.00 per share was
unconscionable and unfair and grossly inadequate and that the
defendants have breached their duties of loyalty and care with
respect to Azurix's public shareholders.  The plaintiff sought a
judgment (i) enjoining the acquisition under the terms proposed
in the letter; (ii) to the extent the transaction is consummated
prior to a final judgment, rescinding the transaction or awarding
rescissory damages to the class; (iii) directing that the
defendants account to the plaintiff and the class for all damages
caused to them and account for all profits and any special
benefits obtained by the defendants as a result of their alleged
unlawful conduct; (iv) awarding to the plaintiff the costs and
disbursements of the lawsuit, including a reasonable allowance
for attorney fees and expenses; and (v) granting such other and
further relief as the court deems appropriate.  Six similar
actions were subsequently filed in the Court of Chancery in the
State of Delaware, New Castle County and all Delaware actions
have been consolidated into a single action.  In addition, a
similar action was filed in the 55th Judicial District Court of
Harris County, Texas.  Certain of the actions filed in the
Delaware court have added Atlantic Water as a defendant. On
December 13, 2000, the parties to the litigation executed a
Memorandum of Understanding that settled both the Delaware and
Texas actions in principle.  Under the proposed settlement, the
defendants acknowledged that the prosecution of the litigation
was a material factor in causing Enron to increase the merger
consideration from $7.00 to $8.375 per share.  The proposed
settlement provides that the defendants will not oppose
plaintiffs' application for attorneys' fees and expenses up to
$2.25 million, which Enron has agreed to pay. The proposed
settlement is subject to the execution of definitive settlement
documents, confirmatory discovery, and court approval.

   Issues regarding water quality or quantity have arisen in
various areas served by Azurix Buenos Aires.   Azurix believes
these episodes for the most part are due to failures by the
Province to deliver infrastructure that it committed to deliver
under the concession contract.  In a few instances, customers of
Azurix Buenos Aires have filed claims for damages due to
allegedly inadequate water quality.  Although to date these
claims have not been for material amounts, other claims regarding
quality or quantity may be filed in the future, the amount of
which Azurix cannot predict.  Azurix would defend any such claims
vigorously, if made, and would seek to have the Province of
Buenos Aires brought in as a defendant and reimbursement from the
Province for any liability, if assesed.  Because no material
claims have been asserted to date, Azurix is not in a position to
assess the likelihood of assertion or of Azurix Buenos Aires
prevailing on those claims.

Regulation

   Azurix is subject to extensive federal, foreign, state and
local environmental laws and regulations. Azurix anticipates
future changes in, or decisions affecting, regulatory regimes
that will serve to expand or tighten regulatory controls. Some of
these changes or decisions could have a material adverse effect
on its financial position and results of operations.

   Most of Azurix's revenues are subject to governmental
regulation of the rates that it charges to its customers. On
November 25, 1999, the U.K. water regulator, the Director General
of Water Services, announced price limits for U.K. water
companies for the period April 1, 2000 through March 31, 2005.
Wessex was notified of a determination of a 12.0% price cut
effective April 2, 2000, before adjustment for inflation.
The announcement included level prices through March 2003
with annual price increases effective April 1, 2003 of 3.8%
and April 1, 2004 of 4.7%, before adjustment for inflation.
Wessex's regulated operating revenues represented approximately
53% of Azurix's total operating revenues for the year ended
December 31, 2000. The outcome of the periodic review is expected
to reduce Wessex's regulated operating revenues from 1999-2000 to
2000-2001 by 12.0%, before adjustment for inflation (or by
approximately 10% after adjustments for inflation and other
factors), and thus materially reduce Azurix's cash flow and
earnings. However, Azurix does not expect this will have a
material adverse effect on its financial position.

   Wessex currently has a virtual monopoly over water supply and
wastewater services within its service region, with the exception
of the areas around and including the cities of Bristol and
Bournemouth and a small area of rural Wiltshire, where three
other companies provide only water and Wessex provides wastewater
services. This may change in the future, however, as the U.K.
Government and the Director are seeking to increase competition
in the water sector.

   At the end of 2000, the U.K. government published new
proposals.  The key features include, among other things, that the
Director would have the primary duty to protect consumer
interests, which can include promoting competition, that competition
would be reviewed in light of industry proposals on
restructuring, increased level of fines, that companies would be
required to provide consumers with comparative performance data
and licenses for abstracting water would be reformed, including
placing time limits on licenses, allowing civil actions for
damages caused by abstraction and ending compensation for removal
of a license after 2012.  The final contents of this legislation
and the timing of its enactment are uncertain, but it is unlikely
to take effect prior to 2002.

