AZURIX CORP, S-1/A, 1999-05-05

AZURIX CORP
S-1/A, 1999-05-05
WATER SUPPLY

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 5, 1999

REGISTRATION NO. 333-74379

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------

AMENDMENT NO. 1

FORM S-1

REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
----------------------

AZURIX CORP.
(Exact Name of Registrant as Specified in Its Charter)

<TABLE>
<S> <C> <C>
4941
DELAWARE 4952 76-0589114
(State or Other Jurisdiction
of Incorporation or (Primary Standard Industrial (IRS Employer
Organization) Classification Code Number) Identification No.)
</TABLE>

RODNEY L. GRAY
VICE CHAIRMAN
AZURIX CORP.
333 CLAY STREET, SUITE 1000
HOUSTON, TEXAS 77002-7361
(713) 646-6001
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices and Agent for Service)

Copies to:

<TABLE>
<S> <C> <C>
JOHN C. ALE SHELLEY A. BARBER JAMES M. PRINCE
EXECUTIVE DIRECTOR VINSON & ELKINS L.L.P. ANDREWS & KURTH L.L.P.
AND GENERAL COUNSEL 2300 FIRST CITY TOWER 4200 CHASE TOWER
AZURIX CORP. 1001 FANNIN 600 TRAVIS
34 PARK STREET HOUSTON, TEXAS 77002-6760 HOUSTON, TEXAS 77002
LONDON W1Y 3PF, ENGLAND (713) 758-3813 (713) 220-4486
(44) 171-970-7763 FAX: (713) 615-5511 FAX: (713) 238-7110
FAX: (44) 171-970-7791
</TABLE>

----------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

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<PAGE> 2

EXPLANATORY NOTE

This registration statement contains two forms of prospectus: one to be
used in connection with an underwritten offering in the United States and
Canada, and one to be used in a concurrent international offering, of common
stock, par value $0.01 per share, of Azurix Corp. The U.S. prospectus for the
offering in the United States and Canada follows immediately after this
explanatory note. After the U.S. prospectus are the alternate pages for the
international prospectus. A copy of the complete U.S. prospectus and
international prospectus in the exact forms in which they are to be used after
effectiveness will be filed with the Securities and Exchange Commission pursuant
to Rule 424(b) under the Securities Act.
<PAGE> 3

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED MAY 5, 1999

PROSPECTUS
- ----------------

[AZURIX LOGO]

COMMON STOCK
----------------------

This is Azurix Corp.'s initial public offering of common stock. Azurix is
offering and selling shares and Atlantic Water Trust, the selling
stockholder, is offering and selling shares of common stock.

The U.S. underwriters will offer shares in the United States and
Canada and the international managers will offer shares outside the
United States and Canada.

We expect the public offering price to be between $ and $ per
share. Prior to the offering, there has been no public market for the common
stock. We are applying to list the common stock on the New York Stock Exchange
under the trading symbol "AZX."

INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 8 OF THIS PROSPECTUS.

----------------------

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price...................................... $ $
Underwriting discount...................................... $ $
Proceeds, before expenses, to Azurix....................... $ $
Proceeds, before expenses, to the selling stockholder...... $ $
</TABLE>

The U.S. underwriters may also purchase up to an additional
shares from the selling stockholder at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments. The international managers may similarly purchase up to an
aggregate of an additional shares from the selling stockholder.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
----------------------
MERRILL LYNCH & CO.

CREDIT SUISSE FIRST BOSTON

DONALDSON, LUFKIN & JENRETTE

PAINEWEBBER INCORPORATED

BT ALEX. BROWN NATIONSBANC MONTGOMERY SECURITIES LLC

----------------------

The date of this prospectus is , 1999.
<PAGE> 4

ART/DIAGRAMS

[EDGAR VERSION ONLY] Two to three pictures of company facilities will be
shown.

In addition, a diagram will depict the three areas of the global water
industry in which we will pursue our business strategy. They include:

Asset ownership and management, which we will pursue through acquisitions
and concessions of water and wastewater assets and building, owning and
transferring water and wastewater assets.

Services, which include operating and managing water and wastewater assets
for municipal and industrial customers, providing residuals management services
(managing the residual byproducts from wastewater) and providing infrastructure
development and maintenance services for underground water and wastewater
assets.

Resource management, which includes extracting, transporting and storing
water and wastewater.
<PAGE> 5

TABLE OF CONTENTS

<TABLE>
<S> <C>
Summary..................................................... 1
Risk Factors................................................ 8
Forward-Looking Statements.................................. 17
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Dilution.................................................... 19
Capitalization.............................................. 20
Currency Exchange Rates..................................... 21
Selected Historical and Unaudited Pro Forma Consolidated
Financial Data............................................ 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Government Outsourcing Through Privatization................ 37
Business.................................................... 40
Regulatory Matters.......................................... 64
Management.................................................. 75
Certain Transactions........................................ 82
Principal and Selling Stockholders.......................... 87
Description of Capital Stock................................ 90
Description of Indebtedness................................. 93
Shares Eligible for Future Sale............................. 101
Material United States Federal Tax Consequences to
Non-United States Holders of Common Stock................. 103
Underwriting................................................ 106
Legal Matters............................................... 110
Experts..................................................... 110
Where You Can Find More Information......................... 111
Index to Financial Statements............................... F-1
</TABLE>

----------------------

You should rely only on the information contained in this prospectus. We
have not, and the selling stockholder and the underwriters have not, authorized
any person to provide you with different information. If anyone provides you
with different or inconsistent information, you should not rely on it. We are
not, and the selling stockholder and the underwriters are not, making an offer
to sell these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this prospectus
is accurate as of the date on the front cover of this prospectus only. Our
business, financial condition, results of operations and prospects may have
changed since that date.

i
<PAGE> 6

SUMMARY

This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, including our financial data
and related notes, before making an investment decision. Unless we indicate
otherwise, the information contained in this prospectus gives effect to the
100,000-for-1 common stock split effective February 2, 1999.

AZURIX CORP.

Azurix Corp. is a global water company engaged in the business of
acquiring, owning, operating and managing water and wastewater assets, providing
water and wastewater related services and developing and managing water
resources. Enron Corp., one of the world's leading integrated natural gas and
electricity companies, formed Azurix to pursue opportunities in the global water
industry. Azurix's first significant step was to acquire Wessex, a water and
wastewater company based in southwestern England, for $2.4 billion on October 2,
1998. Wessex was recognized in December 1998 by the Office of Water Services,
the industry regulator for England and Wales, as the most efficiently operated
water and wastewater company in the region.

Our asset portfolio also includes interests in long-term water concessions
in the Province of Mendoza, Argentina and in Cancun, Mexico. In addition, on
March 25, 1999, we agreed to purchase all of the stock of Philip Utilities
Management Corporation, a water and wastewater services company in the United
States and Canada, for $107 million. The acquisition is expected to close in the
second quarter of 1999. Upon completion of the acquisition, we will provide
operations and management, engineering, residuals management and underground
infrastructure development services for municipal water and wastewater
facilities in North America. We have made each of these investments through one
or more subsidiaries, which will be our approach as we pursue our worldwide
growth strategy.

On a pro forma basis, assuming the Wessex acquisition occurred on January
1, 1998, and including Mendoza from the date of our investment but excluding
Cancun and Philip Utilities, we had operating revenues of $464.2 million, EBITDA
of $298.1 million and net income of $87.2 million for the year ended December
31, 1998 and total assets of $3,358.3 million as of December 31, 1998. To date,
all of our operating revenues have come from Wessex, and substantially all of
our operations have been conducted by Wessex.

We are aggressively pursuing additional water and wastewater transactions
in Europe, North America, Latin America, the Middle East, Africa, Asia and the
Pacific Rim. These include many of the upcoming privatizations identified in
this prospectus as well as various privately negotiated transactions.

Our experienced management team from Enron, Wessex and other water and
wastewater systems, and multinational companies provides us with the experience
necessary to compete successfully in the global water industry. We are
transferring the skills that Enron has successfully applied in developing,
financing, operating and managing the risks of energy infrastructure projects to
our water business around the world. In addition, we are applying to our water
business the operating, management and technical skills that our executives from
Wessex and other companies have successfully used in operating and managing
water and wastewater assets while providing high quality customer service. This
management team competitively positions us to identify, evaluate, acquire,
develop, finance and operate water and wastewater projects and services
worldwide.

1
<PAGE> 7

THE GLOBAL WATER INDUSTRY

The global water industry includes the collection, treatment, storage and
supply of drinking water, and the collection, treatment and disposal of
wastewater and its by-products. Public (municipal and other governmental) and
private (non-governmental) water companies serve industrial, commercial and
residential customers. Azurix estimates that the global water industry has total
annual revenues of approximately $300 billion. In addition, Azurix estimates
that over $600 billion will be spent on worldwide water and wastewater
infrastructure over the next decade.

We believe that significant business opportunities exist for private sector
participation in the global water industry. These opportunities include taking
part in water and wastewater privatizations, providing water and wastewater
related services to municipal and industrial water markets and developing and
managing water resources. Some of the factors creating these business
opportunities for private sector participation in the global water industry
include:

- Governments and industrial companies are recognizing that transferring
ownership, operation or management of water and wastewater assets to
experienced private parties, called outsourcing, is often more efficient
and cost-effective than owning or operating these assets themselves.

- Major capital investment and efficiency improvements are necessary to
meet higher standards of water and wastewater quality and environmental
protection, to connect growing populations to water and wastewater
systems and to replace aging water and wastewater infrastructure.

- Ownership of water and wastewater assets is highly concentrated in the
public sector, and governments frequently face budgetary constraints and
often lack the technical expertise to address these issues effectively.

- Increasing demand for water resources is focusing efforts on water
resource development and management, the means of extracting, managing,
storing and transporting water resources as efficiently as possible, and
of managing the risks related to these activities.

Significant barriers to entry limit the number of companies capable of
competing globally in the markets for water and wastewater privatization,
municipal and industrial outsourcing of services and resource development and
management. Participants must have the requisite operating experience and
management depth to qualify for bidding on international privatizations or
concessions, as well as an ability to identify and evaluate transactions, access
adequate capital at cost-effective levels and develop and manage international
infrastructure projects.

OUR COMPETITIVE STRENGTHS

We have several competitive strengths that should enable us to compete
successfully in the global water industry:

- EXPERIENCED MANAGEMENT AND BUSINESS DEVELOPMENT TEAMS. Although our
company was only recently formed, we have a group of experienced managers
from long-established companies, including Enron, other multinational
companies, Wessex and other water and wastewater companies. Our
management team has extensive experience in both the development and
operation of infrastructure projects worldwide and years of experience in
managing water and wastewater companies primarily in the United Kingdom
and also in the United States. Our senior executives are complemented by
a group of experienced business developers who identify opportunities in
the global water industry. We believe that the collective experience of
our management and business development teams will enable us to compete
successfully for public tenders. Since our formation, we have qualified
for bidding on numerous pending privatizations in Europe, Latin America
and the Middle East. Of those privatizations in which we have actively
participated, only one award has been made. In this bid for the
concession in Valparaiso, Chile, we were second to the winning bidder. We
are currently one of the three finalists for the partial privatization of
the Berlin,

2
<PAGE> 8

Germany water and wastewater system. In addition, we have identified and
negotiated successfully two private transactions.

- WESSEX OPERATING EXPERIENCE AND TECHNICAL EXPERTISE. From Wessex, we have
obtained the operating experience, research skills and technical
expertise necessary to evaluate potential water projects, to qualify for
bidding on water projects in many countries throughout the world, to
build transition and operating teams for new acquisitions and to manage
existing and new water assets. We intend to transfer to our global water
business the operating efficiency, advanced technology, capital
expenditure and operational cost management and regulatory management
skills used successfully by Wessex in operating and managing its water
and wastewater assets.

- REGULATORY AND GOVERNMENT AFFAIRS EXPERTISE. Our management team has
extensive experience in working with regulators and other governmental
agencies and has knowledge of the regulatory framework and privatization
processes in many of the countries in which we intend to pursue water and
wastewater opportunities. This experience and knowledge will allow us to
assess more successfully the regulatory risk and opportunity presented by
those projects we evaluate.

- FINANCING EXPERTISE. Members of our management team have experience using
sophisticated financing and capital raising techniques, in both global
and local markets, to lower the cost of capital for the financing of
projects and acquisitions. As our portfolio grows and matures, we intend
to enhance our equity returns and reduce overall risk exposure through
opportunistic sales of all or a portion of individual assets or
investments that have appreciated in value.

OUR BUSINESS STRATEGY

Our business strategy is focused on three complementary areas in the global
water industry:

- ACQUIRING, OWNING, OPERATING AND MANAGING WATER AND WASTEWATER ASSETS. We
intend to build a diversified portfolio of water and wastewater assets,
including both established businesses with stable returns and concessions
and projects in emerging markets with significant development
requirements and potential for growth and enhanced returns. We intend to
acquire water and wastewater assets through participation in public
tenders and privately negotiated transactions throughout the world,
including Europe, North America, Latin America, the Middle East, Africa,
Asia and the Pacific Rim. Following an acquisition of water or wastewater
assets, we plan to increase revenues by expanding customer bases and
improving the accuracy and timing of billing and collection procedures.
In addition, we intend to grow operating income by improving quality,
extending services, reducing operating costs, prioritizing and managing
capital expenditures, increasing efficiency and applying, where
appropriate, sophisticated financing techniques.

- PROVIDING WATER AND WASTEWATER RELATED SERVICES. Through innovative
technological, environmental and financial solutions, we intend to
provide a broad range of services to municipal and industrial owners of
water and wastewater systems around the world. These services will
include:

-- Operations, management and engineering -- services to design, build,
operate or maintain water and wastewater assets

-- Residuals management -- services to dispose of wastewater and biosolids
that result from wastewater treatment

-- Underground infrastructure remediation and development -- services to
repair and replace water and wastewater distribution and collection
systems

- DEVELOPING AND MANAGING WATER RESOURCES. We intend to pursue
opportunities in water resource development and management and address
the capital, technical and operational needs in this area of the water
industry.

3
<PAGE> 9

By pursuing our business strategy in these three areas, we plan to offer a
full spectrum of services to meet our public and private customers' water and
wastewater needs. In evaluating potential investments, we plan to follow a
disciplined approach focused on identifying the potential for increased returns,
analyzing the impact on tariffs and revenues of the future regulatory regime and
assessing the engineering, operational, regulatory, financing, economic,
structuring, insurance, tax, environmental, legal and accounting risks related
to each transaction. We believe this approach will allow us to identify and
compete successfully for those water and wastewater projects offering attractive
rates of return.

Our principal executive offices are located at 333 Clay Street, Houston,
Texas 77002 (telephone number (713) 646-6001) and 34 Park Street, London W1Y
3PF, England (telephone number (44) 171-970-7763).

4
<PAGE> 10

AZURIX'S CORPORATE STRUCTURE

The following chart illustrates our corporate structure, after the
offering, including our stockholders, significant subsidiary and other
investments. This chart does not show our complete corporate structure and
should be read in conjunction with the more detailed descriptions contained
elsewhere in this prospectus.

[CHART]

ATLANTIC WATER TRUST'S OWNERSHIP INTEREST IN AZURIX

Atlantic Water Trust currently owns all of Azurix's outstanding common
stock. Following completion of the offering, Atlantic Water Trust will own
approximately % of our outstanding common stock, % if the underwriters'
over-allotment options are exercised in full. Each of Enron and Marlin Water
Trust, a Delaware business trust, owns a 50% voting interest in Atlantic Water
Trust. To date, Enron has appointed all of the directors of Atlantic Water Trust
and Azurix, although Marlin Water Trust at any time has the right to elect or
replace half of the directors of Atlantic Water Trust and currently up to half
of the Azurix directors. Following the offering, as long as Atlantic Water Trust
owns a majority of our outstanding common stock, Marlin Water Trust has the
right to direct Atlantic Water Trust to elect or replace a percentage of
Azurix's directors equal to 50% minus the percentage of outstanding common stock
held by persons other than Atlantic Water Trust. Furthermore, Marlin Water
Trust, with the consent of the holders of a majority of our outstanding common
stock held by persons other than Atlantic Water Trust, Enron and its affiliates,
has the right to direct Atlantic Water Trust to elect or replace half of
Azurix's directors. Enron has the right to direct Atlantic Water Trust to elect
or replace the other half of Azurix's directors. As a result, following the
offering, Enron and Marlin Water Trust will continue to exert significant
influence over the policies, management and affairs of Azurix and the outcome of
most corporate actions requiring stockholder approval, including the approval of
transactions involving a change in control of Azurix. See "Certain
Transactions," "Principal and Selling Stockholders" and "Shares Eligible For
Future Sale."

RELATIONSHIP BETWEEN AZURIX AND ENRON

We intend to enter into agreements with Enron, including a business
opportunities agreement, a services agreement, a credit agreement and a license
agreement. The business opportunities agreement will limit the scope of our
business to the businesses generally identified in this prospectus and
activities incidental to those businesses. The agreement will also provide that
Enron and its affiliates may engage in water-related businesses, even if those
activities have a competitive impact on Azurix. Under the services agreement,
Enron will provide various corporate staff and support services to us. Under the
credit agreement, Enron will provide funds to us for general, administrative and
operating expenditures. See "Certain Transactions" for a more detailed
discussion of these agreements.

5
<PAGE> 11

THE OFFERING

The following information is based upon shares outstanding as of March 31,
1999 and excludes approximately 7.8 million shares that may be issued upon the
exercise of options. Unless otherwise indicated, all information in this
prospectus assumes that the over-allotment options are not exercised.

<TABLE>
<S> <C> <C> <C>
Common stock offered by Azurix:
U.S. offering................................. shares
International offering........................ shares
----------
Total................................. shares
==========

Common stock offered by the selling stockholder:
U.S. offering................................. shares
International offering........................ shares
----------
Total................................. shares
==========

Common stock outstanding after the U.S. and
international offerings....................... shares

Common stock subject to over-allotment options
from the selling stockholder.................. shares

Use of proceeds................................. We expect the proceeds to Azurix from this sale of
common stock to be approximately $350 million, before
deducting underwriting discounts and commissions and
estimated expenses. Azurix will not receive any
proceeds from the sale of common stock by the selling
stockholder. We intend to use approximately $
million of the net proceeds that we receive to repay
advances from Enron and other third party
indebtedness. Any remaining proceeds will be used for
working capital and general corporate purposes.

Proposed NYSE symbol............................ "AZX"
</TABLE>

6
<PAGE> 12

SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

The following tables present summary historical and unaudited pro forma
consolidated financial data for Azurix and for Wessex, the predecessor of
Azurix, for the periods and dates indicated. The unaudited pro forma financial
data for Azurix are derived from the unaudited condensed consolidated pro forma
financial data included elsewhere in this prospectus. The unaudited pro forma
financial data give effect to the acquisition of Wessex, the redemption and
elimination of Wessex's preference shares for an aggregate price of $249.8
million and the sale by Wessex of its interest in UK Waste for $337.9 million,
as though each occurred on January 1, 1998. The unaudited pro forma financial
data presented below is not necessarily indicative of the financial results that
would have occurred had the acquisition of Wessex, the redemption and
elimination of Wessex's preference shares and the sale by Wessex of its interest
in UK Waste occurred on January 1, 1998 and should not be viewed as indicative
of operations in future periods. See "Selected Historical and Unaudited Pro
Forma Consolidated Financial Data" for more information regarding the
historical, the unaudited pro forma consolidated and the other financial data.

<TABLE>
<CAPTION>
AZURIX
WESSEX (PREDECESSOR COMPANY) PRO FORMA
YEAR ENDED MARCH 31, YEAR ENDED
----------------------------------------------------- DECEMBER 31,
1995 1996 1997 1998 1998
----------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating revenues.................. $356.3 $376.8 $403.1 $436.6 $464.2
Operations and maintenance
expense.......................... 106.7 106.6 102.4 110.9 120.9
General and administrative
expense.......................... 33.3 27.4 32.2 29.1 44.4
Depreciation and amortization....... 48.5 53.7 58.0 64.3 88.3
Operating income.................... 167.8 189.1 210.5 232.3 210.6
Net income.......................... 123.7 140.4 153.0 16.7(1) 87.2
Basic earnings per common
share(2)......................... 0.87
Diluted earnings per common
share(2)......................... 0.87
OTHER FINANCIAL DATA:
EBITDA(3)(unaudited)................ $227.3 $256.9 $283.2 $309.9 $298.1
Net cash provided by operating
activities....................... 214.6 240.5 246.3 125.0
Net cash used in investing
activities....................... (150.3) (159.4) (97.8) (195.0)
Net cash (used in) provided by
financing activities............. (45.7) (54.6) (373.0) 6.8
</TABLE>

<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-----------------------------
AZURIX AS ADJUSTED(4)
------------ --------------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 5.3 $
Working capital........................................... (129.6)
Total assets.............................................. 3,358.3
Note payable -- affiliate................................. 121.4 121.4
Long-term debt (excluding current maturities)............. 912.1
Other long-term liabilities (including deferred taxes).... 417.9 417.9
Stockholders' equity...................................... 1,645.5
</TABLE>

- ---------------

(1) The year ended March 31, 1998 includes a windfall tax of $162.3 million,
which has been described by the U.K. government as a one-time tax. Excluding
the effect of this tax, for the year ended March 31, 1998, Wessex's net
income would have been $179.0 million.

(2) Basic and diluted earnings per common share for Wessex are not meaningful on
a comparative basis to Azurix and, therefore, are not presented.

(3) EBITDA for any relevant period presented above is defined as net income
before net interest (income) expense, income tax, utility tax, depreciation
and amortization. EBITDA is not a measure recognized by generally accepted
accounting principles and should not be considered in isolation or as a
substitute for operating profit, as an indicator of liquidity or as a
substitute for net cash provided by operating activities. This method may
not be comparable to the EBITDA calculations of other entities.

(4) As adjusted to reflect the application of the net proceeds to Azurix from
the offering.

7
<PAGE> 13

RISK FACTORS

Investing in the common stock will provide you with an equity ownership
interest in Azurix. As an Azurix stockholder, you will be subject to risks
inherent in our business. The performance of your shares will reflect the
performance of our business relative to, among other things, competition, market
conditions and general economic and industry conditions. The value of your
investment may increase or decline and could result in a loss. You should
carefully consider the following factors as well as other information contained
in this prospectus before deciding to invest in shares of the common stock.

BECAUSE WE HAVE A LIMITED OPERATING HISTORY, OUR FUTURE OPERATING RESULTS ARE
DIFFICULT TO FORECAST.

We are a new company with a limited operating history. Our limited
operating history and the unpredictable results of our acquisition strategy make
it difficult to forecast our future operating results. The financial data
presented in this prospectus may not be indicative of our future financial or
operating results. We expect to experience significant competition in bidding
and negotiating for water projects worldwide. As a new company, we will face
competition from companies that have a longer operating history and have more
experience in bidding for water and wastewater projects. Our limited operating
history may create impediments to our being successful in bidding. For example,
we may be at a disadvantage in bidding for some projects because we may not have
a history of operating in a country or region, or we may not have a history of
operating a water or wastewater system or individual treatment plant of a size
comparable to the system or facility being privatized or built.

We will derive our consolidated operating revenues almost exclusively from
the operations of Wessex until such time as our other investments begin to
generate revenue. Operating revenues from Wessex may not be available for
distribution to Azurix due to operating and financing requirements of Wessex,
financing requirements of intermediate companies, regulatory developments
affecting the rates Wessex may charge its customers and other regulatory or
other restrictions on its ability to pay dividends to its shareholders.

OUR PROFITABILITY AND PROSPECTS FOR GROWTH ARE HIGHLY DEPENDENT ON COMPLETING
ACQUISITIONS AND DEVELOPING PROJECTS.

There is a risk that we may not be able to successfully complete
acquisitions of water and wastewater assets and develop projects because these
transactions involve many complexities. Such complexities include, among other
things, negotiation of satisfactory water supply and wastewater treatment
services agreements with local governments and receipt of required governmental
consents and permits. In addition, in evaluating and negotiating water projects,
water companies typically encounter difficulties in determining the status and
condition of existing systems or developing accurate forecasts of material
factors such as the rate of population growth, particularly in developing
countries. In privatization transactions, we may be unable to predict with
certainty the timing of a privatization or the commitment level of a government
to completing a privatization. In addition, most privatizations are
competitively bid, and there is no assurance as to what proportion of the
projects on which we bid will be acquired by us. Because part of our business
strategy is to grow through acquisitions and development projects, we have
recently put in place a business development effort with associated general,
administrative and operating expenses. To the extent we are not successful in
completing acquisitions and development projects, these expenses will not be
absorbed by revenues associated with those acquisitions and development projects
and will decrease our net income. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Outlook."

WATER AND WASTEWATER COMPANIES FACE PRICE REGULATION THAT COULD REDUCE OUR
OPERATING REVENUES.

Governments generally regulate the prices that water and wastewater
companies may charge their customers. Regulatory regimes vary from country to
country and at times can give great discretion to the regulatory authority.
Moreover, the regulatory authorities in countries where we currently operate, or
may operate in the future, could change without notice, as could the regulations
they promulgate. These changes could cause reductions in our operating revenues.
In the case of Wessex, the U.K. Director

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General of Water Services is currently conducting a periodic review of the price
limits for water and wastewater companies in England and Wales that is expected
to result in new price limits for the period from April 1, 2000 through 2005. In
setting prices, the Director must ensure that water companies are able to
finance the proper carrying out of their functions, in particular, by securing a
reasonable return on their capital.

In October 1998, the Director proposed an initial price cut for Wessex in
excess of 17.5% from 1999-2000 to 2000-2001, with prices gradually increasing
thereafter but remaining below the 1999-2000 levels in 2004-2005. Following this
proposal, the U.K. Government announced its decision to require greater capital
expenditures for water and wastewater companies for environmental improvements.
Subsequently, in its April 1999 business plan filed with the Director, Wessex
proposed stable prices from 1999-2000 to 2000-2001, with prices gradually
increasing to 18% higher than current levels in 2005, primarily to fund capital
expenditures mandated by the new environmental standards. The Director has
stated that he will publish draft price limits in July 1999 with the final
determination being made in November 1999. Although we are unable to predict the
precise outcome of the current U.K. rate review, if Wessex were required to cut
its prices as originally proposed by the Director, Wessex's operating revenues
would be reduced by approximately 17.5% and its earnings would be reduced
materially.

