http://www.consultrci.com

************************************************************************
Read SCIENTECH's SourceBook Weekly article: "Making the Wires Sing: Some
Utilities Take on Challenges, Opportunities of Being Wirecoms," at:
http://www.consultrci.com/web/rciweb.nsf/Web+Pages/SBEntrance.html
************************************************************************

===============================================================
SCIENTECH IssueAlert, October 31, 2000
Enron Offers to Buy Out Azurix
By: Will McNamara, Director, Electric Industry Analysis
===============================================================

Enron Corp. announced that it has offered up to $275 million in funding
to take Azurix Corp. (NYSE: AZX) private at a buy-out price of $7 per share.
Enron owns directly and indirectly about 66 percent of Azurix, a global
water company that owns, operates and manages water and wastewater assets
and provides related services. The specific structure and timing of Enron's
proposal has yet to be determined, but the company's board is now considering
the proposal.

ANALYSIS: Azurix has been plagued with operational and financial problems
over the last 12 months, culminating in the departure of its former CEO
Rebecca Mark in late August. Enron had established Azurix in July 1998
with a $2.4 billion acquisition of Britain's Wessex Water, which provides
water and wastewater services to a U.K. population of approximately 3.5
million. Operating primarily in the United Kingdom and Latin America 
(Argentina
and Brazil), Azurix was intended to be Enron's vehicle to capitalize on
what it perceived to be favorable market conditions for water investments.


Yet, Azurix has not been a profitable operation for Enron, and has been
seen as a real anomaly when compared against Enron's consistent success
in its other ventures (for example, EnronOnline). For instance, Azurix
reported year-end 1999 net income of $67 million, significantly under 
projections
for what Enron had hoped for the subsidiary. After months of speculation,
Mark stepped down both as Azurix CEO and from the Enron board of directors,
and was replaced by John Garrison, Jr. Mark maintained throughout her tenure
as CEO of Azurix that the company needed time to develop core assets and
capabilities. However, this approach was in stark contrast to Enron's guiding
philosophy*as espoused by COO Jeffrey Skilling*which has moved the company
away from owning hard assets. Skilling also believed that, although acquiring
the Wessex operation gave Azurix the engineering capability and industry
knowledge to participate in the water business, privatization of the water
industry has slowed down considerably since the company began to penetrate
this market. Instead of pursuing a capital-intensive strategy for Azurix,
Skilling wanted Azurix to become more of a service-oriented business. This
change in business direction coincided with the departure of Mark.

Yet, Azurix has continued to flounder even since Mark left. In the third
quarter of this year, Enron reportedly lost $128 million in its "corporate
and other" category and attributed a fourth of the loss to the Azurix 
operation.
Azurix's stock price started a marked decline in early August when it was
announced that annual results would not meet analysts' expectations. While
Azurix was taken public in June 1999 at a price of $19 per share, it currently
is priced at $6 1/4 (at close of the markets on Oct. 30). This is an 
approximately
$3 increase from what Azurix had been trading at recently, presumably due
to Enron's announcement of the proposed buyout.

Enron's buyout offer comes after four unnamed parties approached Enron
about buying its stake in Azurix. Reportedly, three out of the four potential
buyers were unwilling to pay more than $4 per share, although one of the
buyers initially considered an offer of $7 per share, but ultimately decided
against the purchase. Enron's motivation in returning Azurix to a private
status is probably one of protecting its shareholders. Enron pointed out
in its announcement that shareholders would receive, on a timely basis,
a cash payment for their shares that is significantly above the price of
the shares at which Azurix has traded over the last several months.

Making matters worse for Enron, a group of plaintiffs, represented by New
York law firm Wechsler Harwood Halebian & Feffer LLP, have initiated a
class-action lawsuit against Azurix in the United States District Court
for the Southern District of Texas. The plaintiffs seek to recover damages
on behalf of all investors who purchased Azurix stock during the period
of June 9, 1999 (the date of Azurix's IPO) and Aug. 8, 2000, and who "suffered
damages as a result." The law firm is claiming that Azurix violated the
Federal securities laws. I placed a call to the law firm this morning in
hopes of getting additional information about what the class-action suit
entails. Unfortunately, I did not receive a call back before press time.


The consensus among the vast majority of U.S. energy companies is that
the profitability of water as a convergence strategy is questionable. The
most obvious negative about the water business is that it most likely will
remain a heavily regulated delivery business, offering few opportunities
for private companies to penetrate the market. Water is a very staid business
that seems inconsistent with Enron's aggressive growth strategy. After
Enron secures a fair return for Azurix's shareholders, it is not clear
what the company will do with its water subsidiary, but I would not be
surprised if Azurix is sold to another company. However, in August*right
before Mark's departure*Azurix announced that it had begun a pilot program
in the Lower Rio Grande using its Internet exchange Water2Water.com. The
site will provide users with information, price transparency and efficiency
in water exchanges. This announcement indicated that Azurix would begin
trading water rights, adding this commodity to the growing list of Enron's
traded commodities (energy, telecom, weather derivatives, etc.). So it
may be the case that Enron keeps Azurix, but turns it into a water trading
operation as opposed to water and wastewater services. In any case, the
present objective for Enron will be financing the buyout and ensuring that
Azurix's shareholders receive a significant premium to the market price
of Azurix. Enron also wants to ensure other benefits to Azurix, including
a significant near-term reduction in Azurix's general and administrative
expenses, greater certainty to Azurix's customers and employees and increased
flexibility for restructuring Azurix's assets and business.
===============================================================
Need to design and implement your IT infrastructure? Learn more about 
SCIENTECH's
Information Technology team and what they can do for you at:
http://www.consultrci.com/web/rciweb.nsf/web/Depts-IT.html
===============================================================

SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let
us know if we can help you with in-depth analyses or any other SCIENTECH
information products. If you would like to refer a colleague to receive
our free, daily IssueAlerts, please reply to this email and include their
full name and email address or register directly at:

http://www.consultrci.com/web/infostore.nsf/Products/IssueAlert


Sincerely,

Will McNamara
Director, Electric Industry Analysis
wmcnamara@scientech.com
===============================================================
Feedback regarding SCIENTECH's IssueAlert should be sent to 
wmcnamara@scientech.com
===============================================================

SCIENTECH's IssueAlerts are compiled based on independent analysis by 
SCIENTECH
consultants.  The opinions expressed in SCIENTECH's IssueAlerts are not
intended to predict financial performance of companies discussed or to
be the basis for investment decisions of any kind.  SCIENTECH's sole purpose
in publishing its IssueAlerts is to offer an independent perspective regarding
the key events occurring in the energy industry, based on its long-standing
reputation as an expert on energy and telecommunications issues.

Copyright 2000.  SCIENTECH, Inc.

If you do not wish to receive any further IssueAlerts from SCIENTECH, please
reply to this message and in the body of the email type "remove."