   In connection with Wessex's most recent periodic review of
price limits, the Director has estimated that the cost of the
capital expenditures that Wessex will be required to make during
the period 2000 to 2004, will be approximately GBP764 ($1,143)
million. The determination assumed an after-tax cost of capital
for Wessex of 4.75%.

   Azurix believes that the provincial government of Buenos Aires
has failed to permit Azurix Buenos Aires to charge rates in
accordance with the tariff set by the concession contract and to
deliver infrastructure and other assets as required by the
concession contract, thereby affecting its ability to raise
capital and to serve its customers.  Negotiations with the
province thus far have failed to result in resolution of disputed
items, despite oral assurances from provincial officials to
Azurix Buenos Aires management that various matters would be
resolved by the end of 2000, including allowing Azurix to charge
rates at levels consistent with the concession contract.  In
addition, during the last week of December 2000, some prominent
officials in the Province publicly advocated canceling the
concession.  Azurix does not believe the Province has grounds for
cancellation without compensation and is vigorously challenging
the Province's actions and will continue to do so; however, the
lack of resolution on rates by December 31, 2000, and a shift in
the political environment during the last week of 2000 caused
Azurix to revise its expectation of future cash flows from this
concession, including collection rates from customers, and to
evaluate the recoverability of related tax assets. Accordingly,
Azurix has written down the carrying value of the concession
intangible and related property, plant and equipment to its fair
value.  In addition it has recorded an increase in bad debt
expense and recorded a valuation allowance against its Argentine
tax loss carryforwards (see Note 17).

   On February 15, 2001, the Province and Azurix Buenos Aires
entered into a Memorandum of Understanding regarding a variety of
issues between them.  The Memorandum of Understanding, among
other things, established an investment program for 2001 at a
lower level than previously required and established a framework
for negotiating issues associated with tariff levels and the
remaining capital program.  There is no assurance, however, that
these negotiations will result in a resolution satisfactory to
Azurix or the Province.

NOTE 21 - SUBSEQUENT EVENTS

   On March 16, 2001, shareholders of Azurix approved and adopted
the Agreement and Plan of Merger by and among Enron, Enron BW
Corp., a wholly owned indirect subsidiary of Enron, and Azurix
dated as of December 15, 2000.  The merger was consummated on
March 16, 2001, at which time Enron BW Corp. was merged into
Azurix with Azurix being the surviving corporation.

   Under the Agreement and Plan of Merger, each issued and
outstanding share of Azurix common stock, other than those
shares held by Atlantic Water, Enron, Enron BW Corp., Azurix
and any of their wholly owned subsidiaries, was cancelled and
converted into the right to receive $8.375 per share.  On the
date of the merger, Enron BW Corp. had $325.9 million of cash
that was used to pay consideration to the public shareholders
whose shares were cancelled. As a result of the merger and
effective on the merger date, Azurix had three shares of
common stock outstanding, of which Atlantic Water holds two,
and Azurix common stock ceased to be publicly held.

   Pursuant to the terms of the Agreement and Plan of Merger, on
March 16, 2001, all Azurix stock options and unvested restricted
stock outstanding were cancelled.  Holders of the options
received a cash payment, less applicable withholding taxes, for
both vested and unvested options, based on the excess of $8.375
over the exercise price per share. Holders of unvested restricted
stock received a cash payment of $8.375 per share, less
applicable withholding taxes.  These payments resulted in Azurix
recognizing a pre-tax charge of approximately $4.3 million in the
first quarter of 2001.

   In addition, under the Agreement and Plan of Merger, Azurix
retired $180 million of borrowings outstanding on March 16, 2001
under the Enron credit agreement through the issuance to Enron of
11% cumulative mandatorily redeemable preferred stock with an
initial liquidation preference of $180 million.  The preferred
stock may not be redeemed by Azurix prior to the date that all of
its senior notes due 2007 and 2010 have been redeemed.  The
preferred stock must be redeemed on or before the second
anniversary of the date that the senior notes are no longer
outstanding.  Dividends will accrue, but will not be paid until
all of its senior notes have been redeemed.