FAILURE TO IDENTIFY AND ASSESS ACCURATELY THE RISKS RELATED TO AN ACQUISITION OR
PROJECT COULD REDUCE OUR OPERATING RESULTS, INCLUDING EARNINGS.

In evaluating potential transactions, we make assumptions and projections
based on the potential for increased returns, future regulatory and rate case
changes and the engineering, operations, financing, economic structuring,
insurance, tax, environmental, legal and accounting risks relating to each
transaction. Forecasts, estimates and information provided by local governments
and other sources used to bid for public tenders can prove to be materially
inaccurate or incomplete, resulting in projections for capital expenditures to
improve or build water systems that are below what is ultimately required. If
the assumptions on which we base our decision to acquire assets or develop a
project prove to be incorrect in any material respect, either because of
inaccurate or incomplete information provided by the other party or parties to
the transaction or because of a failure by us to accurately identify or assess
the risks or capital requirements related to a proposed acquisition or project,
then our operating results, including earnings, could be materially adversely
affected. While we attempt to identify all risks associated with any given
transaction, no assurance can be given that we will identify all risks related
to a transaction.

BECAUSE OUR BUSINESS REQUIRES SUBSTANTIAL CAPITAL EXPENDITURES, DIFFICULTY
FINANCING OUR OPERATIONS, ACQUISITIONS AND PROJECTS COULD LIMIT OUR GROWTH AND
REDUCE OUR EARNINGS.

The water assets and projects in which we plan to invest may require
substantial capital expenditures, especially early in the life of our
investments. We intend to finance our investments and projects using various
techniques and instruments such as debt financing, project financing and equity
investments. There is a risk that we may engage in leveraged transactions and
that we may pledge all or substantially all of our assets. For example, the
capital stock of Wessex is pledged as security for the senior credit facility of
Azurix Europe Ltd, Wessex's holding company. In addition, there is a risk that
financing may not be readily available to acquire water and wastewater assets or
develop projects. Our ability to arrange financing will be affected by general
economic and capital market conditions, credit availability from banks or other
lenders and the risks inherent in particular concessions, projects or countries.
In particular projects, we may have a co-owner with limited resources or that
may default on its obligations to contribute capital to the project. Enron is
not obligated to provide additional financial support to Azurix for any capital
expenditures or investments.

IF WE DO NOT HAVE OPERATIONAL CONTROL IN A PROJECT, OUR OPERATING REVENUES AND
EARNINGS COULD BE REDUCED.

We may invest in water and wastewater projects and assets in which we do
not own a majority of the project or assets. In addition, we may invest in or
own projects and assets with partners, co-venturers and other parties, including
governmental entities. Some jurisdictions require participation of employees or
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<PAGE> 15

other stakeholders in company management. In these cases, major decisions may
require the consent of other equity owners or stakeholders.

We may also invest in projects and assets where we do not serve as
operator. For example, we do not have operational control in our Mendoza,
Argentina concession. In these cases, our ability to direct the outcome of
matters with respect to the operations of the project or assets could be
limited. A lack of operational control in a project could materially and
adversely affect our interest in the project and, as a result, our operating
revenues and earnings from the project.

SUCCESS OF OUR BUSINESS STRATEGY MAY BE LIMITED BY OUR ABILITY TO INTEGRATE
ACQUISITIONS AND MANAGE OUR GROWTH SUCCESSFULLY.

We intend to grow in part through acquisitions of water and wastewater
assets. Because we are pursuing acquisitions around the world and because we are
actively pursuing a number of opportunities simultaneously, we may encounter
unforeseen expenses, difficulties, complications and delays, including
difficulties in staffing and providing operational and management oversight. As
we expand our operations through acquisitions, we may encounter difficulties
integrating such acquisitions and successfully managing the growth of a
portfolio of water and wastewater assets that is diverse both with respect to
types of assets and their location. We cannot assure you that our current
management, personnel and other corporate infrastructure will be adequate to
manage our growth or that our systems, procedures and controls will be adequate
to support our expanding operations. To the extent we encounter problems in
integrating acquisitions and managing our growth, our financial results and the
market price of our common stock could be materially adversely affected.

ENVIRONMENTAL FACTORS AND CHANGES IN REGULATIONS COULD INCREASE OUR COSTS OR OUR
LIABILITIES.

There is a risk that changes in regulations applying to the water supply or
wastewater treatment services industry or new, revised or inconsistent
interpretations of these regulations may adversely affect our financial
condition and results of operations. Water companies are subject to water
quality risks related to contamination of drinking water supplies or
environmental danger from effluent discharges. The occurrence of these or other
risks could have a material adverse effect on our financial position and results
of operations.

In addition, many countries in which we plan to do business have recently
developed, or are in the process of developing, new regulatory and legal
structures that regulate the delivery of drinking water and wastewater services
and accommodate private and foreign-owned water businesses. In some instances,
these regulatory and legal structures and their interpretation and application
by administrative agencies are relatively new and incomplete. The interpretation
of existing rules can be expected to evolve over time and may have an
unpredictable impact on our business. We anticipate future changes in, or
decisions affecting, regulatory regimes that will serve to expand or tighten
regulatory controls. Some of these changes or decisions could have a material
adverse effect on our financial position and results of operations.

We may handle hazardous substances in our industrial services business in
addition to biological waste. Stringent environmental laws provide for serious
penalties and sometimes impose strict liability on those who handle these
substances or find them on their property. Accordingly, if we handle hazardous
substances in our industrial services business in the future, there is a risk
that we will incur liabilities and expenses related to the handling of hazardous
substances. Although we maintain insurance against many of these risks, we
cannot be certain that insurance proceeds received under our policies would
adequately cover all liabilities we might incur.

LIABILITY FOR WATER SUPPLY CONTAMINATION COULD RESULT IN MATERIAL LOSSES AND
COSTS.

Where we supply water to end-users, our business is subject to risks of
contamination of the water supply, which could result in disease or even death
or otherwise endanger the public health. As a result of contamination, we could
be subject to civil or criminal enforcement actions, private suits and cleanup
obligations, which could have a material adverse effect on our financial
condition and results of operations.
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Drinking water contamination can be caused by, among other things, wastewater
effluent, stormwater runoff from farms and industrial sites, materials used in
the construction or rehabilitation of water supply pipes, harmful nitrates
attributable to modern farming practices and various other pathogens from a
variety of sources entering the drinking water supply. Accordingly, there can be
no assurance that our water supply will not become contaminated. Although we
maintain insurance against many of these risks, we cannot be certain that
insurance proceeds received under our policies would adequately cover all
liabilities we might incur.

POLITICAL AND ECONOMIC CHANGES IN COUNTRIES IN WHICH WE OPERATE COULD ADVERSELY
AFFECT OUR OPERATING RESULTS.

The success of our strategy in many countries will depend on a political
and economic environment that will accommodate foreign investment and project
development. Our operations will be subject to political and economic risks,
including risks of war, terrorism, expropriation, nationalization, renegotiation
or nullification of existing contracts, changes in rates and methods of taxation
and foreign exchange controls or governmental restrictions on the repatriation
of hard currency. You should be aware that we will operate in countries whose
economies differ in many respects from the economies of the United States,
Canada and most Western European countries, including their structure, levels of
capital reinvestment, growth rate, government involvement, resource allocation,
self-sufficiency, rate of inflation and balance of payments position. In many of
these countries, the government retains significant control over the economy.
Thus, there is a risk that future government actions, especially with respect to
nationally important facilities such as water systems, could have a material
adverse effect on our financial condition and results of operations.

WORK STOPPAGES AND OTHER LABOR RELATIONS MATTERS COULD ADVERSELY AFFECT OUR
OPERATING RESULTS.

We are subject to a risk of work stoppages and other labor relations
matters because we have invested and will invest in the future in assets and
projects utilizing a workforce that in many cases will be unionized. For
example, a portion of the work forces at Wessex, Mendoza, Cancun and Philip
Utilities are represented by unions. In addition, our ability to obtain an
adequate return on an investment will often depend on our success in optimizing
the labor force through voluntary and sometimes involuntary staff reductions.
There is a risk that layoffs, where implemented, could trigger community or
union problems. We cannot assure you that issues with our labor forces will be
resolved favorably to us in the future or that we will not experience work
stoppages in future years.

CHANGES IN CURRENCY EXCHANGE RATES, LIMITATIONS ON SENDING FUNDS OUT OF A
FOREIGN COUNTRY AND FOREIGN CURRENCY RESTRICTIONS OR SHORTAGES COULD ADVERSELY
AFFECT OUR OPERATING RESULTS.

Because we conduct operations outside the United States, limitations on the
right to convert currency or to take it out of a foreign country, changes in
exchange rates and the capacity of currency exchange markets may adversely
affect our ability to repatriate profits. As of December 31, 1998, 98.5% of our
total liabilities were non-U.S. dollar denominated. For the year ended December
31, 1998, 100% of our operating revenues were non-U.S. dollar denominated but
were in the same currency as our non-U.S. dollar denominated liabilities. Legal
restrictions or shortages in currencies in countries outside the United States
may prevent us from converting sufficient local currency to enable us to comply
with our currency payment obligations not denominated in local currency or to
meet our operating needs and debt service requirements.

OPERATING IN COUNTRIES WITHOUT ADEQUATE REVENUE COLLECTION SYSTEMS COULD REDUCE
OUR OPERATING REVENUES.

There is a risk that we will operate in countries whose legal systems do
not have established or well-enforced collection mechanisms for their water
supply and wastewater treatment services. Also, customers in such countries may
not be able or willing to pay for water services. This could have a material
adverse effect on our financial condition and results of operations. There can
be no assurance that government subsidies or taxes and other concessions will
sufficiently compensate private parties that provide these services for the
economic consequences of such conditions. Where initially available, there is a
risk that
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<PAGE> 17

such subsidies and concessions could be reduced or eliminated before reliable
revenue sources and collection mechanisms can be established.

INTERACTION OF DIFFERENT COUNTRIES' TAX LAWS COULD LOWER OUR RETURNS.

Tax laws in various countries treat differently the taxability of various
aspects of income and gain and the deductibility of expenses and losses. Income
earned in one jurisdiction also may be taxable in another, including the United
States. Although in many instances U.S. tax laws will permit us to credit
amounts paid in taxes in other countries against our U.S. tax obligations, the
rules allowing credits are complex and do not allow credits in many
circumstances. Moreover, if we incur expenses in one jurisdiction that benefit a
project in another, they may not be deductible against income in the
jurisdiction where the expenses were incurred. This could occur, in particular,
in the United States, if our operating revenues from future U.S. operations do
not exceed the expenses we incur in the United States in supporting our
worldwide operations.

OPERATING IN COUNTRIES WITH UNDEVELOPED LEGAL SYSTEMS COULD ADVERSELY AFFECT OUR
BUSINESS BECAUSE WE MAY ENCOUNTER DIFFICULTIES ENFORCING OUR CONTRACTUAL RIGHTS.

Developing countries in which we may pursue opportunities may not have
well-established legal systems and lack a well-developed, consolidated body of
laws governing foreign investment enterprises. The uncertainty of the legal
environment in these countries could make it difficult for us to enforce our
rights, or those of our operating companies, under agreements relating to our
operations. In addition, the administration of laws and regulations by
government agencies in such countries may be subject to considerable discretion
or prejudice against foreigners or private investors. As these legal systems
develop, foreign investors may be adversely affected by new laws and changes to
existing laws. In addition, in countries where adequate laws and well-developed
legal systems do exist, it may not be possible to obtain swift and equitable
enforcement of such laws.

RESTRICTIONS IN DEBT AGREEMENTS COULD LIMIT OUR GROWTH AND OUR ABILITY TO
RESPOND TO CHANGING CONDITIONS.

We conduct substantially all of our operations through subsidiaries, and
substantially all of our assets consist of equity in our subsidiaries. Some of
the debt financing arrangements to which our subsidiaries are a party impose
restrictions on their business operations, which may affect our business
operations. The covenants contained in the credit agreements to which Azurix
Europe and Wessex are parties will have several restrictive effects on our
future operations. For example, the covenants contained in the existing senior
credit facility and the new senior credit facility for Azurix Europe require
Wessex to meet financial tests and limit Wessex's ability to borrow additional
funds or dispose of assets. These covenants could hinder our flexibility in
planning for, and reacting to, changes in our business. In addition, our ability
to obtain additional financing for working capital, capital expenditures,
acquisitions, general corporate and other purposes at the Azurix level may be
limited by the fact that the capital stock of Wessex is pledged as security for
Azurix Europe's existing senior credit facility and new senior credit facility.
Additionally, covenants contained in the new senior credit facility restrict
Azurix Europe from paying dividends to Azurix. This could limit our ability to
pay dividends on our common stock. See "Description of Indebtedness."

FAILURE OF COMPUTER SYSTEMS TO RECOGNIZE YEAR 2000 COULD HAVE AN ADVERSE EFFECT
ON OUR BUSINESS.

Year 2000 problems could result from computer hardware and software using
two digits rather than four digits to define the applicable year. These problems
include operational inefficiencies, systems failures, business disruptions and
lost revenues attributable to the inability of these two digit systems to
recognize the Year 2000. We intend to implement Enron's Year 2000 plan to
identify and remediate our Year 2000 problems. However, because we have not
completed our analysis of our Year 2000 readiness or the Year 2000 readiness of
parties on whom we rely, we cannot ensure that the identification and
remediation of our Year 2000 problems will be successful.

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<PAGE> 18

If our mission-critical information systems fail or if suppliers on which
we depend for essential goods and services experience mission-critical
information system failures, our business could be materially adversely
affected. We could face substantial claims by governments, governmental
authorities or customers, as well as loss of operating revenues, due to service
interruptions, violations of environmental regulations, inability to fulfill
contractual obligations, inability to account for obligations and increased
expenses associated with litigation, harm to persons or to property,
stabilization of operations following system failures and the execution of
contingency plans. In addition, we could face claims of damage to persons or
property as the result of improperly treated water or wastewater.

Our preliminary assessment of our Year 2000 issues has not demonstrated a
need to incur material Year 2000 costs. However, the following factors could
result in actual Year 2000 costs being higher than anticipated:

- We intend to engage in future acquisitions and could acquire a business
with significant Year 2000 problems.

- We depend on third parties, including customers, suppliers and service
providers, who may fail to address adequately their Year 2000 problems.

- We rely on automated plant systems, computerized billing procedures and
other embedded chip technologies that could necessitate expensive
corrective actions.

For a more detailed discussion of the state of our Year 2000 readiness, the
costs we anticipate incurring to become Year 2000 ready and our Year 2000
contingency plans, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000."

OUR SUCCESS DEPENDS ON KEY MEMBERS OF OUR MANAGEMENT, THE LOSS OF WHOM COULD
DISRUPT OUR BUSINESS OPERATIONS.

We depend on the continued employment of key management personnel we have
brought in from Enron, Wessex and other multinational companies. We have entered
into employment agreements with these executives. If these officers resign or
become unable to continue in their present role and if they are not adequately
replaced, our business operations could be materially adversely affected. See
"Management."

BECAUSE WE RELY ON ENRON FOR CORPORATE STAFF AND SUPPORT SERVICES AND UTILIZE
ENRON'S REGULATORY AFFAIRS, MARKETING AFFAIRS, TREASURY AND RISK ASSESSMENT AND
CONTROL DEPARTMENTS, CHANGES IN OUR RELATIONSHIP WITH ENRON COULD INCREASE OUR
COSTS.

Our agreement with Enron is for an indefinite term, but either of us may
terminate the agreement on 180 days' notice. We expect that, were Enron to
terminate, during this 180-day period we would be able to arrange alternate
suppliers for all the important services provided. We would expect that these
services would be available from third parties at costs similar to those we pay
Enron. However, where we would have to replicate facilities, services or
employees that we are not using full time, our costs could increase. It is not
possible to predict the specific areas where costs would increase, as that
depends on how much we have grown by the time the agreement terminates.

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BECAUSE ENRON AND ITS AFFILIATES MAY COMPETE WITH AZURIX IN WATER-RELATED
ACTIVITIES AND BECAUSE AZURIX MAY ONLY ENGAGE IN ACTIVITIES GENERALLY IDENTIFIED
IN THIS PROSPECTUS, INCIDENTAL ACTIVITIES AND OTHER ACTIVITIES AS ATLANTIC WATER
TRUST OR ENRON MAY APPROVE, OUR BUSINESS OPPORTUNITIES COULD BE LIMITED.

Enron and Azurix will enter into an agreement that limits the scope of
Azurix's business and provides that Enron and its affiliates may engage in
water-related activities, even if those activities have a competitive impact on
Azurix. In general, Enron will be permitted to engage in any business
whatsoever, including water, wastewater and other businesses competing with
Azurix, and may compete in public tenders against Azurix, provided the business
is conducted and opportunities are identified and developed through Enron's own
personnel and not through Azurix. If an opportunity in the water industry is
presented to a person who is an officer or director of both Enron and Azurix,
the opportunity must first be offered to Azurix, unless water constitutes a
minority of the fair market value of the opportunity, as determined by that
officer or director in good faith based on information available at the time.
Azurix will indemnify Enron and its officers, directors and employees against
all claims brought on account of Enron competing with Azurix, provided Enron has
followed the rules just described. Were Enron to decide to pursue activities in
the water or wastewater industry, its size, access to capital and experience in
developing products and markets could make it a strong competitor.

The agreement will require Azurix to limit its purpose, in its certificate
of incorporation, to the businesses generally identified in this prospectus,
activities incidental to those businesses, and such other businesses as Atlantic
Water Trust may approve in its sole discretion, or if Atlantic Water Trust
ceases to control Azurix, then such other businesses as Enron may approve in its
sole discretion. The agreement thus limits our ability to pursue potentially
profitable activities that are not primarily in the water and wastewater sector,
even though those opportunities come to our attention on account of our
activities in water and wastewater. For example, some jurisdictions may choose
to privatize their water and other utility assets together. As a result of this
agreement, we would need Enron's consent to pursue the privatization if the
water and wastewater aspects were not expected to represent a majority of the
value.

The agreement will restrict both Enron and Azurix from taking action to
restrict each others' businesses or to subject them to regulation under the U.S.
Public Utility Holding Company Act of 1935. The agreement will expire the first
date on which neither Enron nor Atlantic Water Trust directly or indirectly owns
or has the power to vote at least 35% of the shares of Azurix ordinarily
entitled to vote for the election of directors or otherwise controls Azurix. See
"Certain Transactions -- Agreement Regarding Business Opportunities and Related
Matters."

THROUGH ATLANTIC WATER TRUST, ENRON AND MARLIN WATER TRUST WILL BENEFICIALLY OWN
A MAJORITY OF OUR COMMON STOCK AND WILL BE ABLE TO SIGNIFICANTLY AFFECT THE
OUTCOME OF STOCKHOLDER VOTING.

Atlantic Water Trust currently owns all of Azurix's outstanding common
stock. Following completion of the offering, Atlantic Water Trust will own
approximately % of our outstanding common stock, % if the
underwriters' over-allotment options are exercised in full. Each of Enron and
Marlin Water Trust, a Delaware business trust, owns a 50% voting interest in
Atlantic Water Trust. To date, Enron has appointed all of the directors of
Atlantic Water Trust and Azurix, although Marlin Water Trust at any time has the
right to elect or replace half of the directors of Atlantic Water Trust and
currently up to half of the Azurix directors. Following the offering, as long as
Atlantic Water Trust owns a majority of our outstanding common stock, Marlin
Water Trust has the right to direct Atlantic Water Trust to elect or replace a
percentage of Azurix's directors equal to 50% minus the percentage of
outstanding common stock held by persons other than Atlantic Water Trust.
Furthermore, Marlin Water Trust, with the consent of the holders of a majority
of our outstanding common stock held by persons other than Atlantic Water Trust,
Enron and its affiliates, has the right to direct Atlantic Water Trust to elect
or replace half of Azurix's directors. Enron has the right to direct Atlantic
Water Trust to elect or replace the other half of Azurix's directors. As a
result, following the offering, Enron and Marlin Water Trust will continue to
exert significant influence over the policies, management and affairs of Azurix
and the outcome of most corporate actions requiring stockholder approval,
including the approval of transactions involving a change in control of Azurix.
See "Certain Transactions" and "Principal and Selling Stockholders."

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A MAJORITY OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO
ENRON DIRECTORS OR OFFICERS.

Currently, a majority of our directors are also directors or officers of
Enron, a situation that may create conflicts of interest. The directors and
officers of Enron have fiduciary duties to manage Enron, including its
investments in subsidiaries and affiliates such as Azurix, in a manner
beneficial to Enron and its stockholders. Similarly, the directors and officers
of Azurix have fiduciary duties to manage Azurix in a manner beneficial to
Azurix and its stockholders. In some circumstances, the duties of these
directors and officers of Enron may conflict with their duties as directors of
Azurix. In addition, other conflicts of interest exist and may arise in the
future as a result of the extensive relationships between Enron and Azurix.
Enron and Azurix have agreed that conflicts of interest between Enron and Azurix
may be resolved through approval by a majority of the directors of Azurix not
associated with Enron. See "Certain Transactions" and "Principal and Selling
Stockholders."

FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.

The market price of our common stock could drop due to sales of a large
number of shares of our common stock in the market after the offering or the
perception that such sales could occur. These factors could also make it more
difficult to raise funds through future offerings of common stock. See "Shares
Eligible for Future Sale."

After the offering, shares of common stock will be outstanding.
Of these shares, the shares to be sold in the offering will be freely
transferable and may be sold without restriction under the Securities Act,
except for any shares acquired by an "affiliate" of Azurix as defined in Rule
144 under the Securities Act. In connection with the offering, Azurix and the
selling stockholder (holding shares of common stock post-offering)
have agreed, subject to certain exceptions, not to sell any shares of common
stock for a period of 180 days after the date of this prospectus without the
consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of the
underwriters. Upon expiration of the lockup period, shares may be sold
at any time subject to compliance with the volume limitations and other
restrictions of Rule 144. Options to purchase approximately 7.8 million shares
of common stock will also be outstanding after the offering. Such options
generally provide for vesting over a three to five year period. In addition,
more options may be granted in the future. See "Management -- Stock Plan."

After the offering, we intend to file a registration statement covering the
sale of approximately 7.8 million shares of common stock reserved for issuance
under our stock plan. In addition, Atlantic Water Trust has registration rights
for all of its shares of common stock. See "Certain Transactions" and "Shares
Eligible for Future Sale."

Marlin Water Trust, or the trustee under its senior notes indenture, may be
required to cause Atlantic Water Trust to sell shares of our common stock owned
by Atlantic Water Trust if the senior notes of Marlin Water Trust have not been
repaid on or before December 15, 2001 or earlier if specified events occur.
These events include defaults under certain of Azurix's, Enron's or Marlin Water
Trust's debt obligations or a downgrading of Enron senior debt to below "Baa3"
by Moody's Investors Service, Inc., "BBB-" by Standard & Poor's Ratings Services
or "BBB-" by Duff & Phelps Credit Rating Co. and a decline in Enron's common
stock price below $37.84. The last sale price of Enron common stock, as reported
by the New York Stock Exchange, on May 4, 1999 was $76.19. Atlantic Water Trust
may also elect to sell shares of our common stock in advance of the December 15,
2001 maturity of the senior notes of Marlin Water Trust in order to fund the
prepayment of such debt. See "Principal and Selling Stockholders -- Atlantic
Water Trust."

OUR CERTIFICATE OF INCORPORATION CONTAINS PROVISIONS THAT COULD DISCOURAGE A
TAKEOVER.

Our certificate of incorporation authorizes our Board of Directors to issue
preferred stock without stockholder approval. If our Board of Directors elects
to issue preferred stock, it could be more difficult for a third party to
acquire us. In addition, provisions of the certificate of incorporation, such as
a staggered board of directors and limitations on the removal of directors, no
stockholder action by written consent and

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<PAGE> 21

limitations on stockholder proposals at meetings of stockholders, could make it
more difficult for a third party to acquire control of us, even if such change
of control would be beneficial to stockholders. See "Description of Capital
Stock."

THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK AND OUR STOCK PRICE
MAY FLUCTUATE.

There has not been a public market for our common stock. We will list the
common stock for trading on the New York Stock Exchange. We do not know the
extent to which investor interest in Azurix will lead to the development of a
trading market for the common stock or how the common stock will trade in the
future. The initial public offering price will be determined by negotiations
among us, Atlantic Water Trust, Enron and the underwriters. Investors may not be
able to resell their shares at or above the initial public offering price. See
"Underwriting."

The price at which the common stock will trade depends upon a number of
factors, including our historical and anticipated operating results and general
market and economic conditions, some of which are beyond our ability to control.
Factors such as quarterly fluctuations in our financial and operating results,
developments affecting us, our customers, the water markets in which we compete
or the water industry, including the factors listed below under "Forward-Looking
Statements," also could cause the market price of the common stock to fluctuate
substantially. In addition, the stock market has from time to time experienced
extreme price and volume fluctuations. These broad market fluctuations may
adversely affect the market price of the common stock.

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other
than statements of historical facts contained in this prospectus, including
statements regarding our future financial position, business strategy, budgets,
projected costs and plans and objectives of management for future operations,
are forward-looking statements. Although we believe our expectations reflected
in these forward-looking statements are based on reasonable assumptions, no
assurance can be given that these expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from the
expectations reflected in the forward-looking statements include, among other
things:

- Political developments in foreign countries

- The ability to enter new water and wastewater markets in the United
States and in other jurisdictions

- The timing and extent of deregulation of water and wastewater markets in
the United States and in other countries

- Regulatory developments in the United States and in other countries,
including tax legislation and regulations

- The extent of efforts by governments to privatize water and wastewater
industries

- The timing and extent of changes in non-U.S. currencies and interest
rates

- The extent of success in acquiring water and wastewater assets and
developing and managing water resources, including the ability to qualify
for and win bids for water and wastewater projects

- The timing and success of efforts to develop international water and
wastewater infrastructure projects

- The ability of counterparties to financial risk management instruments
and other contracts with us to meet their financial commitments to us

- Our success in implementing our Year 2000 plan, the effectiveness of our
Year 2000 plan and the Year 2000 readiness of third parties

- Our ability to access the debt and equity markets during the periods
covered by the forward-looking statements, which will depend on general
market conditions and our credit ratings for our debt obligations

We undertake no obligation to update or revise our forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur.

