-----Original Message-----
From: DRW-Email@dainrauscher.com [mailto:DRW-Email@dainrauscher.com]
Sent: Thursday, October 25, 2001 10:13 AM
To: rwirth@westerngas.com
Subject: ENE:MARKET FOCUSED ON LIQUIDITY CRUNCH AND UNKNOWN



Dain Rauscher Wessels 
a division of Dain Rauscher Incorporated 

  *Market overly concerned on cash flow liquidity and assuming the most dire 
  assumptions, in our opinion. 
  *Concerns regarding ENE shares have also impacted the entire diversified 
  energy group. 
  *We have developed a net asset valuation assuming further 
write-downs/equity 
  adjustments and come up with a valuation of $27-$35 per share. 
  *For investors with a 12- to 18-month time horizon, ENE shares represent a 
  bargain, in our opinion. We advise investors purchase the shares at 
current 
  levels. 

  Enron Corporation 
  NYSE:ENE 
  Rating:        Strong Buy 
  Risk:          Aggressive 
  Price Target:  $  76 

   , 
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_ 
Price:        $16.41         |  Fiscal Yr       Prev     EPS      P/E 
52-Wk Range:  $85-$16        |      Dec/2001E             $1.80      9.1x 
Tr. 12 ROE:   9.70%          |      Dec/2002E             $2.15      7.6x 
3 Yr EPS Gr:  18.00%         |      Dec/2003E             $2.55      6.4x 
Shares Out:   862.00 million |        2001 Q4             $0.48 
Book Value:   $13.05         | 
Market Cap:   $14.15 billion | 
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_ 
                                Cash Flow       Prev     CFPS     P/CF 
                                        2001E             $2.85      5.8x 
                                        2002E             $3.30      5.0x 
                                        2003E             $4.05      4.1x 
____________________________________________________________________________ 
_ 
__________________________________________________________________________ 


  DIVERSIFIED ENERGY/MLPS 
  Mark Easterbrook, CFA 
  (214) 989-1408 
  mseasterbrook@dainrauscher.com 
  Neal Dingmann 
  (214)989-1402 
  ndingmann@dainrauscher.com 


  ENE:SB-Aggr;MARKET FOCUSED ON LIQUIDITY CRUNCH AND UNKNOWN 

   Cash Flow Liquidity Crisis: We believe this market is assuming the most 
  grim valuation for these off-balance sheet partnerships and other 
investments 
  . . . that they have no residual value. In addition, Enron cannot issue 
debt 
  to fund the short-term cash flow need (as the company needs its investment 
  grade debt rating for its Wholesale segment). Management has discussed 
  various asset sales that should benefit the cash flow situation ($600 
million 
  in the 4Q01 and Portland General in late 2002), but the market is 
unwilling 
  to believe these asset sales will be timely. Shareholders have paniced as 
  75.8 million shares were traded yesterday, but we believe even with dire 
  assumptions the stock can rebound from current levels once the liquidity 
  situation clears up. 
  
   Diversified Energy Group Drawn In: The market now is taking it out on 
  other diversified energy stocks as they declined significantly yesterday. 
We 
  believe investors are worried about two factors that may impact the group: 
1) 
  if these companies extensively using the off-balance sheet structure and; 
2) 
  if the natural gas/power merchant business will be negatively impacted by 
the 
  'wounded' Enron, which is the largest merchant player in North America. If 
  this continues to impact the group, there could be an excellent buying 
  opportunity at some point. 
  
   Long-Term Valuation: We have included a net asset valuation on Enron 
  making several dire assumptions. 
  <ol>1) Enron will be impacted to the full extent of the off-balance sheet 
  partnerships-our assumption is $3.6 billion; 
  2) The company writes down their investment in broadband (our 
estimate-$700 
  million) and their entire net investment in the Dabhol Power Plant in 
India 
  (our estimate-$800 million); 
  3) Valuing the three major business with the corresponding EBIT multiple: 
  Pipeline-8x, Wholesale-12x, and Retail Energy Services-12x. We derive the 
  EBIT multiple on Wholesale (and Retail) using Dynegy's (NYSE: DYN; $37; 
SB- 
  Avg) current EBIT multiple on our expected 2002 EBIT (which includes the 
  $5/share drop from yesterday). Although these EBIT multiple seem to 
  consistent with the current market trends, they are well below historical 
  norms for the group. 
  </ol>We have looked at the asset valuation in two ways. First, we have 
  assumed no asset sales and used equity funding as a 'plug' figure, which 
  dilutes shares outstanding by 24%. Our 'worst case scenario without asset 
  sales' comes up with a net asset valuation of $27.92 per share (including 
  additional shares issued at $15 per share). Our second valuation assumes 
  asset sales of $2.5 billion, assumed debt reduction of $1 billion from the 
  Portland General sale, and no equity financing. With those assumptions we 
  derived a valuation of $35.05 per share. 
  
  Of course, our net asset valuation is based on a long-term view and does 
  not take into consideration the short-term liquidity crunch ongoing at the 
  company. In addition, we are making a fairly bold assumption in that all 
  these partnerships and investments no longer have any residual value. 
  
   Debt Rating Most Important: Enron management will have to fend off any 
  debt rating downgrades below investment grade, so debt cannot make up the 
  cash flow shortfall. The company, in our opinion, will use assets sale 
and, 
  if necessary, equity funding to match up cash flows in the short term. 
  Unfortunately, the timing of assets sales can be lumpy, so equity funding 
is 
  not out of the question. 
  
   Panic Mode Abound:  With the rapid decline of the shares on large 
  volume, we believe investors are panicking and the shares are oversold at 
  7.3x our 2002 earnings expectations. Although the upcoming 10-Q and 4Q01 
  probably will not paint a good picture, we believe the company is in 
better 
  shape than a $15 per-share stock price suggests. With further disclosures 
on 
  operating segments and on the off-balance sheet partnerships, we believe 
  during the next few quarters we could see ENE come back into our $27-$35 
  valuation. 

Stock Opinion 

  We believe that investors with a time frame of 12-18 months should now 
look 
  at Enron shares due to our assessment of the company's attractive 
valuation. 
  There are obviously major concerns regarding Enron's cash flow liquidity 
in 
  the coming quarters, but we believe management should be able to time the 
  sale of assets (and equity financing, if necessary) to bring the balance 
  sheet back into order. Most importantly, the company must keep its 
investment 
  grade rating to keep its Wholesale operations running smoothly. 
  
  We believe the core businesses should allow earnings growth of 18% 
annually 
  (three-year projection). We are not suggesting that Enron is out of the 
woods 
  yet as investors should pay attention to several short-term events. First, 
  the filing of the third-quarter 10-Q should enlighten the Street on the 
  equity reduction and the cash position of the company. We also look for 
the 
  SEC to come down hard on these partnerships. We anticipate further 
  disclosures on these partnership going forward. In addition, we anticipate 
  that the company may still have another write-down and/or further 
reductions 
  of equity in the coming quarters. 
  
  Our net asset valuation notwithstanding, we keeping our $76 price target 
  using a discounted cash flow (DCF) analysis of the wholesale energy 
segments 
  and EES segment. In the more-established energy segments, we used a 
multiple 
  valuation of 10x EBIT. We have changed our risk rating on Enron 
Corporation 
  from Average to Aggressive to reflect our assessment of risks associated 
with 
  the issues discussed in this note. We rate ENE shares Strong 
Buy-Aggressive. 

  Company Description 

  Enron Corporation is the leading integrated natural gas and power company. 
  The company is headquartered in Houston, Texas, with a Web site address of 
  www.enron.com. 


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__ 



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