FYI
---------------------- Forwarded by Mark Koenig/Corp/Enron on 01/12/2001 
10:14 AM ---------------------------


firstcall.notes@tfn.com on 01/12/2001 01:17:14 PM
To: mark.koenig@enron.com
cc:  

Subject: UPDATE OF CALIFORNIA CRISIS AND BRIEF NOTES ON DUKE ENERGY 
CONFERENCE CALL


                          FIRST CALL RESEARCH NETWORK

10:41am EST 12-Jan-01 Prudential (C.COALE 713-650-4732) DUK DYN ENE REI PCG
UPDATE OF CALIFORNIA CRISIS AND BRIEF NOTES ON DUKE ENERGY CONFERENCE CALL

UPDATE OF CALIFORNIA CRISIS AND BRIEF NOTES ON DUKE ENERGY CONFERENCE CALL
PRUDENTIAL SECURITIES                                   January 12, 2001

SUBJECT: Natural Gas Distr./Pipelines

----- ANALYST(S) --------------------          -------- OPINION --------
M. Carol Coale   713.650.4732                 Current: Strong Buy
David R. Tameron   713.650.4731                  Risk: Moderate

----- HIGHLIGHTS---------------------------------------------------------
Key players in California energy crisis meeting continuing to meet in 
Washington
  - nothing material has yet to be finalized.  Our expectations are detailed
within.
1)   Cautioning investors to avoid stocks with California exposure until a 
more
longer term solution is decided upon.  However, the lowest risk is likely in 
the
cheapest stocks, and DUK may be the best bet over the week or so.  DYN in the
mid-$30s and ENE in the mid-$60s are also attractive.
2)   Duke Energy conference call reiterated that about 90% of California
portfolio is hedged forward with non-utilities or in transactions outside of 
the
Independent System Operator (ISO) or Power Exchange (PX).  We estimate Duke's
financial exposure is less than $0.04 per share annually.

-----
DISCUSSION---------------------------------------------------------Thoughts on
California and brief comments on the Duke Energy Conference Call.  Key
representatives of the California utilities, power generators, marketers have
been in meetings in Washington D.C. with the FERC Chairman, Secretary of 
Energy,
U.S. Treasurer and members of the Clinton staff.  We have the following
comments on what we believe may be and should be long-term solutions to the
California energy crisis.

What we think will come out of Washington meetings:
1)   Power generators will agree to selling power under long-term (up to 10
year) contracts at the capped retail rates ($65-$75/Megawatt hour (MWh) 
assuming
that they can buy gas supply forward.  However that market is very illiquid 
and
can take weeks to secure a transaction.
2)   Politicians/legislators want to avoid bankruptcies, but we still think
there is a 50/50 probability.
3)   Utilities likely to be able to buy/sell electricity in forward market.
4)   California is likely to eliminate the Power Exchange (PX) and replace 
with
negotiated buy/sell market.
5)   "Forbearance" brings up issues of whether the utility can defer payments
for power supply for a number of periods or whether the state will pick up the
bills.  The impact on the receivables of the power generators/marketers and
lenders is uncertain.
6)   We believe actual seizure of power plants from the unregulated suppliers 
by
the state is unlikely, as is the removal of emissions credits (also, we
understand NOx emissions credits can be as high as $46/Megawatt hour in
California).
7)   Resignation of reigning FERC Commissioner Jim Hoecker on 1/18/01 allows 
for
Bush-appointed commissioner to step in, most likely to be Republican Curt
Hebert.  Herbert has been vehemently opposed to price caps and supports
competitive markets.
8)   Under a "new FERC", we think there is a low risk of retroactive
repercussions on generators to "give back" past profits on electricity sold in
California last summer, and also that a windfall profits tax on
generators/marketers is unlikely.
9)   Companies such as DUK, DYN and ENE all appear to have less than $0.05 per
share of annual earnings exposure to California generation/marketing sales net
of risk mitigation.  However, recent conversations with Reliant Energy have
revealed that it has not hedged its receivables risk with the utilities in
California.  Typical monthly receivable balances range from $5-$270 million or
up to $0.60 of earnings exposure.  REI is betting on the risk of bankruptcy of
PG&E and Edison is unlikely, and therefore, the cost to set of credit reserves
at this point would more than outweigh potential earnings exposure.
10)  While these stocks, in addition to REI, appear oversold, the stock
performance is likely to be volatile until a solution to the CA energy crisis 
is
introduced. In our view, the California market solutions fall short of the big
picture.  I have been cautioning investors to avoid the above-mentioned stocks
until a more longer-term solution is decided upon.  However, the lowest risk 
is
likely in the cheapest stocks, and DUK may be the best bet over the week or 
so.
Still, DYN in the mid-$30s and ENE in the mid-$60s are also attractive, in our
view.
11)  We expect DYN, DUK, ENE and REI to all report positive 4Q01 earnings
surprises of at least a penny or so, but to the extent that the surprise is
related to power generation, the stocks may not react favorably.

What we think will solve the California problem:
1)   Eliminate all retail rate freezes, and let the market forces balance 
supply
and demand.  Higher electricity prices to the consumer will encourage less use
and the purchase of more efficient energy equipment, and will also encourage
independent generators to build new facilities.
2)   We agree with the allowance of forward sales and a free spot market for
unregulated electricity transactions.
3)   A word on the hydroelectric generators.  Most are government-owned
facilities that virtually generate electricity for "free".  It would stand to
reason that the hydroelectric generators (a.k.a. the federal government) has
been financial benefiting from selling "free" power into a market that has 
been
marginally priced off of high-priced natural gas.  Shouldn't the government 
also
be asked to "share the pain"?

Following highlights from DUK call:
1)   Duke controls or owns 3,300 megawatts of electric generating capacity out
of a portfolio of about 6,000 megawatts.  About 90% of its California 
portfolio
is hedged forward with third parties that are not utilities or in transactions
involving the Independent System Operator or Power Exchange.
2)   Duke's receivables "at risk" are not material financially or 
operationally,
according to the company.  Duke pointed out that just over 10% of EBIT is
generated from its wholesale energy business, although we estimate it is 
closer
to 15%.
3)   Duke has a minimal number of contracts with PG&E and SoCal Ed (EIX
subsidiary).
4)   Nothing material has been agreed upon in the Washington meetings between
industry representatives, legislators and feds, but the likelihood of power
plant seizures and retroactive penalties appear unlikely.
5)   We estimate DUK's annual financial exposure, net of forward sales, is 
less
than $0.04 per share annually.

Stocks mentioned in this note include:  Duke Energy (DUK-65 7/8; rated
Accumulate); Dynegy (DYN-39 ?; rated Accumulate); Edison International (EIX-10
r; not rated); Enron Corp. (ENE-69 7/16; rated Strong Buy); PG&E Corp. (PCG-12
5/16; rated Sell); Reliant Energy (REI-32 7/16; rated Hold).


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