17
<PAGE> 23

USE OF PROCEEDS

We expect the proceeds to Azurix from this sale of common stock to be
approximately $350 million, before deducting underwriting discounts and
commissions and estimated expenses. Azurix will not receive any proceeds from
the sale of common stock by the selling stockholder.

We intend to use the net proceeds that we receive to repay approximately
$70 million that Enron advanced to us to fund our general, administrative and
operating expenses, from our inception through April 30, 1999, in addition to
certain capital expenditures. This includes $28.5 million advanced to us by
Enron to fund our acquisition of, and loan to, our investment in Cancun. The
amount due to Enron is non-interest bearing and has no maturity date.

We intend to use $ million of the net proceeds to repay indebtedness to be
drawn under the new senior credit facility to be entered into in May 1999 by
Azurix Europe Ltd, an indirect, wholly owned subsidiary of Azurix and the
holding company for Wessex. The amounts to be drawn under the new senior credit
facility will bear interest at a floating London interbank offered rate, plus a
margin. The new senior credit facility is for a period of three years. We intend
to incur indebtedness under the new senior credit facility for the following
purposes:

- To repay $ million outstanding under Azurix Europe's existing
senior credit facility entered into to finance the acquisition of Wessex

- To finance $107 million in connection with the acquisition of Philip
Utilities Management Corporation, which is expected to close in the
second quarter of 1999

Any remaining proceeds will be used for working capital and general
corporate purposes. Pending such uses, we intend to invest the remaining
proceeds of the offering in short-term, investment-grade, interest-bearing
securities.

See "Description of Indebtedness" for a description of the terms of the new
senior credit facility and the existing senior credit facility.

DIVIDEND POLICY

We have not paid any dividends on our common stock and we do not currently
anticipate paying any dividends on our common stock. We currently intend to
retain all future earnings to fund the development and growth of our business.
The payment of any future dividends will be at the discretion of our Board of
Directors and will depend on our results of operations, financial condition,
capital requirements and other factors deemed relevant by our Board of
Directors.

18
<PAGE> 24

DILUTION

If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the net tangible book value per share of our common stock after
the offering. We calculate net book value per share by dividing the net assets
(total assets less liabilities) by the number of shares outstanding before the
offering. We calculate net tangible book value per share by dividing the net
tangible assets (total assets less liabilities and net intangible assets) by the
number of shares of common stock outstanding before the offering.

The net book value and net tangible book value of Azurix as of December 31,
1998 were approximately $16.46 and $7.57 per share, respectively. Without taking
into account any changes in net book value or net tangible book value after
December 31, 1998, other than to give effect to the offering and the application
of the estimated net proceeds from the offering, the pro forma net book value of
the common stock as of December 31, 1998 would have been approximately $
million, or $ per share, and the pro forma net tangible book value of the
common stock as of such date would have been approximately $ million, or
$ per share. Assuming the offering had occurred at December 31, 1998, an
immediate increase in net book value of $ per share and an immediate
dilution of $ per share to new investors would have occurred. The following
table shows the effect of the offering as if the offering had occurred at
December 31, 1998 and illustrates the immediate increase in net tangible book
value of $ per share and an immediate dilution of $ per share to new
investors:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Net tangible book value per share as of December 31,
1998................................................... $ 7.57
Increase in net tangible book value per share attributable
to the offering........................................
-------
Pro forma net tangible book value per share as of December
31, 1998 after giving effect to the offering..............
-------
Dilution in net tangible book value per share to new
investors................................................. $
=======
</TABLE>

The following table shows on a pro forma as adjusted basis at December 31,
1998, the number of shares of common stock purchased from us, the total
consideration (including subsequent capital contributions) paid to us and the
average price paid per share by the existing stockholder and by new investors
purchasing common stock in the offering:

<TABLE>
<CAPTION>
SHARES PURCHASED
--------------------- TOTAL AVERAGE PRICE
NUMBER PERCENT CONSIDERATION PER SHARE
----------- ------- -------------- -------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Existing stockholder(1)..................... % $ $
New investors(1)............................
----------- ----- --------------
Total................................ 100.0% $
=========== ===== ==============
</TABLE>

- ---------------

(1) If the underwriters' over-allotment option is exercised in full, sales by
the selling stockholder in the offering will reduce the number of shares of
common stock held by the existing stockholder to approximately % of the
total shares of common stock outstanding after the offering and will
increase the number of shares held by new investors to , or
approximately % of the total shares of common stock outstanding after the
offering. See "Underwriting."

The foregoing table excludes outstanding employee stock options of Azurix
to purchase approximately 7.8 million shares of common stock. The terms of the
options provide for vesting, generally over a three to five year period.
However, assuming all options are exercised, additional dilution to new
stockholders would be approximately $ per share.

19
<PAGE> 25

CAPITALIZATION

The following table sets forth the cash and capitalization of Azurix as of
December 31, 1998, and as adjusted to give effect to the issuance of
shares of common stock offered by Azurix by this prospectus and the application
of our net proceeds from this offering, assuming the offering occurred on
December 31, 1998. The table should be read in conjunction with the Consolidated
Financial Statements of Azurix and related notes thereto and other financial
data included elsewhere in this prospectus. See "Use of Proceeds."

<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents................................... $ 5.3 $
======== ========
Current maturities of long-term debt........................ $ 27.0 $ 27.0
-------- --------
Note payable -- affiliate(1)................................ 121.4 121.4
-------- --------
Long-term debt:
Amounts reclassified from short-term debt(2).............. 424.0
Senior credit facility.................................... 219.5 --
Acquisition loan notes.................................... 117.2 117.2
European Investment Bank credit facilities................ 63.3 63.3
Capital lease obligation.................................. 88.1 88.1
-------- --------
Total long-term debt.............................. 912.1
-------- --------
Stockholders' equity(3):
Common stock, $0.01 par value; 500,000,000 shares
authorized; 100,000,000 shares issued and outstanding;
shares issued and outstanding, as adjusted...... 1.0
Additional paid-in capital................................ 1,671.0
Retained earnings......................................... 10.2 10.2
Cumulative foreign currency translation adjustment........ (36.7) (36.7)
-------- --------
Total stockholders' equity........................ 1,645.5
-------- --------
Total capitalization.............................. $2,706.0 $
======== ========
</TABLE>

- ---------------

(1) Amounts outstanding under the loan to Azurix Europe from Bristol Water
Trust, a wholly owned subsidiary of Atlantic Water Trust.

(2) Reflects bank borrowings due within one year that have been reclassified to
long-term debt. Azurix has refinanced such bank borrowings on a long-term
basis subsequent to year end.

(3) Outstanding shares do not include shares of common stock reserved for
issuance under our stock plan. As of April 30, 1999, there were outstanding
options to purchase approximately 7.8 million shares of common stock.

20
<PAGE> 26

CURRENCY EXCHANGE RATES

In this prospectus, references to "U.S. dollars," "dollars," "U.S.$" and
"$" are to currency of the United States of America and references to "pounds
sterling," "L," "sterling," "pence" and "p" are to currency of the United
Kingdom. Balance sheet information included in this prospectus has been
translated from the applicable foreign currencies to U.S. dollars using the
current exchange rates in effect at the balance sheet date. Income statement
information included in this prospectus has been translated from the applicable
foreign currencies to U.S. dollars using the weighted average exchange rate
during the period or, where known or determinable, at the rate on the date of
the transaction for significant items. Except as described above, and unless
otherwise stated in this prospectus, certain pounds sterling amounts have been
translated from the corresponding pounds sterling amounts, solely for the
convenience of the reader, at the noon buying rate in The City of New York for
cable transfers in pounds sterling as certified for customs purposes by the
Federal Reserve Bank of New York on March 31, 1998, which was $1.61 per L1.00.
Such translations should not be construed as representations that such U.S.
dollar amounts actually represent such pounds sterling amounts or vice versa, or
that such pounds sterling amounts could be or could have been converted into
U.S. dollars at the rate indicated or at any other rate.

21
<PAGE> 27

SELECTED HISTORICAL AND UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL DATA

The following tables present selected historical consolidated financial data
for Azurix and for Wessex, the predecessor of Azurix, for the periods and dates
indicated. In addition, the tables present selected unaudited pro forma
consolidated financial data for Azurix for the year ended December 31, 1998.

The historical financial data for Azurix are derived from Azurix's audited
consolidated financial statements included elsewhere in this prospectus and
includes the impact of the Wessex acquisition from the date of acquisition. All
of Azurix's results of operations occurred in the fourth quarter of 1998,
subsequent to the acquisition of Wessex. The historical financial data for
Wessex as of March 31, 1998 and for the years ended March 31, 1997 and 1998 and
for the six months ended October 2, 1998 are derived from Wessex's audited
consolidated financial statements included elsewhere in this prospectus. The
historical financial data for Wessex as of March 31, 1995, 1996 and 1997 and for
the years ended March 31, 1995 and 1996 are derived from unaudited financial
statements prepared in accordance with U.S. generally accepted accounting
principles that were derived from Wessex's audited financial statements prepared
in accordance with U.K. generally accepted accounting principles.

The unaudited pro forma financial data for Azurix are derived from the
unaudited condensed consolidated pro forma financial information included
elsewhere in this prospectus. The unaudited pro forma financial data give effect
to the acquisition of Wessex, the redemption and elimination of Wessex's
preference shares for an aggregate price of $249.8 million and the sale by
Wessex of its interest in UK Waste for $337.9 million, as though each occurred
on January 1, 1998. The unaudited pro forma financial data presented below is
not necessarily indicative of the financial results that would have occurred had
the acquisition of Wessex, the redemption and elimination of Wessex's preference
shares and the sale by Wessex of its interest in UK Waste occurred on January 1,
1998 and should not be viewed as indicative of operations in future periods.

This information should be read in conjunction with "Capitalization,"
"Unaudited Condensed Consolidated Pro Forma Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of Azurix and Wessex and
related notes thereto included elsewhere in this prospectus.

<TABLE>
<CAPTION>
WESSEX (PREDECESSOR COMPANY) AZURIX
--------------------------------------------------------------- ---------------------------
SIX MONTHS JANUARY 29, PRO FORMA
YEAR ENDED MARCH 31, ENDED 1998 TO YEAR ENDED
------------------------------------------------- OCTOBER 2, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1998 1998 1998 1998
----------- ----------- --------- --------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating revenues.............. $356.3 $376.8 $403.1 $436.6 $233.8 $ 119.7 $ 464.2
Operations and maintenance
expense....................... 106.7 106.6 102.4 110.9 61.7 31.6 120.9
General and administrative
expense....................... 33.3 27.4 32.2 29.1 36.4 20.3 44.4
Depreciation and amortization... 48.5 53.7 58.0 64.3 35.2 22.2 88.3
Operating income................ 167.8 189.1 210.5 232.3 100.5 45.6 210.6
Equity in earnings (loss) of
affiliates(1)................. 11.0 14.1 14.7 13.3 5.8 (0.8) (0.8)
Net interest (income) expense... (13.8) (16.9) (10.2) 8.6 6.1 15.1 66.1
Other expense................... -- -- -- -- -- 1.2 --
Income before income tax and
utility tax................... 192.6 220.1 235.4 237.0 100.2 28.5 143.7
Income tax expense.............. 68.9 79.7 82.4 58.0 28.4 18.3 56.5
Utility tax expense(2).......... -- -- -- 162.3 -- -- --
Net income...................... 123.7 140.4 153.0 16.7 71.8 10.2 87.2
Preference share dividends...... -- 8.0 13.5 15.1 7.7 -- --
Net income available to common
stockholders.................. 123.7 132.4 139.5 1.6 64.1 10.2 87.2
Basic earnings per common
share(3)...................... 0.49 0.62 0.65 0.01 0.30 0.10 0.87
Diluted earnings per common
share(3)...................... 0.40 0.51 0.55 0.01 0.30 0.10 0.87
Dividends declared per common
share(4)...................... 0.19 0.25 0.26 0.31 0.23 -- --
OTHER FINANCIAL DATA:
EBITDA(5) (unaudited)........... $227.3 $256.9 $283.2 $309.9 $141.5 $ 65.8 $ 298.1
Net cash provided by operating
activities.................... 214.6 240.5 246.3 125.0 132.2 4.4
Net cash used in investing
activities.................... (150.3) (159.4) (97.8) (195.0) (108.4) (1,982.6)
Net cash (used in) provided by
financing activities.......... (45.7) (54.6) (373.0) 6.8 (23.6) 1,977.5
</TABLE>

22
<PAGE> 28

<TABLE>
<CAPTION>
WESSEX (PREDECESSOR COMPANY) AT MARCH 31, AZURIX AT
----------------------------------------------------- DECEMBER 31,
1995 1996 1997 1998 1998
----------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................... $ 250.1 $ 228.3 $ (95.5) $ (307.0) $ (129.6)
Total assets...................................... 2,239.9 2,252.7 2,258.0 2,372.3 3,358.3
Long-term liabilities............................. 466.3 473.3 483.4 482.3 1,451.4
Redeemable preference shares...................... -- 235.3 254.7 259.0 --
Stockholders' equity.............................. 1,598.7 1,354.4 1,251.5 1,229.5 1,645.5
</TABLE>

- ---------------

(1) Equity in earnings of affiliates for all periods presented for Wessex is
related primarily to Wessex's interest in UK Waste.

(2) The year ended March 31, 1998 includes a windfall tax of $162.3 million,
which has been described by the U.K. government as a one-time tax. Excluding
the effect of this tax, for the year ended March 31, 1998, Wessex's net
income, basic earnings per common share and diluted earnings per common
share would have been $179.0 million, $0.78 per common share and $0.77 per
common share, respectively.

(3) The basic and diluted earnings per share amounts for Wessex are based on the
historical average ordinary shares of Wessex and average ordinary shares of
Wessex plus the share effect of the potential conversion to ordinary shares
of its dilutive securities, respectively.

(4) Wessex stockholders were given the option to elect dividends declared to be
paid in cash or the issuance of additional ordinary shares. Of the dividends
declared per share for the years ended March 31, 1995, 1996, 1997 and 1998
and for the six months ended October 2, 1998, stockholders elected stock
dividends equal to $0.02, $0.01, $0.02, $0.05 and $0.18 per share,
respectively.

(5) EBITDA for any relevant period presented above is defined as net income
before net interest (income) expense, income tax, utility tax, depreciation
and amortization. EBITDA is not a measure recognized by generally accepted
accounting principles and should not be considered in isolation or as a
substitute for operating profit, as an indicator of liquidity or as a
substitute for net cash provided by operating activities. This method may
not be comparable to the EBITDA calculations of other entities.

23
<PAGE> 29

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following information should be read in conjunction with the
information contained in the Consolidated Financial Statements of Azurix and
Wessex and related notes thereto and the Unaudited Condensed Consolidated Pro
Forma Financial Information of Azurix and related notes thereto included
elsewhere in this prospectus.

OVERVIEW

Azurix was incorporated on January 29, 1998. All of its operating results
and cash flows occurred during the fourth quarter of 1998 following the Wessex
acquisition. During 1998, Azurix indirectly acquired all of the outstanding
ordinary share capital of Wessex, and Enron contributed to Azurix the
outstanding common stock of a subsidiary that in June 1998 acquired an indirect
32.1% ownership interest in Obras Sanitarias Mendoza S.A. Wessex and Obras
Sanitarias Mendoza provide water and wastewater treatment services in
southwestern England and the Province of Mendoza, Argentina, respectively. In
December 1998, Enron contributed Azurix to Atlantic Water Trust and Marlin Water
Trust acquired a 50% voting interest in Atlantic Water Trust. Enron retained a
50% voting interest in Atlantic Water Trust.

BUSINESS ACQUISITION

On October 2, 1998, Azurix, through its indirect wholly owned subsidiary,
Azurix Europe, acquired over 90% of the outstanding ordinary share capital of
Wessex. On that same date, Azurix Europe issued notices to the remaining Wessex
ordinary stockholders, informing them that it intended to exercise its rights
under the English Companies Act to acquire compulsorily all of the outstanding
ordinary shares not held by Azurix Europe. The compulsory share acquisition was
completed in November 1998. The per share price paid to Wessex shareholders was
L6.30. The total cost of the Wessex acquisition, including transaction costs,
was $2.4 billion, plus the assumption of $481.5 million of existing Wessex debt.
The cost included cash consideration paid to Wessex shareholders, net of $1.7
million cash acquired, and the issuance of loan notes to Wessex shareholders in
the face amount of $119.8 million. The acquisition was financed through capital
contributions from Azurix's parent company totaling $1.6 billion and the
issuance of $0.8 billion in debt by Azurix Europe. Wessex had cumulative
mandatorily redeemable preference shares outstanding when it was acquired.
Wessex redeemed these shares in December 1998 for a cash payment of $106.4
million.

SALE OF INVESTMENT IN UNCONSOLIDATED AFFILIATE

On November 30, 1998, Wessex sold its 50% interest in Wessex Waste
Management Ltd, a joint venture with Waste Management International Plc that
does business as UK Waste, for $337.9 million in cash. Azurix recorded no gain
or loss from the sale.

RECENT DEVELOPMENTS

Azurix entered into an agreement on December 19, 1998 to purchase 49.9% of
an entity whose principal asset is the water concession for the city of Cancun,
Mexico. This agreement was not binding until material conditions were met, and
these conditions were met or waived subsequent to December 31, 1998. The
purchase price was $13.5 million, paid on March 24, 1999. In addition, Azurix
has agreed to provide up to $25.0 million in debt financing, $15.0 million of
which was funded on February 25, 1999.

Azurix entered into an agreement on March 25, 1999 to acquire 100% of the
stock of Canadian-based Philip Utilities Management Corporation for $107
million. Philip Utilities is a water and wastewater services company in the
United States and Canada that provides operations and management, engineering,
residuals management and underground infrastructure development services for
municipal water and wastewater facilities. The acquisition is subject to
regulatory and municipal approvals and other third party consents and is
expected to close in the second quarter of 1999.

24
<PAGE> 30

On March 30, 1999, Azurix, through subsidiaries of Wessex, completed a U.K.
pounds sterling denominated bond offering in the amount of $483.5 million.
Wessex used $448.4 million of the proceeds from the sale of the 10-year bonds to
repay all outstanding amounts under its former bank credit facilities as well as
all outstanding amounts under uncommitted credit facilities. Any remaining
proceeds were available for general corporate purposes. The bonds mature March
30, 2009 and bear interest of 5.875% payable annually. See "Description of
Indebtedness."

RESULTS OF OPERATIONS

The following table sets forth condensed statements of income for the
periods indicated.

<TABLE>
<CAPTION>
AZURIX
WESSEX (PREDECESSOR COMPANY) ----------------------------------
------------------------------------------ JANUARY 29, 1998 PRO FORMA
YEAR ENDED YEAR ENDED SIX MONTHS ENDED (DATE OF INCEPTION) YEAR ENDED
MARCH 31, MARCH 31, OCTOBER 2, TO DECEMBER 31, DECEMBER 31,
1997 1998 1998 1998 1998
---------- ---------- ---------------- ------------------- ------------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Operating revenues............ $403.1 $436.6 $233.8 $119.7 $464.2
------ ------ ------ ------ ------
Operations and maintenance
expense..................... 102.4 110.9 61.7 31.6 120.9
General and administrative
expense..................... 32.2 29.1 36.4 20.3 44.4
Depreciation and
amortization................ 58.0 64.3 35.2 22.2 88.3
------ ------ ------ ------ ------
Operating income.............. 210.5 232.3 100.5 45.6 210.6
Equity earnings (loss) of
affiliates.................. 14.7 13.3 5.8 (0.8) (0.8)
Net interest (income)
expense..................... (10.2) 8.6 6.1 15.1 66.1
Other expense................. -- -- -- (1.2) --
------ ------ ------ ------ ------
Income before income tax and
utility tax expense......... 235.4 237.0 100.2 28.5 143.7
Income tax and utility tax
expense..................... 82.4 220.3 28.4 18.3 56.5
------ ------ ------ ------ ------
Net income.................... $153.0 $ 16.7 $ 71.8 $ 10.2 $ 87.2
====== ====== ====== ====== ======
</TABLE>

Operating revenues are derived from water supplied and wastewater treated
for residential, commercial and industrial customers. The supply of water is
either metered, known as measured, or unmeasured. The charge for wastewater
treated is based upon a percentage of the water supplied and charged to that
customer. These services account for approximately 90% of total operating
revenues.

Wessex's subsidiary, SC Technology, sells and operates plants for drying
sludge, the solid waste remaining after wastewater is treated. The majority of
SC Technology's operating revenues are derived from projects related to selling
and managing the construction of plants, and therefore each period's operating
revenue fluctuates according to how many projects are in progress. Other
unregulated activities include the sale of electricity and treatment of organic
waste.

Operations and maintenance expense consists of the costs of supplying water
and treating wastewater, including the costs of maintaining and operating the
plant and equipment used in these processes. The main categories of cost include
labor, power, rent, real estate taxes, chemicals, transport, equipment and
grounds maintenance, and tankering. SC Technology's costs relate to the
construction and delivery of the plant being installed, including the cost of
equipment, civil engineering, building and labor.

General and administrative expense includes personnel costs, transaction
expenses related to due diligence and overhead associated with Azurix's pursuit
of acquisitions and development projects, in addition to support functions such
as billing and customer services, quality and scientific services, regulation,
finance, human resources and public relations.

25
<PAGE> 31

The functional currency of Wessex is U.K. pounds sterling. Accordingly, its
results of operations, translated into U.S. dollars, are affected by the change
in currency exchange rates when comparing periods. The actual average exchange
rates for each applicable period used in translating the U.K. pounds sterling
functional results to U.S. dollars, in accordance with U.S. GAAP, are $1.66 per
L1.00 for the year ended December 31, 1998, $1.65 per L1.00 for the six months
ended October 2, 1998, $1.64 per L1.00 for the year ended March 31, 1998 and
$1.59 per L1.00 for the year ended March 31, 1997.

AZURIX UNAUDITED PRO FORMA FOR THE YEAR ENDED DECEMBER 31, 1998

The following discussion is derived from the Unaudited Condensed
Consolidated Pro Forma Financial Information contained elsewhere in this
prospectus. The pro forma results discussed below include the 1998 results of
Wessex prior to its acquisition by Azurix.

Operating revenues of $464.2 million were all derived from Wessex.
Approximately 91% of these revenues were derived from the sale of measured and
unmeasured water and wastewater services. Operating revenues from SC Technology,
and other unregulated activities, accounted for 5% and 4% of total operating
revenues, respectively.

Operations and maintenance expense of $120.9 million was all incurred by
Wessex. Of this amount, $89.3 million relates to the costs of supplying water
and treating wastewater, including the costs of maintaining and operating plant
and equipment used in these processes, and $23.9 million relates to the costs of
the plants being installed by SC Technology.

General and administrative expense of $44.4 million includes $12.6 million
of costs incurred by Azurix in the pursuit of acquisitions and development
projects. These costs were incurred in the fourth quarter of 1998 and are not
necessarily representative of the costs expected to be incurred on an annual
basis. In addition, $31.8 million of costs were incurred by Wessex from the
support functions of its day-to-day operations. Excluded from this amount is
$20.7 million incurred by Wessex in connection with, and prior to, its
acquisition by Azurix.

Depreciation and amortization of $88.3 million includes $22.0 million for
the amortization of goodwill incurred by Azurix in the acquisition of Wessex.
All of the depreciation expense is derived from depreciation on the property,
plant and equipment of Wessex. The goodwill amortization and depreciation
expense related to Wessex is based on a preliminary purchase price allocation.

AZURIX -- DATE OF INCEPTION TO DECEMBER 31, 1998

Azurix was incorporated on January 29, 1998. All of its operating revenues
and operating income occurred in the fourth quarter of 1998 following the Wessex
acquisition.

Operating revenues of $119.7 million were derived from Wessex.
Approximately 90% of these revenues relate to the sale of measured and
unmeasured water and wastewater services. SC Technology operating revenues, and
operating revenues from unregulated activities, accounted for 6% and 4% of total
operating revenues, respectively.

Operations and maintenance expense of $31.6 million were all incurred by
Wessex. Of this amount, $23.0 million relates to the cost of supplying water and
treating wastewater, including the costs of maintaining and operating plant and
equipment used in these processes, and $7.2 million relates to the costs of the
plants being installed by SC Technology.

Azurix's general and administrative expenses include $7.7 million related
to Wessex's operations and $12.6 million related to the pursuit of acquisitions
and development projects. The expenses related to acquisitions and development
projects stem from a business strategy initiated in the fourth quarter of 1998.

Depreciation and amortization of $22.2 million includes $5.5 million for
the amortization of goodwill incurred by Azurix in the acquisition of Wessex.
All of the depreciation expense is derived from depreciation on the property,
plant and equipment of Wessex. The goodwill amortization and depreciation
expense related to Wessex is based on a preliminary purchase price allocation of
Wessex.

26
<PAGE> 32

Interest expense is related to the Wessex acquisition financing, existing
Wessex debt and funds borrowed in the fourth quarter to redeem the outstanding
preference shares.

The effective tax rate for the period was 64.2%. The difference between the
effective tax rate and the U.S. statutory rate of 35% (U.K. statutory rate of
31%) is primarily related to the following:

- A valuation allowance recognized on a U.S. deferred tax asset generated
from general and administrative expense incurred in the United States

- A valuation allowance recognized on a U.K. deferred tax asset relating to
non-deductible interest expense prior to achieving a consolidated tax
position

- Non-deductible amortization of goodwill resulting from the acquisition of
Wessex

WESSEX (PREDECESSOR COMPANY) SIX MONTHS ENDED OCTOBER 2, 1998 COMPARED TO THE
YEAR ENDED
MARCH 31, 1998

Operating revenues for the six months ended October 2, 1998 decreased by
$202.8 million, or 46.4%, when compared to the fiscal year ended March 31, 1998,
primarily as a result of six months less operating revenues in the current
period, partially offset by a 5.8% increase in the pricing formula contained in
the Wessex license, effective April 1, 1998.

