Phelps Dodge

---------------------- Forwarded by Chris H Foster/HOU/ECT on 03/09/2001
06:52 AM ---------------------------

Christopher McKey
03/09/2001 04:00 AM
Sent by: Christopher McKey
To: Chris H Foster/HOU/ECT@ECT, Frank W Vickers/NA/Enron@Enron
cc:
Subject: Phelps Dodge

Chris, Frank

Below the notes on the Phelps Dodge meeting of last week. Chris, I would like
to discuss later today if possible. Frank, thanks for your input. You will be
glad to hear that nothing much has changed there. If I didn't think PD was
such a strong take-over candidate, I would be shorting their stock massively.

--CM

The meeting with Phelps Dodge to further discuss their energy/metals
situation accomplished little. During the course of a 2 1/2 hour meeting with
Bill Brack (Head of Engineering, and therefore of energy
management/procurement) and Tim Summers plus Mike McElrath (two of his Energy
Managers) the following points were covered:

PD will build two new power plants, one in cooperation with Duke and the
other with BP Amoco. Both to be located in AZ, NM. Coal fired, ca 300 MW, gas
fired ca 250 MW. They will enter long term contracts for power off-take from
these power plants to meet their needs. Discussions with potential partners
have been on-going since last summer. PD sees investment in power plants as
the only answer to the power crunch. Gas has not yet been sourced. Enron not
consulted back then due to our non-asset strategy. Details deliberately vague
on their side.
PD's energy group is unable to discuss any transaction structures which
involve copper plays. We have probed this to death, and Summers finally
admitted that their board will not tolerate any suggestions that copper
upside be "sacrificed" to secure lower/stable priced power. The clear problem
they are experiencing--that energy price relative to copper price is killing
them--is being addressed as an energy price problem only. There is interest
but no mandate within PD's energy group to attempt to address the spread
issue.
Medium and long term energy risk management is limited to physical solutions.
Financial and cross commodity solutions "would never be approved by the
board".
PD continues to search for "5's and low 6's" on baseload power in a market
showing 7's and 8's. They remain 100 MW short, which is driving their
decision to curtail production. We put 5 year indicative low 6's on the table
through a combination of clipped profiles and calls on copper (at 90 cts/lb)
but the copper element in the structure sent them running.
After Brack left the room, Summers admitted that the energy group has done no
deals directly with ENA since Enron almost won the beauty contest to be their
energy partner two years ago, but included power procurement as an area of
value add in our presentation to their board, against the wishes of their
energy team. This clearly rubbed the energy guys the wrong way, and they
haven't forgotten it--too close to home, clearly. I can only conclude that
PD's board would be in a much better position today had they taken Enron's
advice then.
A bit of insight (Frank, you'll enjoy this)--PD claims Enron offered "their
ideas, sold back to them" and "no upside" in our final energy partner
proposal to them two years ago. When I asked how their counter-proposal to
Enron back then (identified projects first put to tender--if Enron is low
bidder, Enron wins project) differed from free consulting, they had no answer.

Summary:
It is clear how PD got into their current energy fix. By admission of the
energy group, nothing much has changed in the last few years there, either in
terms of personnel or in terms of mandate. This, despite the fact that the
viability of a number of PD facilities is in doubt due to energy
mismanagement. Without top-down involvement, we will get no further with
their energy team.

We are currently finalising the energy-copper structure we discussed during
the meeting as I think it is the best option for them. I will also work
further with Foster in Portland to give them the straight commodity offer.
Perhaps this can serve as a focal point for future higher level discussions
outside the sphere of PD's energy group. Joe/Michael-- I will make sure you
get this, as Kalidas may yet have a role to play. It is unfortunate that the
approach PD uses to manage their copper position seems much more
sophisticated than their approach to energy. Results notwithstanding, the
meeting was surprisingly open and candid on their part--no harm done to the
metals part of the business.

Attached find quick-look results of our site analysis. Toured the Sierrita
mine, no easy indication it will be closed end of this month. Personnel
tight-lipped, though their head of environmental affairs lost little time in
asking for a job. I have asked Bucky to keep you informed of developments in
West Coast power, as I suspect their decision on facility closure (at least
Sierrita) will be determined by power price developments between now and end
March.

CM