John Sherriff has asked me to update you on the status of our relationship
with EnCom, as well as what I am doing to develop a plan for the way forward
with our investment.
As you may be aware, Enron made its investment in EnCom in October 1999.
Bruce Wrobel is President/CEO. Our current cumulative investment is now
$34,750,000. We own 63.80 %, and have the right to put 5 members on a board
of nine. There are two other strategic, Japanese investors in the business;
Orix, primarily known as a leasing firm, and YTC, primarily a parts supplier
for Toyota. Enron Japan (EJ) in particular values Orix as a strategic
partner even beyond the context of EnCom (a fact that was reconfirmed when
Ken Lay met with their Chairman during his recent week in Tokyo).
At present, the relationship between EnCom (its vehicle for doing business in
Japan is E Power; and I will use the two terms interchangeably) and EJ is a
difficult one. EnCom entered the Japanese market some months before EJ
entered, and EnCom was seen in the market as Enron's entry vehicle for
Japan. I infer that EnCom has benefited from this association with the Enron
name, and Enron apparently did not discourage it in the early days. With the
arrival of EJ in Tokyo early this year, Enron is working to roll out our
wholesale/merchant business model in Japan. EnCom/E Power has and continues
to receive coverage in the media (much of it self-generated) indicating that
they intend to sign up customers. In fact, E Power's COO Mr. Awono, says
that they will need to sign up retail customers to be able to have load to
support the large power projects they are planning to do. (This unlikely
formula suggests, at least on his part, a degree of naivete, at best, about
how offtake from plants in deregulated markets can be and should be
managed.). Finally, EJ reports meeting with customers, e.g., Sony, who
indicate that E Power holds itself out as also being a "trader". This has
caused some confusion in the marketplace about which "Enron" entity is
providing wholesale/merchant services.
There now also is a question as to what EnCom's business model in Japan
should be. Conversations between Orix and EJ personnel in Tokyo suggest that
Orix believed that Enron would be intimately involved in the day-to-day
management of EnCom (we are not, and Bruce has conceded that prior to EJ's
reporting relationship into London being established, Enron involvement and
direction was largely absent). Moreover, it appears that Orix also believed
that EnCom would be engaged in the business of "aggregation" of power
supplies for further resale in the Japanese market (this is essentially
describing the core Enron merchant business in different terms).
Conversations between Orix and EJ indicate that Orix now does not see EnCom
having in place the people and skills to execute on an aggregation business
strategy. Rather, Orix sees EnCom as having the skill sets of large-scale
asset developers, and this is not a business Orix is particularly interested
in pursuing. Finally, Orix has an employee secunded to EnCom/E Power, and he
reports that Orix now even lacks confidence in EnCom's ability to deliver any
large-scale asset development opportunities. John and I are tentatively
scheduled to meet Orix's Chairman in London on 27th November.
To give E Power its due, it is now also frustrated (Wrobel telephone
conversation with me) because Ken Lay clearly signaled in some of his media
interviews in Tokyo that we were bringing the full panoply of Enron skills to
the market, including the possibility of large-scale power projects. It is
Wrobel's view that this message in the marketplace now undercuts EnCom, as he
believes that people will look to a $60 billion market cap company as a
preferred counterparty for asset development, over a company capitalised at
present to the tune of about $40 million. There is also a Business
Opportunities Agreement between EnCom and EJ addressing how opportunities
that come to Enron personnel, who are also on EnCom's Board, should be
handled. Wrobel believes that we are being a bit narrow in our
interpretation of the Business Opportunities Agreement, a view I do not
share. Ken's statements are correct, i.e., we can do large-scale developments
in JapanIn sum, there is not an agreement as to a clear division of lines of
business between the two organisations.
At present, frustrations on both sides about confusion in the marketplace and
in media messages (EnCom has now agreed that Enron will lead all contacts
with the media, for both firms), have contributed to a situation that is not
amicable. Communications in Tokyo between EJ and E Power have virtually
dried up, though recently EJ has invited E Power to work together on a
Proposal for Mitsubishi.
So Where Are We?
John has asked me to lead an effort to evaluate Enron's investment in EnCom.
This will be fairly comprehensive, including an assessment of the talent on
the ground in Tokyo, an assessment of the viability of their prospects (both
in terms of likelihood of permitting, and, to the extent possible, their
economics), and an assessment of what Enron's stake in this venture ought to
be going forward. I will evaluate the full range, from assuming 100%
control, to a reduced stake (even down to zero), to taking equity in
particular projects. As such, I have sent to Wrobel a list of items
reflecting our initial information requirements for due diligence.
Second, while this due diligence proceeds, we are also attempting to agree on
respective roles for EnCom and EJ in the Japanese market. We remain
committed to retaining an asset development capability in the market, which
does not go down well with Wrobel. We also are sceptical that EnCom has on
board now, or will acquire, the risk management skills that we believe will
be necessary to actually manage fuel and offtake along the lines that Enron
has found highly profitable, e.g., Sutton Bridge tolling. We have said that
we respect their talent for being able to develop large-scale assets (though
our Technical Services Group has already questioned their high staffing
levels), and that we feel the profit-maximising strategy for both firms is
for EnCom to develop projects (sites, permits, engineering), with Enron
holding a tolling agreement and doing the project financing. We believe E
Power should be able to develop very bankable deals on this basis. We do not
have agreement on this point. Wrobel seemingly believes that they will be
able to do the risk management functions, and receive lucrative returns for
the assets they do develop. At this early stage we see no evidence that they
can manage such risks (or that lenders would let them do that), and that it
is more likely that they will end up with a classic IPP structure with gas
"in", PPA "out", and reasonable but not rich returns on equity. Wrobel sees
our "tolling agreement" proposition as taking too much out of EnCom's deals.
For our part, we have said we are willing to assure attractive equity returns
(without saying what that number is), and reward them for their development
Our latest effort is to try to agree a tolling arrangement for a project in
Tohoku province. E Power has already met local officials. As it turns out,
EJ was approached by national government to do a project at the same
industrial complex as that which E Power is working on. By letter from me to
Wrobel of 15 November, Enron has proposed that we pool or combine our efforts
(i.e., E Power's engineering and local permitting expertise, with Enron's
political capital garnered at national level), get the project done together
rather than competing, and divide our labours as noted above, i.e., Enron
does fuel and off-take, E Power does development of the asset. In the phone
call from me to Wrobel that preceded the sending of the letter, Wrobel
expressed serious displeasure with Enron's proposal. He and I are to speak
again; he is to call me back, and if he does not do so on 17 November, I will
call him on 20 November.
I will plan to make progress on my wider review assuming cooperation from
EnCom on our due diligence information requirements. John and I are
committed to moving this forward quickly, but much of the necessary
information is not in hand.
Please let me know if you have any further questions.