Operations and maintenance expense for the six months ended October 2, 1998
decreased by $49.2 million, or 44.4%, when compared to the fiscal year ended
March 31, 1998, primarily as a result of six months less activity during the
current period.

General and administrative expense for the six months ended October 2, 1998
increased by $7.3 million, or 25.1%, when compared to the fiscal year ended
March 31, 1998, primarily as a result of $20.7 million incurred by Wessex
related to its acquisition by Azurix. These expenses were incurred prior to the
consummation of the acquisition. This was partially offset by six months less
activity in the six months ended October 2, 1998.

Depreciation and amortization expense for the six months ended October 2,
1998 decreased by $29.1 million, or 45.3%, when compared to the fiscal year
ended March 31, 1998, primarily as a result of six months less expense incurred
during the six months ended October 2, 1998, partially offset by increased
depreciation due to property additions resulting from Wessex's capital
expenditure program.

Equity earnings of affiliates for the six months ended October 2, 1998
decreased by $7.5 million, or 56.4%, when compared to the fiscal year ended
March 31, 1998, primarily as a result of six months less earnings accumulated
and increased operations and maintenance expense associated with a new recycling
division.

Net interest expense for the six months ended October 2, 1998 decreased by
$2.5 million, or 29.1%, when compared to the fiscal year ended March 31, 1998,
primarily as a result of six months less activity. This decrease was partially
offset by a reduction in the average cash and cash equivalent position deposited
in interest bearing investments in the six months ended October 2, 1998 which
resulted from the payment of the first installment of the one-time utility tax
in December 1997 and the preference share redemption in 1998.

Income tax and utility tax expense for the six months ended October 2, 1998
decreased by $191.9 million, or 87.1%, when compared to the fiscal year ended
March 31, 1998, primarily as a result of a one-time utility tax of $162.3
million levied in the year ended March 31, 1998 and six months less taxable
income in the six months ended October 2, 1998. The utility tax was introduced
in the Finance (No. 2) Act 1997, is referred to in legislation as the Windfall
Tax, and was levied on privatized utilities including the water and electricity
sectors. It is a one-time tax in that the tax legislation only relates to this
assessment and new legislation would have to be enacted for any additional
windfall tax. In addition, the U.K. Government has stated that it was a one-time
tax.

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<PAGE> 33

The calculation of utility tax was based on the profit after tax of Wessex
for the average of the four years ended March 31, 1994, multiplied by a price
earnings ratio of nine. The resulting amount was compared to the value of Wessex
at the date of initial trading of its stock in 1989, and the difference was
deemed to be windfall profits and was taxed at a 23% rate.

WESSEX (PREDECESSOR COMPANY) YEAR ENDED MARCH 31, 1998 COMPARED TO THE YEAR
ENDED
MARCH 31, 1997

Operating revenues for the fiscal year ended March 31, 1998 increased by
$33.5 million, or 8.3%, when compared to the fiscal year ended March 31, 1997,
primarily as a result of a 4.6% increase in the pricing formula contained in the
Wessex license, effective April 1, 1997, which resulted in $17.9 million of
additional operating revenues. In addition, operating revenues from SC
Technology increased by $4.2 million due to a higher number of construction
projects in progress during the year ended March 31, 1998.

Operations and maintenance expense for the year ended March 31, 1998
increased by $8.5 million, or 8.3%, when compared to the year ended March 31,
1997, primarily due to higher operating expenses from SC Technology due to a
higher number of construction projects in progress in the year ended March 31,
1998.

General and administrative expense for the year ended March 31, 1998
decreased by $3.1 million, or 9.6%, when compared to the year ended March 31,
1997, primarily due to cost reduction measures implemented by Wessex, and costs
of $2.1 million incurred in the year ended March 31, 1997 related to an
unsuccessful attempt to acquire a third party.

Depreciation and amortization expense for the year ended March 31, 1998
increased by $6.3 million, or 10.9%, when compared to the year ended March 31,
1997. Substantially all of this increase is due to property additions resulting
from Wessex's capital expenditure program.

Equity earnings of affiliates for the year ended March 31, 1998 decreased
by $1.4 million, or 9.5%, when compared to the year ended March 31, 1997. This
decrease resulted from a lower sales margin due to increased competition, and
higher general and administrative expense related to the hiring of additional
sales staff.

Net interest expense was $8.6 million for the year ended March 31, 1998, as
compared to net interest income of $10.2 million for the year ended March 31,
1997, primarily due to a reduction in the cash and cash equivalent position in
the current period as a result of the buy-back of its "B" and "C" classes of
ordinary shares in February 1997.

Income tax and utility tax expense for the year ended March 31, 1998 as
compared to the year ended March 31, 1997, increased by $137.9 million primarily
as a result of a one-time tax levied on privatized utilities in the year ended
March 31, 1998 of $162.3 million. The effect of the utility tax was partially
offset by a change in the U.K. statutory tax rate from 33% to 31% during the
year ended March 31, 1998, which amounted to $22.6 million.

OUTLOOK

Several developments may significantly affect Azurix's future results of
operations.

Azurix has a business strategy consisting of growth through acquisitions
and development projects. We have recently put in place a business development
effort requiring an increase in personnel to pursue and support acquisition and
privatization activity on a global scale. As of February 28, 1999, Azurix had
hired approximately 145 employees. The associated general, administrative and
operating expenses are approximately $15 million pre-tax on a quarterly basis.

Most of our operating revenues are subject to governmental regulation of
the rates that we may charge to our customers. The U.K. government is currently
conducting a periodic review of the price limits for water and wastewater
companies in England and Wales that is expected to result in new price limits

28
<PAGE> 34

for the period from April 1, 2000 through 2005. In October 1998, the Director
proposed an initial price cut for Wessex in excess of 17.5% from 1999-2000 to
2000-2001, with prices gradually increasing thereafter but remaining below the
1999-2000 levels in 2004-2005. Following this proposal, the U.K. Government
announced its decision to require greater capital expenditures for water and
wastewater companies for environmental improvements. Subsequently, in its April
1999 business plan filed with the Director, Wessex proposed stable prices from
1999-2000 to 2000-2001, with prices gradually increasing to 18% higher than
current levels in 2005, primarily to fund capital expenditures mandated by the
new environmental standards. The Director has stated that he will publish draft
price limits in July 1999 with the final determination being made in November
1999. Although we are unable to predict the precise outcome of the current U.K.
rate review, if Wessex were required to cut its prices as originally proposed by
the Director, Wessex's operating revenues would be reduced by approximately
17.5% and its earnings would be reduced materially. However, we would not expect
that this would have a material adverse effect on Azurix's financial position.
At the time of the acquisition of Wessex, we took into consideration the pending
rate review in our valuation of Wessex.

We anticipate refinancing a portion of our existing debt in May 1999,
potentially resulting in a one-time non-cash charge of $9.8 million ($6.9
million after-tax) in the second quarter due to the write-off of deferred
financing costs. We will incur approximately $ million in financing costs
related to the proposed new financing.

LIQUIDITY AND CAPITAL RESOURCES

All of Azurix's cash flows for the period from inception to December 31,
1998 occurred in the fourth quarter following the Wessex acquisition. Cash flow
from operations totaled $4.4 million during the period from January 29, 1998 to
December 31, 1998. Related to its investment activities, Azurix used $2,270.8
million, in addition to the issuance of $119.8 million of acquisition loan
notes, to acquire ordinary shares of Wessex and $63.2 million for capital
expenditures incurred by Wessex. In addition, Azurix received $337.9 million in
proceeds from the sale of UK Waste. Cash provided by financing activities during
the period totaled $1,977.5 million, primarily comprised of $1,600.2 million
from the issuance of common stock and capital contributions and a net increase
in borrowings of $485.4 million, partially offset by the redemption of the
Wessex preference shares of $106.4 million. Cash received from the issuance of
common stock of $1.0 million and capital contributions of $1,599.2 million are
from Azurix's former parent company, Enron Water (Holding) L.L.C.

At December 31, 1998, Azurix had a working capital deficit of $129.6
million. Approximately 60% of Azurix's operating revenues are derived from
customers whose billings are not based on the delivery of a measured volume of
service. These customers are billed semiannually in advance. Funds received in
advance as of December 31, 1998, where the service has not been provided,
totalled $71.0 million and are reflected on the Consolidated Balance Sheet as
deferred income. This component of the working capital deficit does not require
the future use of cash but is recognized in income over the remaining service
period covered by the billings. The remaining working capital deficit is related
to the timing of cash payments. Excess cash, including funds received in
advance, is used to pay down short-term revolving bank credit facilities. The
funds are re-borrowed under these credit facilities when needed to pay current
obligations. At December 31, 1998, Azurix had available capacity, under its
existing credit facilities, to provide $91.5 million of working capital.
Management believes that cash flows from operations and the available capacity
under credit facilities is sufficient to fund the working capital deficit.

At December 31, 1998, Azurix, through Azurix Europe, had in place a senior
credit facility consisting of a term loan facility of $322.6 million and a
revolving credit facility of $575.3 million. The amounts outstanding at December
31, 1998 were $211.2 million under the term loan facility and $8.3 million under
the revolving credit facility. As a result, Azurix had total availability under
the senior credit facility of $678.4 million, consisting of $567.0 million under
the revolving credit facility and $111.4 million under the term loan facility.
Of the $567.0 million under the revolving credit facility, $91.5 million was
permitted, if required, to fund the working capital deficit that existed at year
end. The term loan capacity of

29
<PAGE> 35

$111.4 million is used to secure a substantial portion of the acquisition loan
notes issued to Wessex shareholders in lieu of cash consideration for their
shares.

In May 1999, Azurix, through Azurix Europe, intends to enter into a new
$686.0 million senior credit facility with a group of banks. Proceeds under the
facility will be used to refinance Azurix Europe's existing indebtedness and to
make loans to affiliates of Azurix Europe for the purpose of financing
acquisitions of and investments in water and wastewater assets and businesses.
We expect that, of the $686.0 million facility amount, $298.6 million will be
available to refinance existing debt of Azurix Europe and $387.4 million may be
lent to affiliates. This borrowing capacity, combined with cash flows from
assets acquired, will be used by Azurix to fund acquisitions and privatizations.
See "Description of Indebtedness" for detailed discussion of terms for all
credit facilities and loan agreements.

Azurix, through Wessex, is a borrower under committed credit facilities
that provide an aggregate $399.1 million for general corporate purposes. As of
December 31, 1998, these bank facilities were completely drawn down. Wessex also
had $24.9 million outstanding under short-term uncommitted bank borrowings at
December 31, 1998. On March 30, 1999, Wessex issued $483.5 million principal
amount of 10-year bonds. Wessex used $448.4 million of the proceeds from the
sale of the bonds to repay all outstanding amounts under its former bank credit
facilities as well as all outstanding amounts under uncommitted credit
facilities. Excess proceeds were available for general corporate purposes.

Azurix, through Wessex, maintains an ongoing asset replacement program
throughout its customer service areas based on an expenditure plan submitted to
the U.K. industry regulator. Wessex expects that its projected capital
expenditures of approximately $230 million for 1999 will be financed with
internally generated funds and from proceeds under long-term and short-term
borrowing arrangements. Included in this amount are contractual commitments for
capital expenditures to be incurred after December 31, 1998 of $130.2 million.
The projected capital expenditures consist primarily of the following:

- Approximately $135 million for wastewater projects, such as construction
of wastewater treatment facilities and improvements to existing
facilities

- Approximately $45 million for water supply projects, such as construction
of water treatment facilities and installation of water mains

- Approximately $25 million for office space construction in the United
Kingdom

- Approximately $20 million related to information technology investment

In addition, in connection with the pending acquisition of Philip
Utilities, Azurix has committed $107 million to fund the purchase price. Azurix
intends to utilize funds drawn under the new senior credit facility for this
purpose. The acquisition is expected to close in the second quarter of 1999.

FINANCIAL RISK MANAGEMENT

Azurix is exposed to market risks, particularly changes in U.S. and
international interest rates and changes in currency exchange rates as measured
against the functional currencies in which it operates. Azurix engages in
hedging programs aimed at limiting the impact of significant and sudden
fluctuations, but there can be no assurance that such an approach will be
successful. Factors that could impact the effectiveness of its hedging programs
include the accuracy of revenue forecasts, volatility of the currency and
interest rate markets, and the availability of hedging instruments. Azurix
utilizes swap contracts to manage interest rate risk. Currency exchange rate
risk is the result of transactions that are denominated in a currency other than
the functional currencies in which we operate. The primary purpose of Azurix's
foreign currency hedging activities is to manage the volatility associated with
currency exchange rates. We manage these risks by utilizing derivative financial
instruments for non-trading purposes. Azurix enters into currency or interest
rate contracts for the sole purpose of hedging an existing or anticipated
exposure, not for speculation. Azurix's accounting policies for, and the
significant terms of, derivative financial instruments are described in Note 1
and Note 8, respectively, to the Consolidated Financial Statements.

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<PAGE> 36

Azurix uses J.P. Morgan's RiskMetrics(TM) system to estimate the
value-at-risk of its financial instruments. Value-at-risk is a statistical
estimate of the loss that would result from changes in market prices.
Value-at-risk is based on volatility and correlation data provided by J.P.
Morgan, a statistical confidence level and an estimate of the time period
required to liquidate the positions in the various financial instruments. The
value-at-risk estimate was based on normal market conditions, a 95% confidence
level and a liquidation period between 30 days and 60 months, depending on the
type of financial instrument. At December 31, 1998, the value-at-risk estimate
for foreign currency and interest rate exposure was $0.7 million and $0.9
million, respectively. The value-at-risk estimate includes only the risk related
to the financial instruments that serve as hedges and does not include the
related underlying hedged item. Judgment is required in interpreting market data
and the use of different market assumptions or estimation methodologies that
will affect the estimated value-at-risk amount.

YEAR 2000

The Year 2000 problem results from the use in computer hardware and
software of two digits rather than four digits to define the applicable year.
The use of two digits was a common practice for decades when computer storage
and processing was much more expensive than it is today. When computer systems
process dates both before and after January 1, 2000, two-digit year "fields" may
create processing ambiguities that can cause errors and system failures. For
example, computer programs that have date sensitive features may recognize a
date represented by "00" as the year 1900, instead of 2000. These errors or
failures may have limited effects, or the effects may be widespread, depending
on the computer chip, system or software, and its location and function.

The effects of the Year 2000 problem are exacerbated because of the
interdependence of computer and telecommunications systems in the United States
and throughout the world. This interdependence applies to Azurix and Azurix's
suppliers, trading partners and customers and to governments of countries where
Azurix does business. This interdependence also applies to Enron, on which
Azurix relies for services as described under "Certain Transactions."

State of Readiness

We intend to follow Enron's Year 2000 plan, which covers all of Enron's
business units. The aim of the Enron plan is to take reasonable steps to prevent
Enron's mission-critical business functions from being impaired due to the Year
2000 problem. As used in this prospectus, "mission-critical" functions refer to
the critical functions whose loss would cause significant injury to persons or
tangible property, or an immediate stoppage of or significant impairment to
business areas of material importance. Enron intends to modify its plan as
events warrant. In addition, we intend to adapt the Enron plan to our
operations. Among other things, we intend to conform Wessex's Year 2000 efforts
to the Enron plan and to introduce this plan to our operations in Cancun.

Central information systems, such as large mainframes and midsize computer
systems at Wessex and desktop or personal computers and computer networks, can
be vulnerable to Year 2000 problems. In addition, devices with chips embedded in
them, such as flow controllers and controllers for automated pumps, are
vulnerable to Year 2000 problems. Devices with chips embedded in them may be
used for many purposes, and finding all of them may be difficult, even with a
careful inventory and remediation process. In addition, we are concerned with
the systems of external entities over which we do not have control. Examples of
these systems include central information systems and embedded devices of our
suppliers and contractors, financial institutions, governments in locations
where we operate, customers and co-venturers.

In general, the Enron Year 2000 Plan adopted by Azurix includes phases of
awareness, inventory, remediation, verification and testing, and contingency
planning. These steps describe a process that continues to go in cycles. For
example, we will continue to refine our inventory of central information systems
and embedded devices until the early days and, if necessary, weeks of January
2000, to identify Year 2000-related problems that require fixing.

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<PAGE> 37

Under the Enron plan, Wessex will continue to:

- Inventory its mission-critical computer hardware and software systems and
embedded chips, i.e., computer chips with date related functions,
contained in a wide variety of devices, that in turn are installed in a
wide variety of equipment and that may fail to function or may function
improperly before, on or after January 1, 2000

- Assess the effects of Year 2000 problems on its mission-critical
functions

- Remedy to the maximum extent practicable material disruptions or other
material adverse effects on its mission-critical functions, processes and
systems

- Verify and test the mission-critical systems to which remediation efforts
have been applied

- Attempt to limit the adverse effect of Year 2000 problems that cannot
reasonably be remediated by January 1, 2000, including developing
contingency plans to minimize Year 2000 problems that have not been
identified or fixed by January 1, 2000

Wessex has completed most of the stages of the Enron Plan and will be Year
2000 ready by July 31, 1999 as shown in the following table:

<TABLE>
<CAPTION>
Y2K PROJECT STAGE CURRENT STATUS TARGET COMPLETION DATE
----------------- -------------- ----------------------
<S> <C> <C>
Inventory................................. Completed N/A
Assessment................................ Completed N/A
Conversion................................ Near Completion July 1, 1999
Testing................................... Near Completion July 31, 1999
Implementation............................ Near Completion July 31, 1999
Contingency Planning...................... Near Completion June 30, 1999
</TABLE>

We are pursuing additional concessions, outsourcing contracts and other
water and wastewater projects. We expect that we will adapt the Enron plan to
cover our additional operations.

The Enron plan recognizes that the computer, telecommunications and other
systems of outside entities have the potential to adversely affect the conduct
of our business. We do not have control of these outside entities or outside
systems. However, the Enron plan includes an ongoing process of contacting
outside entities whose systems have, or may have, a substantial effect on the
ability of each of the relevant businesses to continue to conduct its
mission-critical functions without disruption from Year 2000 problems. The Enron
plan envisions attempting to inventory and assess the extent to which these
outside systems may not be "Year 2000 ready" or "Year 2000 compatible." This
refers to the ability of a system to process data reliably, both before and
after January 1, 2000, without disruption due to an inability to process date
information reliably. This is distinguished from "Year 2000 compliant," which
implies that a system will work properly, both before and after January 1, 2000,
even if outside systems fail to operate properly. In implementing the Enron
plan, we will attempt to coordinate our efforts to prepare for the Year 2000
problem with outside entities.

As of March 15, 1999, Wessex had substantially finished identifying and
assessing its mission-critical central information systems and devices with
embedded chips. Wessex is continuing to analyze, convert and test its
mission-critical central information systems and devices with embedded chips. In
addition, Wessex has contacted all outside entities upon which it relies for
mission-critical functions.

We do not have operational control of the Mendoza concession. Therefore, we
consulted with SAUR, the operator of the concession, to develop an understanding
of SAUR's Year 2000 efforts at Mendoza.

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<PAGE> 38

SAUR is pursuing a Year 2000 plan for the concession with the following stages,
which are shown with a description of their current status and target completion
dates:

<TABLE>
<CAPTION>
Y2K PROJECT STAGE CURRENT STATUS TARGET COMPLETION DATE
----------------- -------------- ----------------------
<S> <C> <C>
Inventory................................. Completed N/A
Assessment................................ Near Completion May 15, 1999
Conversion................................ Incomplete June 15, 1999
Testing................................... To be initiated July 15, 1999
Implementation............................ To be initiated July 31, 1999
Contingency Planning...................... To be initiated July 31, 1999
</TABLE>

The mission-critical systems at the Mendoza concession include business
systems, such as a customer interface system and a payroll system, and devices
with embedded chips such as flow meters and a supervisory, control, and data
acquisition system. Mission-critical external entities include the local
electrical utility for power to supply water pumps, the local telephone company
and local banks that function as collection agents. Although employees of SAUR
plan to visit mission-critical external entities, we cannot assure that the
systems of these external entities will be free from disruptions due to Year
2000 problems, and SAUR cannot ensure that the Mendoza facility will be free
from mission-critical disruptions as a result. We anticipate that SAUR will
include these mission-critical external dependencies in its contingency
planning.

The Cancun concession is in the early stages of adopting and implementing
the Enron plan for Year 2000 readiness. The concessionaire will inventory,
assess, analyze, convert and test the Cancun systems for Year 2000 readiness and
develop Year 2000 contingency plans to minimize Year 2000 problems that have not
manifested themselves or have not been corrected by January 1, 2000. The
schedule for this implementation is as follows:

<TABLE>
<CAPTION>
Y2K PROJECT STAGE CURRENT STATUS TARGET COMPLETION DATE
----------------- -------------- ----------------------
<S> <C> <C>
Inventory................................. Completed N/A
Assessment................................ Near Completion May 15, 1999
Conversion................................ To be initiated June 15, 1999
Testing................................... To be initiated July 31, 1999
Implementation............................ To be initiated August 15, 1999
Contingency Planning...................... To be initiated August 15, 1999
</TABLE>

The Cancun concession has a mission-critical dependency on the local
electric utility and on local banks. Although employees of the concessionaire
plan to visit these mission-critical external entities, we cannot ensure that
the systems of these external entities will be free from disruptions due to Year
2000 problems. As a result, we cannot be certain that the Cancun facility will
be free from mission-critical disruptions. Azurix will include these external
dependencies in its contingency planning.

We believe that Wessex's and the Cancun concession's mission-critical
systems will be Year 2000 ready substantially before January 1, 2000. However,
unforeseen circumstances could arise during the implementation of the Enron plan
that could adversely affect Enron's, Wessex's or the Cancun concession's
mission-critical functions, thereby disrupting or materially adversely affecting
Azurix's business.

Costs to Address Year 2000 Issues

As of April 30, 1999, we have not incurred material costs for Year 2000
issues, and we do not anticipate incurring material costs in implementing the
plan or preparing Year 2000 contingency plans. However, there can be no
assurance that the actual costs of implementing the plan will not exceed our
estimates or that our business will not be materially adversely affected by Year
2000 issues.

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<PAGE> 39

Year 2000 Risk Factors

We plan to satisfy applicable regulatory requirements with respect to Year
2000 readiness. However, failure to comply with such requirements may cause a
regulatory authority to order the cessation of our operations, which could have
a material adverse affect on our business.

As the Year 2000 approaches, there will be increased competition for people
with the technical skills necessary to deal with Year 2000 problems. While we
intend to recruit and retain a sufficient number of people with those skills,
the shortages of skilled personnel could prevent us from doing so. In addition,
we may face shortages of other resources, such as Year 2000 ready computer chips
or components. These shortages might delay or otherwise impair our ability to
assure that our mission-critical systems are Year 2000 ready.

We will rely on Enron for services that involve computer processing. These
Enron systems are mainframe systems used for functions such as asset management,
accounting and human resources. Enron believes that its mission-critical systems
will be Year 2000 ready substantially before January 1, 2000. In addition, we
believe that Wessex's mission-critical systems will be Year 2000 ready
substantially before January 1, 2000. However, unforeseen circumstances could
arise during the implementation of the Enron plan that could adversely affect
Enron's or Wessex's mission-critical functions, thereby disrupting or materially
adversely affecting Azurix's business.

We are taking reasonable steps to identify, assess, and where necessary,
replace devices containing embedded chips. Despite these efforts, we anticipate
that we will not be able to find and replace all the devices with embedded chips
or embedded chips in our systems. Further, we anticipate that outside entities
on which we depend will also not be able to find and replace all devices with
embedded chips or embedded chips in their systems. Some of the embedded chips
that fail to operate or that produce improper results may create system
disruptions or failures. Some of these disruptions or failures may spread from
the systems in which they are located to other systems. These failures may have
adverse effects upon our ability to maintain safe operations and may also have
adverse effects upon our ability to serve our customers, to comply with
environmental statutes and regulations, and to otherwise fulfill contractual and
other legal obligations. The embedded chip problem is widely recognized as one
of the more difficult aspects of the Year 2000 problem. Therefore, the possible
adverse impact of the embedded chip problem is not, and will not be, unique to
Azurix.

The external entities we are contacting include suppliers, customers,
financial institutions, and governmental entities. We intend to meet with many
external entities that are mission-critical to Azurix for Year 2000 purposes.
However, we cannot in any way ensure that these external entities will be Year
2000 ready, nor can we place complete reliance on any assurances, written or
verbal, from these entities that they expect to be Year 2000 ready.

We cannot assure that suppliers upon which we depend for essential goods
and services will test their mission-critical systems in a timely manner.
Failure or delay by all or some of these entities, including U.S. and foreign
governments or governmental authorities, to assess their Year 2000 readiness
could create substantial disruptions having a material adverse effect on our
business.

We have reviewed the most reasonably likely worst case Year 2000 scenarios
we may face. Analysis of these scenarios has led us to contemplate the following
possibilities that, although unlikely, could conceivably occur:

- Widespread failure of electrical, gas and other utilities serving us
domestically and internationally

- Widespread disruption of communications

- Disruption of transportation services for us and our employees,
contractors, suppliers and customers

- Disruption to our ability to gain access to, and remain working in,
office buildings and other facilities

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<PAGE> 40

- The failure of substantial numbers of our mission-critical information
systems, including both hardware and software necessary to control
operational facilities such as water and wastewater treatment facilities
and distribution and collection systems

We could face substantial claims by governments, governmental authorities
or customers, as well as loss of revenues, due to service interruptions,
violations of environmental regulations, inability to fulfill contractual
obligations, inability to account for obligations and increased expenses
associated with litigation, harm to persons or to tangible property, violation
of environmental regulations, stabilization of operations following system
failures and the execution of contingency plans. We could also experience an
inability by customers and others to pay, on a timely basis or at all,
obligations owed to us. In addition, we could face claims of damage to persons
or property as the result of improperly treated water or wastewater. Under these
circumstances, there would be a material adverse effect on revenues and
operations. However, this effect can not be quantified at this time. Also, the
cumulative effect of Year 2000 failures in the United States and internationally
could have a substantial adverse effect on the domestic and worldwide economy.

