Enron Mail

Cc:joseph.sutton@enron.com, david.haug@enron.com
Bcc:joseph.sutton@enron.com, david.haug@enron.com
Date:Thu, 21 Sep 2000 10:18:00 -0700 (PDT)

Jeff, I understand at last week's PRC you asked Dick what the difference was
between EECC, and, say, Brown and Root. Let me try and answer that and at
the same time provide my recommendations on how EECC should evolve inside the
new Enron.

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

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

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

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

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

f. ROIC: as we recognized the Enron deal flow was decreasing, we were asked
in the last two to three budget cycles to maintain or grow our net income.
Therefore, we embarked on non-Enron third-party construction business. This
marginal income has increased our use of working capital. Still, this year's
return on all our working capital will be about $22%, down from 29% last
year, but still a 25% average over two years which is not unreasonable. You
asked about the details of our working capital; I'm scheduled to brief you on
2 Oct.

g. Internal flexibility: there have been many instances over the years where
having an internal contractor has enhanced the ability of an Enron developer
to close the deal. For example, on the 1999 Peakers, although other
companies have out-sourced the same type of work, I assure you that because
of the late start getting going by the Enron developers, having to out-source
would of easily cost us four to six weeks of summer revenues on the
schedule. On our current Dabhol LNG project, an outside turnkey contractor
would never be motivated to try and maintain the current schedule, given the
weaknesses in the Owners' contractual positions, including quarry suitability
and subsea surface rock surprises, etc. Many other examples abound.

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

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

My recommendations for evolving EECC is as follows:

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

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

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

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

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

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

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

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

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