============= Page 1 of 4 ============= L ~u x To: Files From: John L. Garrison Date: October 2, 2001 Subject: Azunx Strategy Market Opportunity and Industry Structure • The world wide opportunity in the Water and Waste Water Industry is tremendous (see excerpts from SG Equity Research on RWE below) Table 35 Estimates for Infrastructural Investment requirements In water MID" 1995-2010. 2006.2015& Europe 180-220 ISO North America 75-90 300 Latin America 50-75 200 Middle East 10-20 50 Asia Pacific 130-145 300 Africa 30-45 100 Total 475-595 1,000 Nurr• WE err., V.wn.t Cmnnonne l t 'Thames estimates that the private sector water market, currently worth around US$100bn, will almost quadruple to US $375bn by 2010_ (taken from page 68 orSG Equity Research on RWE) Figure 40 Forecast water international operating profit E `o 0 600- W 500" 400 a a 300 r 200 I o f loo a a 96.97 97-98 Saura; Thane:, 50 5analdas esdmatct i 04-05 ' AAFBI-017119 Confidential Treatment Requested Under FOIA =XH019-00924 GOVERNMENT EXHIBIT 823 Crim. No. H-04-25 (S-2) .98.99 99-00 00-01 01-02 02-03 03-04 ============= Page 2 of 4 ============= Azurix Strategy 10121200I Page 2 o The US market alone is estimated to be significantly large as well. Region Investment ($billion) Time Frame US 1,000 2000-2020 source; American water Works Association, Water Inkastructure Network (WIN) Driving forces behind nsuket opportunity o Population growth and access to water and waste water service o Increasing drinking water quality and environmental standards o Assets predominantly owned by public sector that requires private sector capital and management to address the growing needs • Challenging market forecast on a year to year basis o Privatization opportunities are driven by local political process o Development of regulatory frameworks takes time o Mergers and acquisitions approval process receive significant political attention and regulatory oversight o Short term disruption of capital markets and access to capital as a result of developing market contagion  Tequila effect with Mexico  Russia and Turkey economic challenges  Argentina current economic situ ation Significant barriers to entry o Cannot bid on privatization opportunities without demonstrated operating and technical capabilities o Mergers and acquisitions candidates want to be acquired by companies that "understand" the water business o Ability to access international capital markets o Experience in privatizing and deregulating markets • Industry Structure o Industry market leaden are three European Companies  Vivendi Environmental  Ondeo (Suez) RWE o Opportunities exist to acquire other water and waste companies to gain scale and broaden presence in Europe, American and Far East.  Market size and comple:aty will allow for a new entrant with global capabilities AAFBI-017120 Confidential Treatment Requested Under FOIA EXH019-00925 ============= Page 3 of 4 ============= Azurix Strategy 102/2001 Page 3 Market Conclusion • Tremendous opportunity with the size and complexity of the market • Market will take time to develop and is difficult to forecast on a quarter-to-quaver and on a year- to-year basis. • Room for a new market entrant with the qualifications, size, and scale to take advantage of the opportunities Azurix & Enron Strnteey • Focus on acquisition candidates and concession privatization in markets where Enron and Azurix have in-depth market knowledge o Europe, Americas, Far East • Retain Wessex as a platform to continue to have the world class operating and technical capabilities that are required to participate in the industry • Develop, using Azurix and Enron personnel, a small cadre of highly experience executives that have experience in project development, evaluation, structuring and operational experience. • Divest Service Business that have provided limited value and return opportunities in the water industry o Azurix North America, IASA Mexico, and Brazil • Divest Concessions that we do not have direct control over or acquirer is willing to pay more than our reservation price o Azurix Cancun and Azurix Mendoza • Divest high risk projects with significant market and political risk o Madera Water Bank, E-Business Initiatives Stratew Conclusion • Azurix strategy of focusing an acquisitions and concessions requires a long-term outlook in a slow developing market environment. The initial lack of success was a result of market timing, execution issues and diffusing the focus to include services, water trading operations and E- cormmeree initiatives. For the next two to three years, Azurix should monitor the developments in the industry and, after that time, be prepared to make select investments. Economics and Model Development • Size of the market and dynamic nature of the market requires the development of investment opportunity templates o The proforma templates include key assumptions concerning revenue, margins, capital requirement and return on capital potential AAFBI-017121. Confidential Treatment Requested Under FOIA =XH019-00926 ============= Page 4 of 4 ============= Azurix Strategy 10/212001 Page 4 • Large Project Assumptions o Capital Employed 0 o Revenues 0 o Margins 0 o Debt to Capital Ratio 0 o Return on Capital Employed 0 • Medium Project Assumptions o Capital Employed 0 o Reve 0 o Matgias 0 o Debt to Capital Ratio 0 o Reoan on Capital Employed 0 • Small Project Assumption o Capital Employed [I o Revenues a o Margins a I o Debt to Capital Ratio 0 o Return no Capital Employed 0 • Model Assaaiptions o Number of projects o Capital employed o Capital Structure I Leverage o SGitA Economic Conclusion o Given the size of the market there is significant opportunity to grow at the forecasted rate without achieving a significant market penetration o Retntn assumptions are achievable based on Azurix actual performance of projects like Cancun o See appendix for templates of preliminary macro economic revciw :H019-00927 AAFBI-01712: Confidential Treatment Requested Under FOIA