We will continue to monitor business conditions in order to assess and
quantify any material adverse effects that may result from Year 2000 problems.

Contingency Plans

As part of the Enron plan, we will develop contingency plans in case we
have not satisfactorily remediated all our internal mission-critical systems and
in case outside systems are not Year 2000 ready. Our contingency plans will be
designed to minimize the disruptions or other adverse effects resulting from
Year 2000 incompatibilities with respect to our mission-critical functions and
systems and to facilitate the early identification and remediation of Year 2000
problems that first manifest themselves after January 1, 2000.

Our contingency plans will include an assessment of our mission-critical
internal information technology systems and our internal operational systems
that use computer-based controls. The contingency planning will begin in 1999
and will continue as necessary. As we implement our contingency plans, we will
assess any mission-critical disruptions due to external Year 2000 failures.
These assessments will be conducted for both our U.S. and non-U.S. operations.
In assessing Year 2000 failures, we will monitor mission-critical services such
as electrical power and telecommunications services. The contingency plans will
also cover events such as failure of the delivery of chemicals for water and
wastewater treatment or events of sabotage.

Our contingency plans will include the creation of response teams that will
be standing by and prepared to respond rapidly to Year 2000 problems. The
composition of these teams will vary according to the nature, importance and
location of the problem. We will also station response teams at our non-U.S.
operations as necessary.

Outlook

The extent and magnitude of the effects of Year 2000 on us, both before and
after January 1, 2000, are difficult to predict or quantify for a number of
reasons including:

- Difficulty of locating chips embedded in computer hardware and in devices
used in mission-critical systems such as process or flow control,
environmental, transportation, access and communications

- Difficulty in evaluating and testing outside systems connected to our
computer, telecommunications, plant or other mission-critical systems or
on which our mission-critical systems depend, such as electrical
utilities or telecommunications carriers

- Difficulty locating mission-critical internal software that is not Year
2000 compatible

- The possible unavailability of trained hardware and software engineers,
technicians, and other personnel to perform remediation, validation, and
testing of mission-critical systems
35
<PAGE> 41

Year 2000 costs are difficult to estimate accurately because of
unanticipated vendor delays, technical difficulties, the impact of tests of
outside systems and similar events. For example, there can be no assurance that
all outside systems that are mission-critical to us, or are mission-critical to
the Enron systems on which we depend, will be adequately remediated so that they
are Year 2000 ready by January 1, 2000. If there are Year 2000 failures that
create substantial disruptions to our business or to Enron's business, the
adverse impact on our business could be material. Moreover, the estimated costs
of implementing the Enron plan do not take into account the costs, if any, that
might result from Year 2000 failures that occur despite our implementation of
the Enron plan.

36
<PAGE> 42

GOVERNMENT OUTSOURCING THROUGH PRIVATIZATION

Governments around the world are increasingly outsourcing the ownership,
operation and management of their water and wastewater assets and services to
the private sector. For many projects, there is a lead-time of several years
while the government, with the help of its international financial and legal
advisors, works on the concept of privatization and gains consensus among
various interest groups. The decision to privatize is generally authorized by
legislation. Different approaches are used by various governments. Many
governments choose a public tender process to ensure that privatizations occur
at market rates. In some parts of the world, particularly Latin America, an
auction format has been used successfully. In other places, notably China,
private parties often negotiate directly with the government with no formal
invitation to bid.

If a tendering process is used, rules are published. These rules generally
require some form of qualification for bidders, where parties submit financial
and operational credentials and the government accepts only qualified parties as
bidders. Qualification for bidding has heavily emphasized prior experience in
operating water and wastewater systems or individual treatment plants that are
of a size at least comparable to the system or facility being privatized or
built. The potential bidders submit extensive documentation to qualify for
bidding and often must form entities within the country through which to submit
their bids. In addition, governments often consider the financial strength of
the potential bidders and may require substantial bid bonds or letters of credit
to be provided as part of the bid.

COMMON FORMS OF OUTSOURCING

- SALE OF WATER ASSETS. A government may incorporate a water and wastewater
system and sell all or part of it to private parties. The water company
is given a monopoly license to operate in a specified service territory.
The license may be subject to revocation for non-performance or another
breach of its terms and to renewal periodically, typically every 20 to 30
years. For example, the United Kingdom privatized the ten regional water
and wastewater authorities in England and Wales through public offerings
of shares in 1989, and Berlin, Germany is in the process of selling a
49.9% interest in its water and wastewater system.

- CONCESSIONS. Short of an outright sale of water assets, a government may
grant a private party the right to operate a water and wastewater system
for a fixed term, retaining title to the underlying assets. The holder of
a concession takes on the financial risks of managing the assets during
the term of the concession, often 20 to 30 years but in some cases
extending much longer. The concession agreement often mandates
improvements to the water and wastewater system, sets standards of water
quality that must be achieved and establishes a timeframe for realizing
these objectives. At the end of the concession, control of the assets
reverts to the government, which may renew the concession with the
existing holder or another party. Many of the water and wastewater
opportunities around the world take the form of concessions. See
"Business -- The Global Water Industry -- Trend Toward Government
Outsourcing Through Private Sector Participation."

- CONSTRUCTION AND OPERATION OF A SINGLE ASSET. Sometimes a government will
ask a private sector participant to construct and operate a particular
facility that serves its water or wastewater system. Frequent examples
are water and wastewater treatment plants, pipelines and aqueducts. Two
typical transaction structures are a build-own-operate or
build-own-transfer project. In both a build-own-operate and a
build-own-transfer project, the private party builds, owns and operates
the asset. In the case of a build-own-transfer project, the private party
then transfers the asset back to the government after a fixed term,
usually 15 to 25 years but often longer. The build-own-operate or
build-own-transfer contract describes the project and its services, as
well as the revenues the private party will receive for the services the
asset provides.

- LEASES. Under a lease, a government turns over control of the system for
a fixed period but, unlike in a concession, the government retains much
of the economic risk. In France, most municipalities use a type of lease
called an affermage, which is also used in many former French colonies.

37
<PAGE> 43

- OPERATIONS AND MANAGEMENT CONTRACTS. Sometimes a government will ask a
private party to operate its system on a day-to-day basis, but will keep
most of the economic risk relating to the system. The term of the typical
operations and management contract is five to ten years. These contracts
are common in the United States. See "Business -- The Global Water
Industry--Trend Toward Government Outsourcing Through Private Sector
Participation -- North America."

- OUTSOURCING PARTICULAR SERVICES. A government also may ask private
parties to provide specific services to a government operated water or
wastewater system. Examples of these services include billing,
construction projects and residuals management. The service provider
typically takes no risk for the system as a whole, only for the
particular services it provides. See "Business -- The Global Water
Industry -- Outsourcing Opportunities in the Municipal and Industrial
Services Markets."

SELECTED AWARDED WATER AND WASTEWATER PRIVATIZATIONS

The following is a list of selected water and wastewater privatizations in
Europe, North America, Latin America, Asia and the Pacific Rim that have been
awarded during the past several years. The majority of these privatizations have
been in the form of concessions, build-own-transfers or leases, except in North
America, where private parties have primarily entered into operations and
management contracts. Except as otherwise indicated in the notes to the
following table, the estimated size of these awarded privatizations is taken
from the October 1998 edition of Public Works Financing. The estimated size for
operations and management contracts represents aggregated fees over the term of
the contract. The estimated size for build-own-transfers represents construction
costs. The estimated size for concessions represents total project costs.

SELECTED AWARDED WATER AND WASTEWATER PRIVATIZATIONS

<TABLE>
<CAPTION>
LOCATION YEAR PROJECT ESTIMATED SIZE
-------- ---- ------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
EUROPE:

Germany............... 1992 25-year concession for water supply and wastewater $ 528
treatment plant in Rostock

Germany............... 1997 Sale of 49% stake and 20-year management contract for water 139
and wastewater system for Potsdam

Hungary............... 1998 Sale of minority interest in water company serving Budapest 340

Turkey................ 1995 15-year build-own-transfer project for dam and wastewater 800
works near Izmit and pipeline supplying Istanbul

United Kingdom........ 1989 Stock offerings of 10 regional water and wastewater 8,640(1)
companies in England and Wales
NORTH AMERICA:

Georgia............... 1998 20-year operations and management contract for water system $ 400
in Atlanta

Indiana............... 1998 10-year operations and management contract for wastewater 225
treatment plants in Indianapolis

Michigan.............. 1998 7-year design, build and maintain water treatment plant in 260
Detroit

New Jersey............ 1996 20-year full service operations and management contract for 200
water and wastewater collection in North Brunswick

Oklahoma.............. 1997 25-year contract to operate three wastewater plants in 250
Oklahoma City

Puerto Rico........... 1995 6-year operations and management contract for water and 600
wastewater plants

Wisconsin............. 1998 10-year operations and management contract for wastewater 350
system in Milwaukee
</TABLE>

38
<PAGE> 44

SELECTED AWARDED WATER AND WASTEWATER PRIVATIZATIONS (CONTINUED)

<TABLE>
<CAPTION>
LOCATION YEAR PROJECT ESTIMATED SIZE
-------- ---- ------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
LATIN AMERICA:

Argentina............. 1993 30-year concession for water and wastewater system for $4,000
the "Capitale Federale" of Buenos Aires

Argentina............. 1995 30-year operations and management contract for water and 1,200
wastewater system for Santa Fe, Rosario and surrounding
area

Argentina............. 1997 30-year concession for water system in Cordoba 495

Argentina............. 1998 95-year concession and sale of shares for water and 150(2)
wastewater system for Province of Mendoza

Bolivia............... 1997 30-year concession for water and wastewater system in 360
both La Paz and El Alto

Chile................. 1998 35-year concession and sale of shares for water and 138(3)
wastewater system for Valparaiso and surrounding region

Colombia.............. 1997 30-year build-own-transfer contract for wastewater 130
treatment plant in Bogota

Mexico................ 1993 Four multi-year contracts to upgrade Mexico City's water 1,000
distribution program

Mexico................ 1993 25-year concession for water and wastewater system for 70
city of Cancun and surrounding area

Mexico................ 1996 12-year build-own-transfer concessions for treatment 200
facilities at five Pemex refineries

ASIA AND THE PACIFIC RIM:

Australia............. 1993 25-year build-own-transfer contract for wastewater $ 200
treatment plant in Sydney

Australia............. 1995 15-year operations and management contract for water and 1,100
wastewater services in Adelaide

China................. 1996 49% stake in 13 water plants in Jiangsu Province 162

China................. 1998 18-year build-own-transfer contract for water supply for 120
Chengdu

Indonesia............. 1997 Two 25-year concessions for water systems in Jakarta 1,750

Malaysia.............. 1992 20-year build-own-transfer contract for water treatment 290
facilities at Sungai Layang

Malaysia.............. 1995 25-year contracts to operate 26 water systems around 312
Kuala Lampur

Malaysia.............. 1995 26-year upgrade and operations and management concession 800
for water treatment facilities in Selangor

Philippines........... 1997 Privatization of the Metro Manila water and wastewater 5,700
system
</TABLE>

- ---------------

(1) Information is from HM Government Perspective.

(2) Information is from Azurix internal sources.

(3) Information is from December 23, 1998 Financial Times.

39
<PAGE> 45

BUSINESS

Azurix is a global water company engaged in the business of acquiring,
owning, operating and managing water and wastewater assets, providing water and
wastewater related services and developing and managing water resources. Enron,
one of the world's leading integrated natural gas and electricity companies,
formed Azurix to pursue opportunities in the global water industry. The company,
now called Azurix, was incorporated as a shell company by Enron on January 29,
1998. Azurix's first significant step was to acquire Wessex, a water and
wastewater company based in southwestern England, for $2.4 billion on October 2,
1998. Wessex was recognized in December 1998 by the industry regulator as the
most efficiently operated water and wastewater company in England and Wales.
Following our acquisition of Wessex, we began implementing our global business
strategy.

Our asset portfolio also includes interests in long-term water concessions
in the Province of Mendoza, Argentina and in Cancun, Mexico. In addition, on
March 25, 1999, we agreed to purchase all of the stock of Philip Utilities
Management Corporation, a water and wastewater services company in the United
States and Canada, for $107 million. The acquisition is subject to closing
conditions, including the receipt of third party and regulatory consents, and is
expected to close in the second quarter of 1999. Upon completion of the
acquisition, we will provide operations and management, engineering, residuals
management and underground infrastructure development services for municipal
water and wastewater facilities in North America. We have made each of these
investments through one or more subsidiaries, which will be our approach as we
pursue our worldwide growth strategy.

On a pro forma basis, assuming the Wessex acquisition occurred on January
1, 1998, and including our investment in the Mendoza concession from the date of
our investment but excluding Cancun and Philip Utilities, we had operating
revenues of $464.2 million, EBITDA of $298.1 million and net income of $87.2
million for the year ended December 31, 1998 and total assets of $3,358.3
million as of December 31, 1998. To date, all of our operating revenues have
come from Wessex, and substantially all of our operations have been conducted by
Wessex. The following table represents the operating revenues contributed by
each of the service categories of our business from the date of inception to
December 31, 1998, although most of the contributions occurred after the date of
the Wessex acquisition:

<TABLE>
<CAPTION>
OPERATING
REVENUES
-------------
(IN MILLIONS)
<S> <C>
Water supply................................................ $ 35.0
Wastewater services......................................... 73.1
Residuals management........................................ 7.2
Other....................................................... 4.4
------
Total............................................. $119.7
======
</TABLE>

40
<PAGE> 46

THE GLOBAL WATER INDUSTRY

The global water industry includes the businesses of collecting, treating,
storing and supplying drinking water, and of collecting, treating and disposing
of wastewater and wastewater by-products. Public and private water companies
serve industrial, commercial and residential customers. Azurix estimates that
the global water industry has total annual revenues of approximately $300
billion. In addition, Azurix estimates that over $600 billion will be spent on
worldwide water and wastewater infrastructure over the next decade.

The ownership of water assets and the provision of water and wastewater
services around the world remains highly concentrated in the public sector,
typically at the municipal or community level. Major capital investment and
increased efficiencies in the water sector are required by the following:

- Increasingly stringent standards for water quality, wastewater services
and environmental protection

- The need to provide growing urban populations with safe drinking water
supply and wastewater treatment systems

- The aging of existing water and wastewater infrastructure

Governments throughout the world frequently face budgetary constraints and
often lack the technical and operational skills of private sector participants
to address these issues efficiently. As a result, governments are increasingly
turning to the private sector to address their water and wastewater
infrastructure needs.

Industrial companies also must comply with increasingly stringent standards
for water quality, wastewater services and environmental protection. To meet the
additional expense of complying with these standards and to reduce uncertainty
in financing their operations, many industrial companies are beginning to
outsource their water supply and wastewater requirements to third parties with
the expertise to construct and operate their systems and provide services on a
more efficient and cost effective basis. The ability to manage water resources
and efficiently transport water to areas where water is scarce, including the
delivery of drinking water to growing urban centers, is becoming increasingly
important as well.

As a result, we believe that significant opportunities exist for private
sector participation in the water and wastewater industry. These opportunities
include taking part in water and wastewater privatizations, providing water and
wastewater related services to municipal and industrial water markets and
developing and managing water resources.

TREND TOWARD GOVERNMENT OUTSOURCING THROUGH PRIVATE SECTOR PARTICIPATION

Following the trend of private sector participation in the natural gas,
electricity and telecommunication industries, governments around the world are
increasingly turning to the private sector to own, operate and manage their
water and wastewater assets and services. According to World Bank statistics,
between 1984 and 1990, developing countries awarded contracts for only eight
water and wastewater projects to private companies, amounting to a total of $297
million. According to these same statistics, by the end of 1997, the cumulative
level of private sector investment had increased to $25 billion. As of October
1998, according to Public Works Financing statistics, there were approximately
380 planned, funded or completed water and wastewater projects with private
sector participation worldwide for a total estimated cost of approximately $74
billion.

The following discussion summarizes some of the water and wastewater
outsourcing arrangements that have been awarded to date and are expected to be
upcoming in various regions of the world. For a more detailed description of the
outsourcing arrangements that have been awarded to date, see "Government
Outsourcing Through Privatization."

41
<PAGE> 47

EUROPE. The United Kingdom has privatized large portions of its water
sector. French municipalities have long turned to the private sector to operate
their water and wastewater systems. Several other European water and wastewater
service providers are scheduled to offer major concessions or build-own-
transfer or build-own-operate projects in 1999 and 2000. We believe that the
pace of privatization may increase once these additional privatizations have
occurred in Europe and the benefits of privatization are recognized. In
addition, European Union directives are imposing higher water and wastewater
standards on member countries and are requiring significant capital investment
for compliance throughout the region. We believe that these countries will rely
on the private sector to help fund these capital requirements. The following is
a list of selected upcoming water and wastewater privatizations expected to be
awarded in Europe.

SELECTED UPCOMING WATER AND WASTEWATER PRIVATIZATIONS -- EUROPE

<TABLE>
<CAPTION>
COUNTRY PROJECT
- ------- -------
<S> <C>
Bulgaria............................. Sale of stock and concession for water and wastewater
for Sophia

Czech Republic....................... Sale of stock and concession for water and wastewater
for Prague

Germany.............................. Sale of stock in a holding company which holds an
interest in the water and wastewater company serving
Berlin

Greece............................... Concession for water and wastewater for Athens

Hungary.............................. Upgrade for water treatment and disposal plant in
Dunavarsany

Italy................................ Sale of stock for water and wastewater for Rome

Italy................................ Privatization of water and wastewater for Puglia
Region

Italy................................ Build-own-transfer project for wastewater facility at
Porto Marghera outside Venice

Poland............................... Concession for water and wastewater for Poznan

Portugal............................. Concession for water and wastewater for Cascais

Romania.............................. Sale of stock and concession for water and wastewater
for Bucharest

Spain................................ Design and build water treatment plant at Palma,
Majorca

Turkey............................... Operations and management contract for wastewater
services for Cesme-Alacaty

Turkey............................... Construction of wastewater treatment plants in Seyhan
and Yuregic

United Kingdom....................... Private sector participation of Ministry of Defence's
water and wastewater assets
</TABLE>

42
<PAGE> 48

NORTH AMERICA. In the United States, approximately 80% of the population is
currently served by approximately 24,000 government owned and operated water and
wastewater authorities. Although the U.S. market shows significant potential for
concessions or asset sales because so small a percentage of the population is
served by private water companies, few municipalities have used these
approaches. Municipalities are reluctant to give up ownership of their water and
wastewater systems and access to tax exempt financing. Thus, in the U.S. market,
governments typically enter into public/private partnerships in which private
parties make equity investments in partnership with local water and wastewater
companies or provide lower-cost outside capital sources to fund infrastructure
requirements and growth opportunities. Governments are also outsourcing the
operation of their water and wastewater assets to private parties.

The key factors contributing to these outsourcing decisions are:

- Increased regulatory and environmental requirements contained in the Safe
Drinking Water Act and the Clean Water Act

- Deteriorating water and wastewater infrastructures within the nation's
largest urban areas

- New technologies designed to improve water and wastewater solutions with
a minimal environmental impact

- Significant capital requirements to meet these needs, estimated by the
U.S. Environmental Protection Agency to be approximately $275 billion for
water and wastewater infrastructure over the next 20 years

The following is a list of selected upcoming water and wastewater
privatizations expected to be awarded in North America.

SELECTED UPCOMING WATER AND WASTEWATER PRIVATIZATIONS -- NORTH AMERICA

<TABLE>
<CAPTION>
STATE PROJECT
- ----- -------
<S> <C>
California........................... Contract for construction project manager for water
capital improvements in San Francisco

Florida.............................. Design, build and operate water treatment plant for
Tampa Bay Water

New York............................. Operation and management of wastewater system in
Buffalo

New York............................. Privatization by Army Corps of Engineers of water and
wastewater at Ft. Hamilton

Texas................................ Design, build and operate water treatment plant in
Houston

Washington........................... Design, build and operate project for Cedar River
water treatment plant in Seattle

Washington, D.C...................... Privatization of city aqueduct
</TABLE>

43
<PAGE> 49

LATIN AMERICA. The pace of infrastructure privatizations in Latin America
has accelerated since the first electricity privatizations took place in Chile
during 1982. Since then, privatizations of electricity, natural gas and
telecommunications assets have occurred in parts of Argentina, Brazil, Chile,
Colombia, the Dominican Republic, El Salvador, Guatemala, Panama and Peru, among
other countries. To date, privatizations of water and wastewater systems have
occurred in Argentina, Brazil, Bolivia, Chile, Colombia and Mexico and are
scheduled in many other countries, including the Dominican Republic, Ecuador,
Panama and Venezuela. The following is a list of selected upcoming water and
wastewater privatizations expected to be awarded in Latin America.

SELECTED UPCOMING WATER AND WASTEWATER PRIVATIZATIONS -- LATIN AMERICA

<TABLE>
<CAPTION>
COUNTRY PROJECT
------- -------
<S> <C>
Argentina............ Concession for water and wastewater in the Province of
Buenos Aires

Argentina............ Concession for water and wastewater for Province of Misiones

Argentina............ Construction of aqueduct in Cordoba

Argentina............ Concession for water and wastewater in Tucaman Province

Bolivia.............. Concession for water for Cochambamba

Brazil............... Privatizations of state water and wastewater systems in each
of the following states: Parana, Sao Paulo, Rio Grande do
Sul, Bahia, Mato Grosso do Sul, Amazonas, Rio de Janeiro,
Santa Catarina and Espirto Santo

Chile................ Sequential sale of controlling stakes in 12 remaining
regional water and wastewater systems including capital city
of Santiago

Colombia............. Concession for water and wastewater for Monteria

Dominican Republic... Institutional strengthening and rehabilitation for country's
three principal water and wastewater service providers

Ecuador.............. Concession for water and wastewater for city of Guayaquil

Guatemala............ Build-own-transfer project for water supply wells in
Guatemala City

Panama............... Concession for countrywide water and wastewater system

Peru................. Construction of wastewater treatment plant in Lima

Venezuela............ Rehabilitation of Caracas water system

Venezuela............ Privatization of Fajardo water system in Miranda State

Venezuela............ Concession for water and wastewater in Margarita Island
</TABLE>

44
<PAGE> 50

MIDDLE EAST AND AFRICA. Many Middle Eastern and African countries are faced
with acute water shortages. As a result, several Middle Eastern countries are
seeking private development of major transportation or treatment projects which
may include build-own-transfer projects for pipelines, canals and treatment
plants. Although privatization is not widespread in Africa, there are
exceptions. Cote d'Ivoire, while still a French colony, granted a long-term
concession to a French-owned company. A majority of the concessionaire is now
owned by public stockholders. The following is a list of selected upcoming water
and wastewater privatizations expected to be awarded in the Middle East and
Africa.

SELECTED UPCOMING WATER AND WASTEWATER PRIVATIZATIONS -- MIDDLE EAST AND AFRICA

<TABLE>
<CAPTION>
COUNTRY PROJECT
- ------- -------
<S> <C>

Egypt................... Build-own-transfer project for water transmission and
treatment system for area of Suez Gulf and East Cairo

Israel.................. Tender for wastewater treatment plants in Beersheeva
Municipality

Jordan.................. Build-own-transfer project for water pipeline to Amman

Kuwait.................. Build-own-transfer project for wastewater treatment plant
for Sulaibiya

Lebanon................. Build-own-transfer project for water pipeline and water
treatment plant for Beirut as part of the national plan for
water privatization

Morocco................. Concession for water and wastewater system for Tangiers

Tunisia................. National plan for water privatization in advanced stages;
each city is able to independently arrange for privatization
and is actively doing so
</TABLE>

ASIA AND THE PACIFIC RIM. In Asia, the recent financial crisis and ongoing
economic uncertainty may be limiting private investment in the water sector.
Prior to the economic downturn in Asia, water concessions had been granted in
Indonesia, Malaysia and the Philippines. In China, municipal water agencies have
entered into build-own-transfer arrangements with Western companies for water or
wastewater treatment plants through auctions and negotiation. The following is a
list of selected upcoming water and wastewater privatizations expected to be
awarded in Asia and the Pacific Rim.

SELECTED UPCOMING WATER AND WASTEWATER PRIVATIZATIONS -- ASIA AND THE PACIFIC
RIM

<TABLE>
<CAPTION>
COUNTRY PROJECT
- ------- -------
<S> <C>

Armenia................. Operations and management contract for water and wastewater
for Yerevan

China................... Joint venture for Beijing No. 10 water treatment plant

China................... Build-own-transfer arrangement or joint venture for water
and wastewater system for Xunchang, Sichuan Province

Georgia................. Concession for water and wastewater for Tblisi

India................... Build-own-transfer project for water treatment plant in
Haldia

India................... Privatization of water treatment plant for Delhi
India................... Design and build water supply projects in large and medium
towns in state of Orissa

Nepal................... Operations and management contract for water supply and
wastewater collection services to Kathmandu Valley
</TABLE>

45
<PAGE> 51

OUTSOURCING OPPORTUNITIES IN THE MUNICIPAL AND INDUSTRIAL SERVICES MARKETS

We believe that municipal governments and industrial companies in North
America and Western Europe, in particular, will increasingly seek to outsource
the management of their water and wastewater systems to private parties with the
operating experience and capital to provide reliable services, to comply with
more stringent regulatory requirements for water quality and environmental
protection and to reduce uncertainty in financing these operations. To comply
with stricter environmental and drinking water quality standards, municipalities
will incur increased labor costs for treatment, higher monitoring and equipment
maintenance costs and increased costs of disposing of biosolids. Federal funding
grants to help municipalities meet their financial needs have declined over
time, leaving municipal wastewater authorities facing serious budgetary
challenges. Private sector outsourcing can include any combination of design,
financing, construction, ownership or operation of a facility; administrative
services such as metering, billing, collection or maintenance; and applying
process engineering technologies such as biosolids filtration, clarification,
purification, separation, drying and disposal.

Industrial companies are also experiencing rising costs related to their
water and wastewater needs. The chemical, refining, pharmaceutical, high
technology, food and beverage, paper and pulp, steel, automobile and energy
industries have large water supply and wastewater treatment requirements. These
industries require pure water for their operations and produce effluents that
must be treated before being released into normal wastewater systems or being
discharged directly into the environment. Most industrial wastewater needs to be
pre-treated and environmental laws prohibit the direct discharge of wastewater
into the environment without a permit. Many industries treat and dispose of
their own wastewater because the relatively concentrated wastes from these
industries frequently cannot be discharged into the public sewer system and
on-site treatment is usually less expensive.

These industrial companies must invest large amounts of capital in their
water and wastewater treatment and distribution assets. By outsourcing the
management of these assets to third parties, these companies may reduce the
uncertainty associated with expenditures required by changes in water quality
standards and environmental regulations. Obtaining landfill, storage and
incineration capacity to dispose of the residue from the wastewater treatment
process is a major component of providing industrial wastewater services, and
may involve procuring long-term capacity of specially lined or hazardous waste
landfills.

The services to be provided to municipal and industrial customers generally
fall into three main categories:

OPERATIONS, MANAGEMENT AND ENGINEERING. Over the past few years, large
cities and industrial companies have reduced costs by outsourcing the design,
construction, operation or maintenance of their water and wastewater assets to
private sector service providers. Many of these service providers have
consolidated and the market is much less fragmented than either the residuals
management or the underground infrastructure markets. Consequently, competition
for major contracts for the largest cities in the United States has been
significant. Although some companies have focused on providing services to small
to medium sized municipalities and large industrial firms, many of these
companies lack the financial capacity or risk management capability to purchase
water and wastewater assets from their industrial customers or to qualify on
their own as the operators and managers of their customers' facilities.
According to the May/June 1998 issue of Environmental Business Journal, the fees
associated with providing contract operations and consulting, design engineering
and maintenance services to customers in the municipal and industrial markets in
the United States are estimated to have exceeded $5.5 billion for 1997, and are
expected to continue to grow.

RESIDUALS MANAGEMENT. Managing the biosolids that result from municipal and
industrial wastewater represents a large component of the cost of wastewater
treatment. Increasingly stringent effluent discharge standards are resulting in
a significant increase in the quantity of residuals. At the same time,
environmental regulations are limiting waste disposal options. For example,
ocean dumping of biosolids has been banned in the United States and the European
Union, increasing costs for managing residuals in these regions. In addition,
environmental regulations are requiring firms to provide beneficial reuse
solutions. Incineration, landfilling, land application and producing compost are
becoming the only available
46
<PAGE> 52

disposal options in many countries and have inspired a number of new disposal
and reuse technologies. Certain applications can turn biosolids from waste into
a substance that can be sold as soil conditioner or that can be burned as fuel.
These technologies create a product with market value and provide an
environmentally attractive alternative to the increasingly expensive and scarce
disposal options of incineration and landfilling.

Residuals management companies provide services to local and state
agencies, municipalities and private companies. Specific services include the
transportation, treatment, site monitoring, disposal and environmental
regulatory compliance services associated with biosolids and wastewater
disposal. These companies provide a variety of residuals management options to
prospective customers who seek alternative methods of biosolid treatment. Not
all methods can be profitably and practically applied in all geographic areas
due to the specific nature of the terrain and agriculture in the region and the
local biosolid content.

We estimate that 55% of biosolids produced in the United States are
recycled, and we anticipate that recycling of biosolids will continue to grow
over the next decade. As recycled uses of biosolids continue to increase, we
believe that larger and more sophisticated companies will have opportunities to
create value through economies of scale and scope by providing new solutions to
these problems.

UNDERGROUND INFRASTRUCTURE REMEDIATION AND DEVELOPMENT. We estimate that
nearly 60% of the assets in the water and wastewater industry consist of
underground distribution networks and that over half of the approximately $275
billion of capital that the EPA estimates will be spent in the United States
during the next 20 years will be spent on repairing, replacing and developing
the nation's underground water and wastewater infrastructure.

Much of the cost associated with the repair, replacement and development of
underground infrastructure is attributable to the lost revenues resulting from
the disruption of service associated with open cut excavation. During the past
decade, advances in the oil and natural gas industry have been used in the water
industry, enabling the repair of underground infrastructure without open cut
excavation. Trenchless technologies such as horizontal drilling, tunneling,
grouting and pipe lining enable the repair and replacement of water
infrastructure with a fraction of the disruption associated with traditional
open cut excavation.

Currently, small local civil engineering firms and contractors perform most
of the trenchless underground infrastructure work. As the size of these projects
grows and the capital requirements and sophistication of these newer
technologies increase, we believe larger, better capitalized and more
sophisticated firms who hold experience in the oil and gas industry will have a
competitive advantage in obtaining this business. We expect that the underground
water and wastewater infrastructure market for the municipal market in the
United States will grow during the next decade.

WATER RESOURCE DEVELOPMENT AND MANAGEMENT

We believe that the management of aquifers and other water resources and
the storage and transportation of water offer important opportunities for
business development. In many regions of the world, such as parts of North and
South America, the Middle East and many island nations, lack of abundant water
resources is a critical issue. Governments, which historically have been
responsible for developing and managing water resources, are now seeking private
sector assistance to address their water resource issues due to the operational,
technical and financial expertise required to operate, build and fund these
capital intensive projects.

In many countries, including the United States and China, water consumption
is mainly driven by patterns of population movements and industrial and urban
development. In parts of the United States, increases in water demand resulting
from large population shifts to the sunbelt, multi-year droughts and
irrigation-intensive agriculture have resulted in consumption that exceeds the
natural rate of replenishment. This has led to large scale diversions of surface
water through dams and reservoirs and to diminished groundwater supply. In
China, rapid economic growth in the Southern provinces (primarily the Guandong

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and Shanghai areas) has significantly increased demand for water.
Drinking-quality water now used in agriculture may need to be diverted to
population centers.

In light of these factors, industry participants are focusing new efforts
on means of extracting, managing, storing and transporting water resources as
efficiently as possible. The large amount of capital required and the inability
of local governments to fund these needs compound the difficulties in developing
and managing water resources. Transporting water over long distances to urban
areas requires canals, aqueducts, underground pipelines and/or pumping stations.
These are typically large infrastructure projects requiring significant
development, construction, operational and financial expertise.

COMPETITION

Participants in the global water market face significant challenges,
including qualifying for the bidding process, obtaining and demonstrating
operating experience and management depth, accessing capital, obtaining and
demonstrating expertise in managing international infrastructure projects,
identifying and evaluating transactions and assessing and mitigating risks,
especially operational, political and regulatory risks. As a result, only a
small number of companies currently compete globally in the water and wastewater
privatization market.

Two French companies, Suez Lyonnaise des Eaux and Compagnie Generale des
Eaux, a subsidiary of Vivendi, currently are recognized as the leading
competitors in the international water and wastewater market. According to Suez
Lyonnaise des Eaux, it serves an aggregate population of approximately 77
million for water and 52 million for wastewater. According to Vivendi, Compagnie
Generale des Eaux serves an aggregate population of approximately 80 million for
water and 30 million for wastewater. These two companies are significantly
larger than the next group of international competitors, the largest of which
serves an aggregate population of approximately 31 million. These smaller
competitors include privatized water and wastewater companies from the United
Kingdom and some smaller French and Spanish companies. We are a new competitor
in the international water and wastewater market, and we currently serve an
aggregate population of approximately four million. Some construction companies
also bid on water and wastewater projects, more often on build-own-transfer
projects than on concessions.

In the United States, the water and wastewater industry is highly
fragmented, with over 55,000 public and private water entities serving
approximately 90% of the nation's population. Of this number, nearly half are
investor owned and the rest are publicly owned, generally by local
municipalities. Most of these entities serve only a single community or region.
There are only 17 publicly traded water and wastewater companies among the
nation's approximately 30,000 investor owned companies, and only three of these
companies have a market capitalization of over $500 million. Several of these
publicly traded companies have become active consolidators by acquiring the
small private and public investor owned utilities that operate in markets
contiguous to or near their own. Of the three largest consolidators, none has
more than a 3% market share in the United States, and these three combined serve
only 6% of the nation's customers. In addition, several electric utilities have
begun to acquire municipally owned water distribution companies in the United
States. Many companies compete in the United States for municipal service
contracts and industrial outsourcing opportunities, including subsidiaries of
the French and U.K. water companies.

In the United Kingdom, 10 water and wastewater authorities in England and
Wales were privatized in 1989 to form 10 water and wastewater companies
operating in geographically discreet regions. Wessex has a virtual monopoly over
water supply and wastewater services in its licensed region, with the exception
of the cities of Bristol and Bournemouth and a small area of rural Wiltshire,
where three companies provide water and Wessex provides wastewater services.
Other companies may apply to the industry regulator for a so-called "inset
appointment" to serve particular areas within Wessex's or any other licensee's
service area. Historically, very few inset appointments have been granted in
England and Wales. Wessex does have one inset appointment within its territory
resulting from the privatization of water supply activities formerly provided by
the Ministry of Defence. Wessex chose not to pursue this project because of
unacceptable contract terms. The Chancellor of the Exchequer announced in March
1999 that the Government intends

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to study ways to increase competition in the United Kingdom's water sector. We
cannot predict what changes, if any, the Government will adopt to promote
competition. See "-- Existing Azurix Assets -- Wessex."

OUR COMPETITIVE STRENGTHS

We have several competitive strengths that should enable us to compete
successfully in the global water industry.

EXPERIENCED MANAGEMENT AND BUSINESS DEVELOPMENT TEAMS

Although our company was only recently formed, we have a group of
experienced managers from long-established companies, including Enron, other
multinational companies, Wessex and other water and wastewater companies. Our
management team has extensive experience in both the development and operation
of infrastructure projects worldwide and years of experience in managing water
and wastewater companies primarily in the United Kingdom and also in the United
States. Many of our executives were actively involved in developing and managing
natural gas and power projects for Enron in the United States and around the
world. Enron is one of the world's leading integrated natural gas and
electricity companies with a market capitalization of approximately $28 billion.
Rebecca Mark, chairman and chief executive officer of Azurix and a vice chairman
of Enron, leads the Azurix team in implementing its global water strategy.
During her tenure at Enron, Ms. Mark was responsible for the successful
development of natural gas and power projects worldwide. Beginning with Enron's
first international power project in Teesside, England in 1989, Ms. Mark led the
team that developed gas and power projects around the world with total estimated
capital costs exceeding $10 billion.

Four other senior executives give the management team collectively 80 years
of experience in managing water companies in the United Kingdom and the United
States. In addition, our management team has infrastructure development
experience in Europe, North America, Latin America, the Middle East, Africa,
Asia and the Pacific Rim. Our senior executives are complemented by a group of
experienced business developers who identify opportunities in the global water
industry. We believe that the collective experience of our management and
business development teams will enable us to compete successfully for public
tenders. Since our formation, we have qualified for bidding on numerous pending
privatizations in Europe, Latin America and the Middle East. Of those
privatizations in which we have actively participated, only one award has been
made. In this bid for the concession in Valparaiso, Chile, we were second to the
winning bidder. We are currently one of the three finalists for the partial
privatization of the Berlin, Germany water and wastewater system. In addition,
we have identified and negotiated successfully two private transactions.

Our management team will build upon its extensive experience and knowledge
from Enron, Wessex, other water and wastewater systems and other multinational
companies to provide us with the necessary skills to compete effectively in the
global water industry. Although most of our management team's experience in the
water and wastewater industry has been primarily in the United Kingdom and the
United States, we believe that our management team has the requisite operating
experience and management depth to identify and evaluate potential water and
wastewater projects, to qualify for bidding on projects in many countries
throughout the world, to access capital and to develop and manage projects. Our
management team has the ability to:

- Mobilize the array of resources needed to enter competitive bids for
concessions tendered in privatizations

- Develop projects requiring construction of new facilities in developed
and emerging countries

- Meet the challenges of "fast-track" projects to be brought on-line within
12 to 18 months

- Execute major acquisitions

- Operate regulated companies, including managing their tariff and other
regulatory issues

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- Apply innovative financing and risk-management strategies in markets
worldwide

We expect to apply many of the same disciplined techniques to analyze
projects and mitigate risks that Enron has developed in its own worldwide
activities. In identifying and quantifying the risks and value of a transaction,
these processes require an analysis of the engineering, operational, regulatory,
financial, economic, structural, legal, insurance, tax and accounting
implications of the transaction. These analytical skills will competitively
position us in the identification, evaluation, development, financing and
acquisition of worldwide water and wastewater projects and in the provision of
associated services.

WESSEX OPERATING EXPERIENCE AND TECHNICAL EXPERTISE

From Wessex, we have obtained the operating experience, research skills and
technical expertise necessary to evaluate potential water projects, to qualify
for bidding on water projects in many countries throughout the world, to build
transition and operating teams for new acquisitions and to manage existing and
new water assets. Wessex supplies approximately 400 million liters of water per
day to a population of approximately 1.1 million and treats on average 484
million liters of wastewater per day from a population of approximately 2.5
million. In December 1998, the water industry regulator for England and Wales
rated Wessex the most efficiently operated privatized water and wastewater
company. Wessex's management team has been in place since the privatization of
the U.K. water industry in 1989. For a discussion of Wessex, see "-- Existing
Azurix Assets -- Wessex."

Wessex uses advanced treatment techniques, increased automation of
operations and services and state-of-the-art control and monitoring systems that
are designed to ensure consistently high standards at low cost. Since its
privatization, Wessex has improved levels of quality and standards of service,
providing reliable water supplies without requiring any water usage
restrictions. It has delivered this high quality service while reducing
operating costs and delivering capital improvements below budgeted amounts. In
addition, Wessex has developed extensive performance data that will be used for
benchmarking purposes in Azurix operations around the world.

We will also benefit from Wessex's experience with meeting mandated capital
expenditure targets through the use of standard designs, the cost-effective
management of major projects and in-house process and concept design. In
addition, the use of local contractors and detail designers as well as
appropriate technology and efficient procurement are key factors in capital
expenditure management that have benefited Wessex in the past. During the 1990s,
Wessex successfully managed a $2.0 billion investment program on time and below
the price allowed by regulation. Current regulatory reports show Wessex as
having among the lowest unit costs and achieving the second highest return on
capital in the U.K. water and wastewater industry.

We will apply Wessex's operational and capital expenditure management
skills in our global water business. We believe many of these skills are
transferable to other water and wastewater assets or services we will acquire or
manage.

REGULATORY AND GOVERNMENT AFFAIRS EXPERTISE

Our management team has extensive experience in working with regulators and
other governmental agencies. For example, our executives include:

- The executive and regulatory team from Wessex, which has operated for 10
years in the U.K.'s privatized water sector

- The former general manager of the Metropolitan Water District of Southern
California, which through its 27 member public agencies provides almost
60% of the water used by nearly 16 million people living in portions of
Los Angeles and southern California

- A director of the Azurix regulatory team, who has 25 years of regulatory
experience in electricity, gas and water, both in the United States and
internationally

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- Executives and lawyers who have worked on private projects and
distribution systems in the gas and electric sectors in Argentina,
Brazil, China, Colombia, Croatia, Germany, India, Italy, Malaysia, the
Philippines, Poland, the United Kingdom and the United States, among
other countries

These members of our management team have extensive government affairs
experience and have often been involved in building relationships with local and
national governments and advising these governments on how to structure their
privatization process and regulatory regime to encourage foreign investment. In
some cases, they have direct experience in the countries and even the regions or
municipalities where we will pursue projects and operate assets, sometimes
working with the same governmental officials who may make decisions regarding
water and wastewater privatizations.

As governments around the world turn to the private sector to fill their
water needs, they will draw on examples of successful privatizations in the
water sector elsewhere and, if applicable, in gas and electric sectors in their
own country. For example, the United Kingdom's privatizations of its electric
and gas sectors already has served as a model for many countries' privatizations
of those sectors, specifically, Argentina, Brazil, Chile and Colombia. We
believe governments will look to the U.K. model in water as well, and through
Wessex we are very familiar with that regime. For example, the recent water
privatization in Chile follows a national regulatory regime like the United
Kingdom, which adheres to the principles of incentive-based regulations.
Although the methods of calculating rates of return are slightly different, the
core principles remain the same. As another example, highly successful
build-own-transfer projects and privatizations of gas and electric distribution
networks have occurred in Argentina, Brazil, China, Colombia, Germany, Eastern
Europe, India and the Philippines. As those countries look for precedents in
water and wastewater, they will turn to many of the projects and systems on
which our executives previously have worked.

Although we believe that the regulatory and government affairs expertise
demonstrated by our management team is transferable to water and wastewater
privatizations, there are some differences between the sectors. Because water is
an essential good affected by health, safety and environmental issues,
regulation of water is more influenced by socioeconomic and welfare pressures
than electricity and gas regulation. In addition, water and wastewater utilities
are typically vertically integrated natural monopolies, often owned by a public
entity, and subject to greater regulation than electricity and gas utilities
which are more often privately held and subject to greater competition. Finally,
water and wastewater businesses are more often regulated at a local or regional
level as compared to national regulation than electricity and gas.

Despite these differences, we believe that the experience of our management
team in the fundamental aspects of regulation and privatization is transferable
to water and wastewater privatizations.

FINANCING EXPERTISE

Access to capital is essential in the global water business due to its
significant financial requirements. We plan to employ sophisticated financing
techniques and instruments similar to those successfully used by members of our
management team in other infrastructure-intensive businesses. Our executives
have experience in raising large amounts of capital through the capital markets
and through innovative financing structures. In addition, the team brings
experience in attracting private equity capital and using this capital to
enhance the borrowing capacity of our projects and achieve greater returns for
equity holders. In financing a project through debt, we may enhance returns by
placing a portion of the debt at the level of the holding company created to own
a particular concession or facility. As our portfolio grows and matures, we also
intend to enhance our equity returns and reduce overall risk exposure through
opportunistic sales of all or a portion of individual assets or investments. In
addition, our management has experience in applying financing techniques
familiar to the domestic infrastructure market, such as leveraged leases, to
international markets.

Many of our executives have developed extensive contacts and experience in
the global financial market. We intend to work in partnership with multilateral
agencies such as the World Bank, International

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Finance Corporation, the Inter-American Development Bank, the European Bank for
Reconstruction and Development and the Overseas Private Investment Corporation.

We intend to apply our financial expertise and skills to the global water
industry to lower the cost of capital for our projects and acquisitions.

OUR BUSINESS STRATEGY

Our business strategy is focused on three complementary areas in the global
water industry:

- Acquiring, owning, operating and managing water and wastewater assets

- Providing water and wastewater related services, including operations,
management and engineering, residuals management, and underground
infrastructure development and remediation services

- Developing and managing water resources

Our participation in each of these areas should allow us to satisfy the
needs of a full spectrum of water and wastewater customers. The particular
characteristics of each market as well as customer needs that vary by region and
market will drive our approach to developing these business lines and providing
creative solutions to water and wastewater needs in those markets.

ACQUIRING, OWNING, OPERATING AND MANAGING WATER AND WASTEWATER ASSETS

ACQUIRING WATER AND WASTEWATER ASSETS. We intend to build a diversified
portfolio of water and wastewater assets, including both established businesses
with stable returns and concessions and projects in emerging markets with
significant development requirements and potential for growth and enhanced
returns. We also intend to consider acquisitions of privately owned water and
wastewater assets throughout the world with predictable contractual or regulated
revenue streams that will complement our portfolio and strengthen our
competitive position in the global water industry.

We intend to acquire water and wastewater assets through participation in
public tenders and privately negotiated transactions throughout the world,
including Europe, North America, Latin America, the Middle East, Africa, Asia
and the Pacific Rim. As the trend toward privatization continues, we expect new
opportunities to materialize around the world. See "-- The Global Water
Industry -- Trend Toward Government Outsourcing Through Private Sector
Privatization."

We intend to target opportunities where there is potential for increased
returns and where we can draw on the experience of our management team in
regulatory and rate case analysis, political risk assessment, country-specific
project development and water infrastructure operation. In some instances, we
may join with other parties, including local entities, in acquiring or bidding
on assets. We will evaluate potential projects and acquisitions based on a
variety of financial, strategic, regulatory and operational factors and utilize
our sophisticated financial, legal and tax analysis capabilities to determine
the appropriate acquisition and ownership structure designed to minimize risks.
From inception, the analysis of potential acquisitions will be staffed by our
employees with assistance from affiliated companies and external experts as
needed. We expect to work with Enron's extensive network of offices and
businesses around the world in identifying and pursuing potential water and
wastewater and service opportunities.

We carefully evaluate each project to assess its value. First, we conduct a
due diligence review, identifying and quantifying the specific risks of the
transaction. We then measure and manage these risks by preparing a detailed
financial projection containing elements that we believe may affect the project
materially throughout its economic life. We forecast inflation rates and, where
applicable, changes in foreign exchange rates. We test projections for debt
capacity, terms and rates along with an evaluation of local and world financial
markets to assure the accuracy of our assumptions relating to capital costs. We
quantify all other assumptions from the internal and external team of experts to
forecast costs and revenues in the transaction. We then run multiple
simulations, testing for various sensitivities and producing an analysis of the
return on capital, adjusted for the risk of the specific project.

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Azurix Europe is a party to various credit facilities and loan agreements
with restrictive covenants. We do not believe that these existing credit
facilities will impair our ability to carry out our business strategy. Although
the existing senior credit facility and the new senior credit facility both
place restrictions on Azurix Europe's ability to engage in mergers, acquisitions
or asset sales, they do not place any such restrictions on Azurix. We are
currently refinancing the existing senior credit facility and expect to replace
it in May 1999 with a new senior credit facility that will specifically permit
Azurix Europe to lend funds to other subsidiaries or affiliates of Azurix for
the purpose of making investments in, or acquisitions of, water or wastewater
related assets or businesses around the world. In addition, neither the new
credit facility nor the other existing credit facilities and loan agreements
prohibit Azurix from engaging in mergers, acquisitions or asset sales. In
addition, they do not hinder Azurix's ability to incur indebtedness at the
Azurix level or incur project specific indebtedness with the borrowing capacity
generated from the cash flows of future acquisitions. See "Description of
Indebtedness."

The business opportunities agreement that we will enter into with Enron
will limit the businesses that we may pursue. The agreement will allow us, only
with Enron's consent, to engage in businesses outside the water and wastewater
industries, or in which water and wastewater is not expected to generate the
major component of value. This could limit our ability to pursue potentially
profitable ventures that are not clearly in the water and wastewater sector,
even though those opportunities come to our attention on account of our
activities in water and wastewater. See "Certain Transactions -- Agreement
Regarding Business Opportunities and Related Matters."

OWNING, OPERATING AND MANAGING WATER AND WASTEWATER ASSETS. To ensure a
smooth transition and to introduce more efficient working practices in the
concessions and businesses we acquire and the start-up of new facilities we
construct, we will send specialist transition teams of experienced staff with a
full range of skills. Existing employees of Wessex, including over 300
engineers, scientists and other specialists, will be made available to operate
our assets, especially during critical periods of takeover or start-up. We
intend to use the systems and working methods that Wessex successfully employed
to increase productivity and reduce costs.

Following an acquisition of a water or wastewater asset, we intend to:

- Enhance income by extending services and increasing operating revenues

- Reduce operating costs and capital expenditures through better management
and procurement strategy

- Increase efficiency through the use of technology and management
information systems

- Apply innovative financing techniques and sound financial and risk
management techniques

Revenue Enhancements. Water and wastewater systems offer many opportunities
to increase operating revenues. For example, we might expand the number of
customers connected, while more efficiently managing the capital expenditures
required to serve them. New customers could result from inherent population
growth or migration to urban areas in the service territory. Another operating
revenue enhancement is the effective use of water meters. Many water systems
around the world do not use water meters. By installing meters where
appropriate, we could track water demand more effectively and allocate water
resources and service teams more efficiently. Where permitted, we will shorten
billing periods, which expedites receipt of operating revenues and increases
their collectibility. We will also apply more sophisticated billing technology
to assure that customers are being billed and delinquent accounts are being
pursued. Through improved service and better community relations, we expect to
reduce uncollectibles.

Cost Containment Strategies. Our experience at Wessex helps us identify
ways to control expenditures in operating our water and wastewater systems and
facilities worldwide. These techniques are highly transferable from one location
to another. In particular, we intend to:

- Use sophisticated tracking and monitoring equipment to reduce water
losses from leakage and theft

- Reorganize the workforce to improve productivity
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- Procure equipment, chemicals and ancillary services more cost effectively

- Shorten construction periods

We expect that these value-added strategies will allow us to realize
attractive returns on our global water industry investments. Whether responding
to a tender or negotiating a contract directly, we expect to combine our
experience from the concessions and projects we already have with our financing
skills to offer a highly competitive price and, once we acquire an asset, to
serve our customers efficiently and effectively.

PROVIDING MUNICIPAL AND INDUSTRIAL SERVICES

We intend to provide a broad range of cost-effective services to owners of
water and wastewater systems in governmental, commercial, industrial and
agricultural markets around the world through innovative technological,
environmental and financial solutions.

Our water related services business will target municipal and industrial
customers, initially in the United States and Europe, that are seeking to
outsource the management of their systems. These customers generally desire a
service provider with the operating experience and capital to provide reliable
water supply and wastewater treatment services and the ability to comply with
more stringent regulatory requirements for water quality and environmental
protection. The current market has few operators that manage a large number of
diverse assets and thus have the skills to compete effectively. By consolidating
contracts for operation and management of treatment facilities and management of
biosolids disposal or reuse through acquisition and growth, we can achieve
economies of scale and operational efficiencies in this business that will allow
us to compete more effectively.

Furthermore, by offering operations, management and engineering, residuals
management and underground infrastructure remediation and development services,
we believe that we will position ourselves to capitalize on privatizations as
they occur. Providing a full range of services represents our primary method for
consolidating municipal outsourcing activities, promotes access to a full range
of governmental clients and allows municipalities to explore all their options
from outsourcing services to full privatization of their systems. Working with
municipal clients will also allow us to understand local markets and identify
attractive systems for acquisition.

DEVELOPING AND MANAGING WATER RESOURCES

We believe the growing demand for drinking water has generated a need for
better management of water resources. We believe that there are significant
capital, technical and operational needs for this area of the water industry and
that governments are increasingly turning to the private sector to manage and
meet these needs. Wessex has recently commenced a trial of aquifer storage and
recovery, which involves injecting drinking water into deep aquifers that act as
natural underground reservoirs. Water put into the aquifer at times of low
demand can be stored for months or years, to be used when demand is high. In
addition, we are pursuing build-own-transfer projects for long-distance
pipelines, aqueducts and reservoirs in the Middle East and other projects to
extract water in Latin America. We intend to pursue opportunities in water
resource development and management as they arise.

EXISTING AZURIX ASSETS

The following table details operating revenues, operating income (loss) and
identifiable assets by geographic area for Azurix for the year ended December
31, 1998:

<TABLE>
<CAPTION>
OPERATING OPERATING IDENTIFIABLE
REVENUES INCOME (LOSS) ASSETS
--------- ------------- ------------
(IN MILLIONS)
<S> <C> <C> <C>
U.S. ............................................ $ -- $(14.7) $ 4.2(1)
Non-U.S.......................................... 119.7 60.3 2,476.5
</TABLE>

- ---------------

(1) Amount represents leasehold costs and capitalized transaction costs on
active transactions.

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WESSEX

Wessex's principal business is providing water supply and wastewater
services in southwestern England through Wessex Water Services Ltd., a wholly
owned subsidiary. In December 1998, the Office of Water Services, the industry
regulator for England and Wales commonly called Ofwat, published its assessment
of relative operating efficiency, which showed Wessex as the most efficiently
operated water and wastewater company under its supervision. Ofwat also has
recognized Wessex for providing among the highest overall standards of service
of water and wastewater companies in the industry. Independent research shows
that over 90% of Wessex's customers consistently rate its service as "excellent"
or "good." During the 1990s, Wessex successfully managed a $2 billion investment
program on time and below the price allowed by regulation. Wessex's other
principal subsidiary is SC Technology, which conducts business as Swiss Combi
and designs, sells and operates biosolid drying plants.

Much of Wessex's success in delivering high standards efficiently is due to
the investment in and application of the latest technology. Sophisticated
control and planning systems have largely eliminated the need for Wessex's 2,500
installations to be permanently manned. Instead, water supply and wastewater
treatment collection and distribution systems can all be monitored from one
central base. Regular maintenance and response to customer requests or
emergencies are handled through an integrated planning and management system
that ensures rapid response in the most efficient manner.

WESSEX WATER SERVICES. Through Wessex Water Services, Wessex provides water
supply and wastewater services in southwestern England. Wessex has a virtual
monopoly over water supply and wastewater services in its region, with the
exception of the cities of Bristol and Bournemouth and a small area of rural
Wiltshire, where three companies provide only water and Wessex provides
wastewater services.

The Wessex region covers approximately 10,000 square kilometers and is
predominantly rural. There are two major urban areas in the region, with Bristol
and Bath in the north and Bournemouth and Poole in the south. The largest town
for which Wessex provides water is Poole with a population of approximately
140,000, and the largest town for which Wessex provides wastewater services is
Bristol, with a population of approximately 400,000 (approximately 800,000
including the surrounding area). The region's economy, which is one of the
fastest growing in the United Kingdom, is based on agriculture, financial
services, aerospace, defense establishments and specialist manufacturing.

Water Supply Services. Wessex supplies approximately 400 million liters of
water per day to a population of approximately 1.1 million using its water
infrastructure. The system includes approximately 138 water sources, 128 water
treatment plants, 320 pumping stations, 360 storage reservoirs and 11,000
kilometers of water mains. Wessex serves approximately 500,000 domestic and
commercial locations. Wessex's customer base is approximately 56% residential
and 44% commercial by volume of supply.

Wessex withdraws 78% of its water from underground sources and the
remainder from reservoirs (19%) and rivers (3%). Wessex has a comprehensive
network of storage reservoirs (interlinked by a regional grid), which facilitate
water management during periods of low rainfall. As a result of its strong water
resources, internal grid network and water management, Wessex has not enforced
any restrictions on water usage in the past 22 years. Ofwat has ranked Wessex as
having fewer than average unplanned interruptions to water supply.

Wessex is strengthening its water resources through reductions in leakage
and trials in the use of aquifer storage and recovery. Although Wessex has
reduced leakage by 20% since 1993, its leakage rates remain above average for
the U.K. industry. Ofwat sets mandatory targets to reduce leakage from both
company and customer pipes. These targets are reviewed annually and failure to
meet the targets could result in enforcement action. Wessex intends to reduce
leakage by optimizing pressure in its pipes, improving its response time for
repairing leaks and replacing pipes and joints.

The flow in some rivers in Wessex's region is being affected by water being
withdrawn from underground aquifers by Wessex. This problem resulted from the
granting of water withdrawal rights to Wessex's predecessors prior to
privatization. Wessex has taken measures to reduce withdrawals of water
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and has given a commitment, subject to available funding, to eliminate low river
flows caused by withdrawals of water by 2010. Wessex may need to develop
additional water resources.

Wessex has invested approximately $589 million in capital projects related
to improvements in its water infrastructure since privatization in 1989, of
which approximately $430 million has been invested since 1993. Wessex's water
supply network continues to require further investment.

Wessex takes an integrated approach to water quality, based on effective
control and monitoring of treatment and distribution systems. All water
treatment works have continuous automated operation and quality monitors. Wessex
also monitors water quality through a program of regular sampling and analysis.
During the year ended December 31, 1997, Wessex tested approximately 160,000
drinking water samples and achieved 99.9% compliance with the strict United
Kingdom and European Union standards. Ofwat has ranked Wessex as above average
for the provision of water supplies overall.

Wastewater Services. Wessex treats on average 484 million liters of
wastewater per day from a population of approximately 2.5 million through its
infrastructure of approximately 360 wastewater treatment plants, 1,300 pumping
stations and 15,000 kilometers of sewers. Residential customers account for
approximately 76% of wastewater revenues and commercial customers account for
24%.

Wastewater is collected in the wastewater system and pumped or gravitated
to wastewater treatment plants where the wastewater passes through processes
designed to remove biosolids and purify the wastewater. Following further
processes, Wessex disposes of 83% of its biosolids to agricultural land, uses
12% in landscaping and land reclamation work and disposes of 5% in landfills.
Approximately 20% of biosolids are subjected to an advanced heated drying
treatment at Wessex's major wastewater treatment facility at Avonmouth, near
Bristol. Wessex is currently installing similar drying facilities, referred to
as biodriers, at Bournemouth and Weston-super-Mare. A second plant is also
planned for construction in 1999 at Avonmouth.

Wessex has invested approximately $1.1 billion in capital projects related
to improvements in its wastewater infrastructure since privatization, of which
approximately $785 million has been invested since 1993. Wessex has been
upgrading many of its wastewater treatment plants to comply with European Union
legislation. At some of its treatment facilities, Wessex has introduced advanced
filtering technology using membranes, ultraviolet disinfection and fully
enclosed underground plants in connection with the treatment of wastewater.
Wessex's new wastewater treatment plant at Porlock is the largest operational
plant in Europe to use membrane filtering technology to produce wastewater which
is virtually bacteria and virus free. Wessex is building a similar system at
Swanage in Dorset.

Wessex's wastewater treatment plants perform well above industry standards.
During the year ended March 31, 1998, Wessex's wastewater treatment plants were
in substantial compliance with applicable discharge standards and 99% of these
plants were in 100% compliance with applicable discharge standards. Wessex is
committed to providing full treatment for all continuous coastal discharges
which impact on recreational waters. Full compliance with European Union bathing
water quality standards in the Wessex region during the period from April to
September 1998 was 91%, and the instances of noncompliance were due primarily to
agricultural runoff and industrial discharges, not Wessex's treatment
operations.

Properties. Wessex manages over 2,500 installations. These include
approximately 138 water sources, 128 water treatment plants, 320 clean water
pumping stations, 360 storage reservoirs, 1,300 wastewater pumping stations and
361 wastewater treatment plants. The following is a list of the five largest
water treatment plants operated by Wessex:

<TABLE>
<CAPTION>
LOCATION CAPACITY
- -------- ------------------------
(MILLION LITERS PER DAY)
<S> <C>
Maundown.................................................... 72.0
Upton Scudamore............................................. 36.4
Corfe Mullen................................................ 33.0
Sturminster Marshall........................................ 30.0
Durleigh.................................................... 30.0
</TABLE>

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The following is a list of the five largest wastewater treatment plants
operated by Wessex:

<TABLE>
<CAPTION>
ESTIMATED EQUIVALENT
LOCATION POPULATION SERVED
- -------- --------------------
<S> <C>
Bristol (Avonmouth)......................................... 897,000
Holdenhurst................................................. 180,000
Poole....................................................... 159,000
Bath (Saltford)............................................. 109,000
Bridgwater.................................................. 107,000
</TABLE>

Customer Charges. Ofwat sets limits on the rates Wessex may charge for its
regulated water supply and wastewater treatment businesses, including the extent
of annual rate increases. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Outlook."

Charges for water supply and wastewater services are calculated separately
based on the average costs of providing each service for each class of
customers. Currently, approximately 82% of household bills are calculated in
part on the basis of the ratable value of the property, a valuation which was
used by local governments to set municipal charges until April 1, 1990, rather
than their usage. The remaining 18% of household customers pay based on metered
water usage. Where a customer receives a metered water supply, wastewater
services charges are based on the volume of water supplied. Wessex offers free
meter installation service to all its customers and, as a result, the level of
metering in Wessex's territory is above the industry average in the United
Kingdom. New properties will be subject to metering.

Charges are generally set on a standard tariff basis. Charges for bulk
supplies of water are usually determined on an individual basis, as are charges
for some larger commercial water supplies and some industrial wastewater. The
charging basis for bulk supplies in some cases provides for annual recalculation
by reference to the expenditure associated with the supply. Wastewater from
industrial users is normally charged on a formula basis taking account of the
volume of wastewater, its strength and costs of removal and treatment.

In November 1998, following public consultation in April, the U.K.
Government announced new legislation to regulate water charging in England and
Wales. The proposed legislation is currently before the U.K. Parliament and
would grant domestic customers the right:

- To resist water metering in their current homes where they are not using
water for non-essential purposes

- To have a free meter installed if they wish to have one, where this is
practicable

- Where they have taken up the right to have a free meter installed, to
revert to an unmetered basis of charging within 12 months if they so
choose

In addition, the proposed legislation would enable the government to
protect vulnerable customers with high essential water use, who live in homes
with meters, from higher than average water bills.

A review of the customer charges of Wessex is in process and new price
limits will apply from April 1, 2000. See "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Outlook" and "Regulatory Matters."

Competition. Despite an absence of regulatory restrictions on entry into
the U.K. water industry, 98% population coverage and high infrastructure costs
deter potential new entrants. There is some limited direct competition in the
industrial market. For example, other companies may be granted the right through
"inset appointments" to supply water and wastewater services to Wessex's
customers using in excess of 250 megaliters of water per year. Inset
appointments may also be granted for "greenfield sites," which are areas
previously not served by existing companies, or where an incumbent water company
consents to change its boundary to allow part of its area to be transferred to
another company or potential company. Wessex does have one inset appointment
within its territory resulting from the privatization of

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water supply activities formerly provided by the Ministry of Defence. Wessex
chose not to pursue this project because of unacceptable contract terms.

SC TECHNOLOGY. In 1996, Wessex acquired SC Technology, which does business
under the name of Swiss Combi. Based in Switzerland, SC Technology is one of the
leading biosolid drying companies in the world. SC Technology designs, sells and
operates environmentally sound biosolid drying processes and markets recycled
biosolids for agriculture and land reclamation. SC Technology currently has
approximately 40 plants completed or under construction, located in more than
ten countries, primarily in Western Europe.

Volumes of biosolids are increasing worldwide. Historically, these
biosolids were supplied to farmers or disposed of at sea. Wessex believes that
the ban imposed on disposal of biosolids at sea, together with concerns from
food retailers about the recycling of untreated biosolids over agricultural land
and air pollution problems resulting from the incineration of biosolids, make
the biosolid drying process an attractive method of biosolid disposal for the
future. The Swiss Combi process uses a contained drying system to produce
pasteurized dried granules which are odor free and easy to handle and transport.
The granules, known as biogran, have a much lower bacterial count than digested
biosolids and can be safely sold as a soil conditioner. They also may be sold as
fuel.

MENDOZA, ARGENTINA

In May 1998, Enron, in a consortium co-led by SAUR, a French water company,
successfully bid to acquire a controlling interest in Obras Sanitarias Mendoza
S.A., a privatized company that holds a 95-year exclusive concession to provide
water and wastewater services to the majority of the Province of Mendoza,
Argentina. Enron has contributed to Azurix its 32.1% interest in Obras
Sanitarias Mendoza, the concession holder. SAUR also owns a 32.1% interest in
the concession holder, local private investors own a 3.3% interest, Italgas owns
a 2.5% interest, employees own a 10.0% interest and the Province of Mendoza owns
the remaining 20.0%. Obras Sanitarias Mendoza is currently operated by SAUR
under an operations agreement and is governed by a five-member board of
directors, two of which have been appointed by Azurix.

The concession is located in the desert bordering Chile at the base of the
Andes mountains. Its service territory covers six municipalities. The Mendoza
area has a strong economy, and is one of Argentina's fastest growing provinces.
Per capita revenue is among the highest in Argentina due to the petroleum and
mining industry activity in the area, and per capita water usage is among the
highest in the hemisphere.

The concession holder is charged with operating, maintaining and upgrading
its ten drinking water plants, 17 wastewater treatment plants as well as
associated distribution and collection networks to Mendoza. Obras Sanitarias
Mendoza serves over one million water customers and has 285,000 water
connections. Obras Sanitarias Mendoza provides wastewater services to 883,000
people and has 210,000 wastewater connections. The concession contract requires
Obras Sanitarias Mendoza to expand the water and wastewater connections in the
concession area over the next 10 to 15 years. Through 2015, approximately $180
million is expected to be spent on new connections, new water and wastewater
treatment facilities and system improvements. Obras Sanitarias Mendoza's assets
include raw water transportation pipelines and aqueducts, drinking water
treatment plants and other general assets.

Water supply comes primarily from the regional river, Rio Mendoza. The
surface water feeds by gravity to treatment plants. The remaining groundwater
comes from approximately 160 wells. Obras Sanitarias Mendoza uses four large
lagoon systems to provide the majority of wastewater treatment within the
concession area. Average billing is approximately $30 bi-monthly for water and
wastewater.

Obras Sanitarias Mendoza is required to meet standards of service
established by the special purpose regulatory body known as Ente Provincial de
Agua y Saneamiento and to make appropriate arrangements for the improvement and
extension of service. The standards of service include quality and availability
requirements, which are initially set by the concession contract. Each year, the
operator must submit an

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annual report that will specify, among other things, Obras Sanitarias Mendoza's
progress with respect to its plan of operation and expansion.

Obras Sanitarias Mendoza must pay the Province a yearly royalty based on
net operating revenues collected. This royalty is equal to 3.85% of net
operating revenues collected in the first five years of the concession and 9.98%
thereafter.

The concession may be terminated for fault of the concession holder under
any of the following circumstances:

- Repeated failure to provide service as required by the concession
contract

- Repeated violation of applicable environmental regulations

- Unjustified delays in completion of the then-current plan of operation
and expansion

- Willful withholding of information from the environmental regulator

- Failure to maintain adequate performance bonds

- Any change in the corporate structure of the concession holder or the
operator without the prior approval of the Province

The Province can undertake the partial or complete termination of the
concession for noncompliance with the terms of this contract or for public
interest reasons. In the event of a termination for public interest reasons, the
Province must compensate the concession holder for its lost investment. Obras
Sanitarias Mendoza believes it is in compliance with the concession contract in
all material respects. As the concession holder, Obras Sanitarias Mendoza would
be liable for any claims or damages, environmental or otherwise, relating to
this concession. As a shareholder, we believe that our potential liability is
limited to our investment in the concession holder.

CANCUN, MEXICO

In March 1999, we acquired for $13.5 million a 49.9% economic interest in
and the right to manage and operate the water and wastewater treatment
concession for Cancun and Isla Mujeres, Mexico. Desarrollos Hidraulicos de
Cancun, S.A. de C.V. is the concessionaire that holds the concession. Affiliates
of one of the former shareholders, Grupo Mexicano de Desarrollo, S.A., own an
aggregate 50.1% economic interest in the concessionaire. In February 1999, we
lent the concessionaire $15 million to permit it to retire a portion of its
indebtedness, and we may make additional loans of up to $10 million to initiate
improvements in the wastewater treatment system.

The concession was initially granted on the condition that the
concessionaire would invest capital in projects to provide services under the
concession. As a result of the devaluation of the Mexican peso in 1994, the
concessionaire was unable to meet some of its investment obligations and the
government of the State of Quintana Roo in August 1996 designated the state
regulatory authority, known as CAPA, to operate the concession. In February
1997, Grupo Mexicano and the concessionaire agreed with the state government
that, as a condition to reassuming operation of and retaining the concession,
the concessionaire would make the necessary investments and form an association
with an experienced operator of water concessions. In general, the parties
involved agreed on the following:

- The concessionaire would be responsible for adjusting its financial
statements and making pertinent payments in order to show financial
stability and sustainability

- The concessionaire and CAPA would review the capital expenditure program
for the period 1997-2000 and would implement it immediately after
approval

- The parties would reconstruct the concession agreement and develop a new
one with the National Water Commission (Comision Nacional de Agua) acting
as a mediator

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<PAGE> 65

The cost to the concessionaire for these investments is estimated at $44
million over the next five years. The concessionaire is required to pay to the
State of Quintana Roo an annual concession fee of 7.5 million pesos (in 1993
pesos), adjusted annually in accordance with changes in the Mexican consumer
price index. The concession extends to October 2023.

At the end of the concession term, and any extensions, the concessionaire
will be required to deliver to the government at no cost the facilities and
equipment used to provide services under the concession. The concession may be
revoked by the government in the event of a breach of the concession terms if
the concessionaire does not present a program to cure the breach within 30 days
of notice of default. The concession can be terminated if the concessionaire is
bankrupt, insolvent, liquidated or dissolved. The concession may also be revoked
upon the transfer of part or all of the concessionaire's rights under the
concession without government approval or if the concessionaire does not
maintain a performance bond in an amount equal to 10% of annual operating
revenues for the prior year.

Based on figures available at the date of acquisition, the concessionaire
serves a population of approximately 390,000 through 73,000 connections. An
estimated 65% of the concession's operating revenues are derived from the supply
of drinking water to tourist hotels, whose operating revenues are primarily U.S.
dollar based.

The operations and tariffs for water and wastewater systems in the State of
Quintana Roo are regulated by CAPA. The water tariff paid by the hotels,
commercial and industrial customers is adjusted monthly according to the change
in Mexico's consumer price index as published by the Mexican government. In
addition, the concession provides that the rate paid by the hotels will be
increased in the event of a variation of the Mexican peso/U.S. dollar exchange
rate in excess of 15% due to a short-term event. The remainder of operating
revenues come from residential and public services drinking water supply and
from wastewater services. Residential drinking water rates are adjusted annually
with changes in the Mexican minimum wage established by the minimum wage
commission. Currently, less than 40% of the wastewater in the Cancun urban zone
that is collected is being treated.

The tariff rates, which vary according to the customer class, resulted in
an average billed consumption of 7.95 pesos per cubic meter of water consumed in
1998. Operating revenues and expenses of the concessionaire in 1998 were 205
million pesos ($22.0 million) and 164 million pesos ($17.7 million),
respectively. Operating income in 1998 was 40 million pesos ($4.4 million).
These figures are estimated by management and have not been audited. The U.S.
dollar amounts have been translated based on the April 30, 1999 exchange rate of
9.3 pesos to one U.S. dollar.

We have three seats on the board of directors of the concessionaire, while
the 50.1% shareholders have two. We have the right to appoint the chief
executive officer, the chief financial officer and the chief operating officer
of the concessionaire. The 50.1% shareholders have the right to appoint the
chairman of the concessionaire's board and the non-voting board secretary.
Resolutions concerning major corporate actions and governance issues require
supermajority approval.

As the concessionaire, Desarrollos Hidraulicos would be liable for any
claims or damages, environmental or otherwise, relating to this concession. We
believe that our potential liability is limited to our investment in the
concessionaire.

PHILIP UTILITIES MANAGEMENT CORPORATION

We entered into an agreement on March 25, 1999 to purchase all of the stock
of Philip Utilities Management Corporation, a water and wastewater services
company headquartered in Hamilton, Ontario, Canada. We will pay a total of $107
million in cash, approximately 68% to Philip Services Corporation and
approximately 32% to Ontario Teachers' Pension Plan Board. The acquisition is
subject to closing conditions, including the receipt of third party and
regulatory consents, the receipt by Philip Services Corporation's secured
lenders of advice regarding the fairness of the purchase price and the release
of all liens, security interests or similar encumbrances on shares of Philip
Utilities. The acquisition is scheduled to close in the second quarter of 1999.

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Philip Utilities operates facilities in three of the ten provinces of
Canada, with a concentration of operations in Ontario, and in the United States
in the states of Arizona, Florida, Georgia, Louisiana, Maine, New Jersey, Texas
and Washington. In calendar year 1998, Philip Utilities had operating revenues
of $100 million. The following is a discussion of Philip Utilities' business
operations.

OPERATIONS, MANAGEMENT AND ENGINEERING. Philip Utilities' operations,
management and engineering business is divided along two business lines:
contract operations on the one hand and engineering and automation on the other.

Contract Operations. Philip Utilities' contract operations division
contributes approximately 30% of its operating revenues. Philip Utilities'
largest contract operation projects are in Hamilton-Wentworth, Ontario and
Seattle, Washington. In 1994, Philip Utilities won the contract to operate and
maintain the 192 million-gallon-per-day water treatment facility and the 110
million-gallon-per-day wastewater treatment facility of the regional
municipality of Hamilton-Wentworth. Under the operations agreement, Philip
Utilities receives an adjustable flat fee plus a portion of any cost savings
realized under the contract. Services provided under the operations agreement
include the day-to-day operation, maintenance, repair, and permitting and
compliance of the facility.

Philip Utilities' second largest contract operation project is the design,
build and operate contract for the 120 million-gallon-per-day Tolt River
Treatment Facility that is currently under construction in Seattle, Washington.
In 1996, Philip Utilities teamed with the engineering firm of Camp Dresser &
McKee, Inc. to win this 15-year contract which is renewable by the City of
Seattle for two additional periods of five years each. CDM Philip, Inc., an
80%-owned subsidiary of Philip Utilities, receives approximately $74.8 million
in design and construction fees. CDM Philip subcontracted the design/build
portion of the contract to Dillingham Construction, N.A., Inc. for approximately
$63 million. Construction of the Tolt River plant is currently on schedule with
the facility scheduled to commence operations in December 2000. Once operations
have commenced, CDM Philip is entitled to an annual service fee of approximately
$1.7 million, subject to modification for incentive bonuses, pass-through costs
and other adjustments.

Engineering and Automation. Philip Utilities' engineering and automation
activities are based in Ontario and Atlanta, Georgia. Philip Utilities provides
plant design, construction, project management, and process design and
engineering services primarily for municipal customers and other Philip
Utilities operations. Philip Utilities also provides process automation and
instrumentation services including design, assembly, testing and installation of
supervisory control and data acquisition systems and other computer control
technologies primarily for municipal customers. Philip Utilities' engineering
and automation activities contributed approximately 12% of its operating
revenues in 1998.

RESIDUALS MANAGEMENT. Residuals management accounted for approximately 16%
of Philip Utilities' operating revenues in 1998. Philip Utilities' residuals
management division is comprised of three complementary operations that apply
dewatering and land application methods to residuals management:

- Trimax Residuals Management, Inc. primarily serves the municipal water
and wastewater sector, with the majority of its operating revenues
derived from dredging and removing water from sewage lagoons and tanks.
Trimax is headquartered in Edmonton, Alberta and conducts operations in
the United States and Canada. Major contracts are held with the Greater
Vancouver Regional District, the cities of San Diego and Detroit, as well
as several pulp and paper companies. Trimax has built its business around
a mobile water removal technology that provides a great deal of
flexibility and versatility in the marketplace. The product of this
process is a manageable biosolid that is typically disposed of through
land application. Trimax accounted for approximately 63% of Philip
Utilities' residuals management operating revenues in 1998.

- Braemar Acres Limited processes industrial wastewater and municipal
biosolids for disposal through land application. Braemar Acres,
headquartered in Ontario, has existing operations that are principally
located within the province of Ontario and include disposal of lime
sludge for a sugar manufacturer, processing of paper sludge for five of
the six pulp and paper companies in eastern

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Ontario, waste food organics recycling, and biosolids for the
Hamilton-Wentworth facilities and the city of Niagara, Ontario. Braemar
Acres accounted for approximately 10% of Philip Utilities' residuals
management operating revenues.

- Enviroganics of Texas, Inc. is a Houston-based company that provides
wastewater biosolids management and residuals management services to over
165 wastewater treatment facilities in Texas. Enviroganics' services
include removal and processing of biosolids, on-site mobile water
removal, operation of customer's processing equipment and hauling and
disposal through land application of biosolids. Services are typically
rendered under purchase orders instead of long-term contracts.
Enviroganics accounted for approximately 25% of Philip Utilities'
residuals management operating revenues in 1998.

UNDERGROUND INFRASTRUCTURE REMEDIATION AND DEVELOPMENT. Philip Utilities
offers a wide range of underground asset management services to customers in the
United States and Canada. These services include closed circuit television
inspection, location mapping, as well as pipeline repair and rehabilitation.
Since 1996, Philip Utilities has focused on migrating from traditional pipe
rehabilitation to trenchless technologies. Philip Utilities employs a variety of
trenchless technologies for which it holds licenses in various geographic
territories. Among these licensed products are epoxy resins, polyurethane
fold-and-form pipe, a roll-down pipe product, two cured-in-place products and a
spot repair system. The underground infrastructure division contributed
approximately 40% of Philip Utilities' operating revenues in 1998.

OWNERSHIP OF WATER AND WASTEWATER ASSETS. In addition to its outsourcing
operations, Philip Utilities owns two utilities that serve approximately 3,000
end use customers in suburban areas around Houston, Texas: Southwest Utilities,
Inc. and Walker Water Works, Inc. These two utilities own and operate both water
and wastewater treatment services and are regulated by the Texas Natural
Resource Conservation Commission and the Environmental Protection Agency. This
is Philip Utilities' smallest division and contributed approximately 2% of its
operating revenues in 1998.

SUPPLIERS

We intend to achieve economies of scale in buying goods and services. In
addition, we expect to centralize purchasing arrangements to reduce costs and
improve quality. Wessex's only significant supplier of goods or services is
SEEBOARD plc, a subsidiary of Central and South West Corp., which supplies
electricity to approximately 100 of Wessex's sites. Wessex pays approximately
$6.4 million per year, which represents approximately 5% of Wessex's annual
operating costs. The contract was effective October 1, 1997 and runs for two
years. The price is based upon a negotiated pence amount per kilowatt hour for
each site. Wessex is not dependent on any single supplier, including SEEBOARD,
because its supplies are readily available from alternative sources at market
rates and on similar terms. None of Wessex's suppliers is affiliated with it.

RESEARCH AND DEVELOPMENT

Since our formation, we have established a link with the Water Research
Centre, which is conducting a U.K. industry-wide research and development
program that currently invests approximately $6.6 million each year in research
programs. The Water Research Centre is internationally renowned as the market
leader in water and wastewater technology. We will have a research department
based within the Water Research Centre at Swindon in the United Kingdom. The
Water Research Centre will also provide us with a service to monitor the
development of water and wastewater technologies across the world and with the
opportunity to access, and, when appropriate, invest in new technologies. Wessex
contributes approximately $160,000 per year to this program.

Wessex carries out its own research and development to improve the
reliability and effectiveness of its treatment systems. In-house research and
development projects include development of a mobile filter for wastewater
treatment and disinfection and membrane filtering technology. Wessex has spent
approximately $1.6 million on these two project areas in the last three years. A
third major project area is pasteurization

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of wastewater biosolids using the Swiss Combi heated drying technique. Wessex
has spent approximately $640,000 over the last three years in this area.

EMPLOYEES

As of February 28, 1999, we had approximately 145 employees, excluding
employees of Wessex. As of February 28, 1999, Wessex had approximately 1,440
employees, which includes approximately 50 employees at SC Technology. As part
of its efforts to improve operating efficiencies, Wessex has reduced the number
of its employees by approximately 500 employees since March 31, 1993, primarily
through attrition and voluntary retirement packages.

INSURANCE

We believe that our insurance arrangements, including self-insurance, are
customary for the industry and are adequate. Wessex, Mendoza and Cancun have
separate locally underwritten insurance policies covering employers liability,
public and products liability, excess public and products liability and their
motor fleets. Enron's corporate insurance program covers the direct exposures of
Azurix and the indirect exposures to Azurix from its less than wholly owned
subsidiaries, to the extent not covered by the subsidiaries' policies. Following
the offering, Azurix will continue to participate in Enron's corporate insurance
program. In the future, Azurix may establish a separate program for Azurix and
Azurix's subsidiaries.

LEGAL PROCEEDINGS

There are no legal or arbitration proceedings, including any that are
pending or threatened, of which we are aware that if adversely determined would
have a material adverse effect on our financial position, liquidity or results
of operations.

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REGULATORY MATTERS

The following is a summary of regulatory matters relating to water and
wastewater operations in the United Kingdom, Argentina and Mexico. In addition,
the following summarizes regulatory matters in the United States and Canada,
where we intend to operate water and wastewater assets in the future.

In general, most countries where we have invested, or intend to consider
investments, have drinking water quality and environmental laws and regulations.
We intend to invest in companies or projects that operate in material compliance
with drinking water quality and environmental laws and regulations. However, we
cannot guarantee that the due diligence we perform in advance of investing in an
entity will identify any or all noncompliance with environmental laws and
regulations by such entities.

Because the supply of clean drinking water and the treatment of wastewater
are essential societal needs, we anticipate that these activities will be
subject to at least some form of regulation wherever we do business. The nature
and extent of environmental laws and regulations vary from country to country
and there may be wide disparities in the requirements from one part of the world
where we do business to another. Generally speaking, compliance with these laws
and regulations is mandatory and penalties, as well as injunctive and other
relief, are usually available in the event of noncompliance. Moreover, these
laws and regulations may require improvements to water and wastewater systems
that will require additional capital and operating costs for us to remain in
compliance.

Changes in the nature of these laws and regulations, or in the level of
their enforcement, also have the potential to impact adversely our financial
results during the relevant period. These adverse impacts could cause our actual
financial results to differ materially from those we project, forecast, estimate
or budget. Moreover, changes in these laws and regulations may require
improvements in order to remain in compliance that can result in additional
capital and operating costs.

Where we operate water or wastewater companies serving end-users, we can
expect to be subject to regulation on the rates we may charge. The regulatory
regime will vary from jurisdiction to jurisdiction, but can be expected to
resemble in some respects the regime in place in the United Kingdom, Argentina
or Mexico.

Wessex has established a comprehensive environmental auditing program that
is designed to provide early identification of potential environmental problems
associated with its activities and to provide reasonable assurance that all
identified problems are properly and promptly addressed. We expect to use the
environmental auditing capabilities already established within Wessex to
evaluate potential environmental and other regulatory risks that may be
associated with water and wastewater systems, companies and concessions in which
we may invest. We will also use these capabilities to monitor environmental and
other regulatory compliance in all water and wastewater systems, companies and
concessions in which Azurix or one of its subsidiaries takes an active
management role. Despite the demonstrated effectiveness of this environmental
auditing program with respect to Wessex's operations, however, there can be no
assurance that this approach will be adequate to address and manage all such
risks associated with our business.

U.K. REGULATORY MATTERS

The economic aspects of the water industry in England and Wales are
principally regulated under the provisions of the Water Industry Act 1991.
Following privatization of the U.K. water industry, each of the water and
wastewater companies became regulated through a license and the regulatory
provisions of the Water Industry Act 1991 and regulations and orders thereunder.
The license designates the relevant company as a water and/or wastewater
undertaker in its own area and provides for the monitoring of the company's
performance by the Director General for Water Services and the Secretary of
State for the Environment.

In setting prices, the Director is currently required to allow water and
wastewater companies a projected rate of return sufficient to finance their
operations and attract the capital necessary for investments in infrastructures
required to meet environmental and other regulatory standards. The actual
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rates of return achieved by individual companies can vary significantly from the
projected rates of return assumed by the Director in setting prices.

Each water company is under a general duty to develop and maintain an
efficient and economical system of water supply within its license area. Each
wastewater company is under a general duty to provide, improve and extend a
system of public sewers and to maintain those sewers to ensure that its sewerage
region is effectively drained. In addition, discharges from wastewater treatment
plants must be licensed by the Environment Agency, and wastewater companies are
responsible for regulating discharges of industrial wastewater into sewers.
Contamination caused by wastewater discharged from a treatment plant may subject
the wastewater company to liability, including clean up costs.

The Director is responsible for ensuring that water and wastewater
companies comply with their license conditions. Conditions may be modified with
the consent of the licensee after the giving of public notice and consideration
of comments and objections. In the absence of consent, the only means by which
the Director can secure a modification is following a modification reference by
him to the U.K. Competition Commission. The Commission is required to
investigate and report on whether matters specified in the reference may be
expected to operate against the public interest and, if so, whether the adverse
public interest effect of those matters could be remedied by modification of the
conditions of the license. If the Commission makes adverse findings, the
Director must then modify the license accordingly.

A license may also be revoked or transferred to another company in
circumstances specified under law or in the license. These circumstances include
the failure to comply with an enforcement order made by the Secretary of State
for the Environment or the Director or the inability of the relevant water and
wastewater company to pay its debts.

WESSEX WATER SERVICES' LICENSE

Wessex's license continues indefinitely, or until such time as the
Secretary of State serves notice of revocation of the Wessex license. The
effective date of revocation, under the terms of Wessex's license, cannot occur
prior to 2014. In the event that Wessex becomes insolvent or it is determined
that Wessex has committed a material breach of its duties, the Secretary of
State, or, with his consent, the Director, may seek a special administration
order, under the terms of which Wessex's affairs, business and property may be
transferred to another company in order to ensure that Wessex's appointed
functions can be carried out. In either event, the legislation provides for
Wessex's assets to be transferred to the new replacement appointee on terms
approved by the Director or the Secretary of State, including as to
consideration to be paid by the new appointee. The license sets out the charging
formula imposed on Wessex, which is subject to review every five years. The
formula is tied to the retail price index plus an adjustment factor which can be
positive, zero or negative. The adjustment factor is set by the Director on a
case by case basis for each company at the review to bring the companies in line
with the target rate of return set by the Director. The license regulates the
fees that Wessex can charge new customers upon connecting them to the water or
wastewater network. It requires Wessex to fix its rates and prohibits Wessex
from unduly discriminating against any individual or class of customer with
respect to charges.

Wessex is required to maintain sufficient financial and managerial
resources to carry out the appointed business and necessary investment. The
license requires it to publish separate accounts, including on a current cost
accounting basis showing its regulated business separately from all other
businesses and activities. Regulated businesses, such as Wessex, are subject to
business practices limitations, such as restrictions on cross-subsidies, that
restrict affiliate dealings and promote competitive contracting. The license
also requires Wessex to put in place financial structures protecting a
sufficient amount of its assets so that its water and wastewater services could
still be provided in the event of Wessex's insolvency.

The license includes service targets which apply to Wessex and are
monitored by the industry regulator. The license also requires Wessex to pay
annual fees, based on Wessex's revenues, which are intended to cover the costs
of the regulation of the water industry. In 1998, Wessex paid approximately
$665,000 in such fees.

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The license has been modified as a condition of regulatory clearance of
Azurix's acquisition of Wessex to address regulatory concerns arising out of the
acquisition. In particular, the modification strengthens the financial
independence of Wessex Water Services' regulated business, providing of water
supply and wastewater services, by imposing the following:

- Restrictions on transfers of assets, guarantees, intercompany loans and
loans containing cross-default provisions

- A requirement that transactions with associated companies must be entered
into on an arm's length basis at market rates

- A requirement to maintain an investment grade rating for corporate debt
of Wessex Water Services

The license as modified also requires a dividend policy to be agreed with
the Director that ensures that Wessex Water Services retains sufficient funds to
finance its core activities and requires Wessex Water Services to conduct its
regulated business as if a separate public limited company. Enron gave a holding
company undertaking that requires, among other things, that Enron and its
affiliates give Wessex Water Services all information necessary for it to carry
out its obligations and to refrain from action that would cause Wessex Water
Services to breach its obligations. This undertaking also provides that the
board of Wessex Water Services must include at least three independent
non-executive directors of standing and relevant experience.

TARIFF RATES

The Director regulates prices and service levels. Price controls applicable
to each water and wastewater company are subject to review by the Director every
five years, but both the Director and the individual company may seek an interim
determination to adjust price limits between the periodic reviews in limited
circumstances.

Unlike "rate of return" economic regulation, such as exists for many U.S.
industries, regulation in the United Kingdom generally uses forms of "price
limitation." This is intended to reward companies for efficiency and quality of
service to customers. The U.K. regulatory system allows companies to retain for
a period of five years any savings attributable to efficiencies that they are
able to achieve. In the case of water, the main instrument of economic
regulation is a price limitation formula set out in each company's license. This
formula limits charges made by water and wastewater companies for a basket of
principal regulated services. The limit is expressed as a percentage change by
reference to the retail price index. This adjustment can be positive, zero or
negative and is determined in light of past operational efficiencies, assumed
future operational efficiencies, investments to meet water quality standards,
expenditures to enhance security of supply and service levels and an appropriate
return on capital.

During the prior periodic review, completed in July 1994, the Director
developed a structure for determining adjustment factors based on a matrix of
purpose and cost categories. The purpose categories comprised of base service
provisions, the maintenance of existing levels of service, as well as enhanced
service levels, the water supply/demand balance and obligatory quality
enhancements. The limits on Wessex's real price changes, i.e., in addition to
the retail price index, resulting from the 1994 periodic review were +1.5% for
each year until March 31, 2000.

The Director is currently conducting a periodic review, to conclude in
November 1999 when he will set new price limits for the period from April 1,
2000 to March 31, 2005. As part of the current review process, on October 29,
1998, the Director published a consultation paper setting out proposed ranges
for bills for the period from 2000 to 2005. The Director has confirmed that, on
the basis of past efficiencies achieved by water companies and evolving views
about the cost of capital, he expects substantial price reductions in April
2000. However, the U.K. Government has recently proposed a five-year program of
mandatory capital expenditures by the water companies aimed at quality and
environmental improvements. This program is estimated to cost the industry $13.3
billion in the aggregate over the five years. In setting

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the new price adjustment factor, the Director will make an allowance for the
investment needed to meet new quality and environmental obligations.

The Director proposed, in the case of Wessex, that expected average
household bills, in real terms, could be over 17.5% lower in 2000-2001 than in
the previous year, but that bills overall would rise, by 2004-2005, to a level
exhibiting only a small reduction compared with the expected 1999-2000 bill.
This would constitute a material increase in prices following the one-time
reduction in 2000-2001. The Director's proposal did not take into account the
recent capital expenditure proposals of the U.K. Government. The Director has
invited views on whether the one-time reduction is appropriate or whether the
initial reduction could be modified so that bills could be broadly stable over
the five year period. The Director's estimates for future bills assume that the
scope for efficiency savings across the industry in operating costs could vary
between 2% and 4% a year, and that for capital expenditure the average overall
scope for efficiency is between 10% and 15% over the five year period. They also
assume a post-tax cost of capital of 5.25% for all but the smaller companies.

The Director held formal meetings with each of the water and wastewater
companies during January and February 1999 to discuss the issues raised by a
proposed price reduction including the responses of the public. In its April
1999 business plan filed with the Director, Wessex proposed stable prices from
1999-2000 to 2000-2001, with prices gradually increasing to 18% higher than
current levels in 2005, primarily to fund capital expenditures mandated by the
new environmental standards. The business plan will be considered by the
Director as part of the periodic review. The Director has stated that he will
publish his draft determination of new price limits to run from 2000 to 2005 in
July 1999, with his final decisions made in November 1999. If a company
disagrees with the Director's price determination, it may challenge his proposal
by requesting a reference to the Competition Commission. Although we are unable
to predict the precise outcome of the current U.K. rate review, if Wessex were
required to cut its prices as originally proposed by the Director, Wessex's
revenues would be reduced by approximately 17.5% and its earnings would be
reduced materially. However, we would not expect that this would have a material
adverse effect on Azurix's financial position. At the time of the acquisition of
Wessex, we took into consideration the pending rate review in our valuation of
Wessex.

CHANGE TO REGULATORY REGIME

On June 30, 1997, the U.K. Government launched a review of the framework
for the regulation of all utilities, and in March 1998 set out its proposals in
a consultation paper.

In July 1998, following the consultation, the U.K. Government published its
response. Among other things, it suggested that:

- Consumer protection should be the Director's primary duty achieved
wherever possible and appropriate through promoting effective
competition, but also taking into account the need to ensure that
regulated companies are able to finance the carrying out of their
functions

- There should be consumer representative bodies to promote consumer
interests

- A clearer link should be made between the prices utilities can charge and
the customer service standards they achieve

- Full information should be available on companies' performance on
customer service standards and on the links between this performance and
the remuneration of directors

- Ministers should issue statutory guidance on social and environmental
objectives

On publishing the response, the Secretary of State for Trade and Industry
stated an intention to introduce legislation to implement the proposals as soon
as parliamentary time permits. In his March 1999 Budget Speech, the Chancellor
of the Exchequer announced that the Deputy Prime Minister will review
competition in the water industry.

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DRINKING WATER QUALITY AND ENVIRONMENTAL REGULATION

The water and wastewater industries in England and Wales are subject to
numerous environmental regulatory requirements under the Water Industry Act
1991, the Water Resources Act 1991 and the Environment Act 1995. The Water
Industry Act 1991 established a new, more extensive and more stringent quality
regime for the water and wastewater industry through the creation of the
National Rivers Authority, since replaced by the Environment Agency, and the
Drinking Water Inspectorate.

The Drinking Water Inspectorate is responsible for ensuring that water
supplies meet the standards set out in the U.K. Water Quality Regulations. The
licensed Inspectorate conducts technical audits to assess annually the quality
of the drinking water supplied by the licensed companies. If any company fails
to meet the relevant water quality standards, the Inspectorate may require it to
take any necessary remedial action.

Under the Water Resources Act, the Environment Agency may require persons
to take precautions against pollution, may prohibit or restrict activities
likely to cause pollution in areas designated by the Secretary of State for the
Environment, and may issue consents to discharge matter from a drain or sewer.
When reviewing existing consents and issuing new ones, the stated practice of
the Environment Agency is to seek to set conditions at the level required to at
least maintain and, where appropriate, improve the quality of the receiving
waters.

The activities of the U.K. water and wastewater companies are also affected
by the requirements of European Union directives, including the Drinking Water
Directive, the Bathing Waters Directive and the Urban Wastewater Treatment
Directive, each of which has been brought into force in the United Kingdom. The
environmental systems which Wessex has in place are designed to comply with
European Union and U.K. requirements.

In May 1997, the Secretary of State for the Environment announced a review
to examine ways in which environmentally damaging abstractions can be equitably
curtailed. The review will consider arrangements to reduce abstractions under
existing licenses and for revoking licenses in areas where pumping causes
significant environmental damage. He has also announced that the Director will
be setting mandatory targets to reduce leaks from water supplies, which will be
reviewed annually. Failure to meet the targets would carry penalties and could
ultimately lead to a water and wastewater company being put into the hands of an
administrator appointed by the Director.

In view of the age and history of many sites owned by Wessex, Wessex may
incur liability for sites that are found to be contaminated, resulting in
increased costs of managing or cleaning up such sites. Environmental legislation
requires the polluter (or if the polluter cannot be found, the owner or
occupant) of contaminated land to clean up any contamination which causes, or is
likely to cause, significant harm to the environment. Polluters are also
required to clean up any pollution of water sources. Other proposals which may
impose strict liability for environmental damage are also under consideration by
the European Union. Wessex expects that the direction of future changes will be
towards further tightening of controls. However, Wessex does not believe that
any liability which it may incur under environmental legislation or published
European Union directives will have a materially adverse effect on its results
of operations, financial position or liquidity.

ARGENTINE REGULATORY MATTERS

GENERAL REGULATION OF WATER

Argentina has a federal system of government that grants significant
regulatory powers to the provinces. Under the Argentine Constitution, each
province has jurisdiction over its own natural resources, including water, and
the legal power to create standards to protect such resources.

Federal laws apply to areas within national jurisdiction, such as the
federal capital, and to matters which affect the nation as a whole and not
merely one province. At the national level, the Secretariat of Natural Resources
and Sustainable Development is principally responsible for the protection of the

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environment, and the Ministry of Health and Social Action is principally
responsible for the protection of public health. The Secretariat of Natural
Resources and Sustainable Development also is responsible for the development
and implementation of national water policy and for establishing priorities of
uses for multiple-use water resources.

Under the Argentine Constitution, the provision of water services at the
local level generally is within the authority of the provinces and
municipalities. In the Province of Mendoza, for example, the Ministry of Public
Works and the Environment is granted general authority over all non-agricultural
water services, and environmental regulation. Concessions for the provision of
water services are granted by the provincial government by statute and decree,
with oversight vested in the Ministry of Public Works and in a special purpose
regulatory body known as EPAS. Decisions of EPAS may be reviewed by the Minister
of the Ministry of Public Works and the Governor of the Province of Mendoza.

REGULATION OF WATER SERVICE AND TARIFF RATES

In Argentina, provision of local water service and tariff rates are
generally controlled by provincial regulatory authorities, through a framework
established by statute and concession contracts. Governmental acts are subject
to judicial review in Argentine courts, but there is no right to appeal
provincial decisions setting tariffs to the Argentine federal government. Where
a water service concession is held by a company substantially owned by a U.S.
company, however, recourse may be available through international arbitration
under the Bilateral Investment Treaty between the United States and Argentina,
which provides for fair and nondiscriminatory treatment of investments.

The Province of Mendoza provides an example of the process of granting
concessions and setting tariffs on a provincial level in Argentina. In Mendoza,
the basic regulatory framework is established by provincial statutes and
decrees. Within that framework, EPAS and the Ministry of Public Works regulate
the provision of service and the setting of tariffs.

TARIFFS. In Mendoza, tariffs are proposed by the local regulatory agency,
EPAS, and then submitted to the Minister of the Ministry of Public Works, the
provincial legislature and Governor for approval. EPAS must recommend rate
regimes with an aim to reflect efficient costs of operation, maintenance and
expansion and renewal of the water system, including debt service. EPAS also
strives to promote rational and efficient use of services and resources leading
to a balance of supply and demand, and to address sanitation and social
objectives. EPAS is authorized to establish tariff rates that require some users
to pay rates that subsidize the cost of providing service to other users.
Argentine law provides that in setting tariffs, EPAS must take into account
costs of operations, maintenance, amortization of services and a "reasonable"
rate of return for the concessionaire in the context of an efficient level of
operation. The basic tariff regime is to be reviewed every five years.

The current tariff schedule imposes a fixed monthly charge per customer,
based on a formula which takes into account the customer's land area, types and
size of structures and uses of the land, that normally will remain unchanged
until the new tariff regime is implemented. Changes in current tariffs are
allowed for several enumerated reasons, including if operating costs increase or
decrease by 4% as reflected in official national indices, if there is a change
in the national "convertibility law" which establishes a 1:1 exchange rate of
the peso with the dollar, if there are changes in the capital program due to
government or regulatory reasons, or if there are changes in taxes, other than
income taxes.

A new tariff regime is to be implemented in Mendoza within the next several
years based on a metered charge per liter of water used. The concession contract
contains assurances that the concessionaire will receive the same level of
revenue as under the prior regime, thus allowing the concessionaire to retain
efficiency gains and pass through changes in costs. The contract contains no
provision for direct pass through for inflation or revisions in tariffs for
capital expenditures. The concessionaire may request adjustments to the new
tariff if any of the following occurs:

- The new tariff lowers consumption significantly

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- The concessionaire shows that the new tariff does not promote rational
use of the assets and capital employed for the operations of the company
or does not allow it to carry out the obligations of the company

- The concessionaire shows that most of the benefits of cost reductions are
inuring to consumers

ENVIRONMENTAL MATTERS

Beginning in the early 1990s, Argentina began addressing environmental
matters systematically at the federal level. For instance, in 1991, the
Argentine government enacted a law establishing the Secretariat of the
Environment and calling for a balancing of economic development with the
conservation of natural resources, the improvement of the environment and the
prevention and amelioration of the effects of pollution. In August 1994, the
Argentine Constitution was amended to assure the right of all residents of
Argentina to a healthy environment and granted the Argentine government
authority to establish minimum standards of environmental protection which are
to be implemented by the provinces. The 1994 amendments to the Constitution also
provide that damage to the environment must be repaired immediately in
accordance with applicable law, and prohibit the importation of actually or
potentially toxic or radioactive waste. In 1995, the Argentine government
initiated a program to protect the environment by promulgating rules regarding
water, land, air and noise pollution and hazardous substances.

Throughout Argentina, the provinces take the lead in regulating discharges
of pollutants into waterways. These provinces typically set permissible
standards for pollutant levels in the discharges, issue permits and enforce
them. In Mendoza, wastewater discharges are regulated at the provincial level by
the Ministry of Public Works, which has adopted laws respecting water quality.
As in most provinces in Argentina, the Ministry of Public Works issues permits
and regulates discharges of pollutants into water bodies. In addition, the
concessionaire is required to comply with the drinking water quality standards
set by the concession contract and enforced by EPAS. The Argentine government
can enforce the provisions of the Argentine Civil and Criminal Codes against the
concessionaire.

Most provinces in Argentina have also adopted their own regulations for air
and waste as well. The various provincial laws establish different compliance
and enforcement requirements.

MEXICAN REGULATORY MATTERS

WATER PROVISION ISSUES

Article 27 of the Mexican Constitution reserves water resources to the
nation. Article 115 of the Mexican Constitution places responsibility for
providing public services, including water and wastewater treatment, on the
municipalities with the participation of the State when required by law. The
Ministry of Environment, Natural Resources and Fisheries, through the National
Water Commission, is responsible for:

- Assigning water rights and discharge rights to users and assessing the
relevant fees

- Enforcing water-related environmental regulations

- Planning the efficient development of water resources

- Developing regulatory, legal and financial structures for water
concessions at the municipal level with an emphasis on private
participation

- Providing technical assistance to local water authorities and advising on
project feasibility

- Providing financial support for priority water projects, particularly in
low-income areas

The states and municipalities are responsible for setting conditions for
concessions and for establishing a tariff structure for all customer groups,
collecting payments from customers and paying the National Water Commission for
use of water rights. The Cancun concession is regulated by Concession Integral
de los Servicos de Agua Potable, Alcantarillado Sanitario y Saneamiento,
referred to as CAPA, an agency of

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the State of Quintana Roo. One of the requirements of the concession is that the
concessionaire achieve and maintain a 95% connection rate for water and
wastewater for the population. Changes to the connection rate requirement will
be subject to the mutual consent of both CAPA and the concessionaire.

The Governor of the State of Quintana Roo appoints the members of CAPA. If
the Governor is not supportive of the concessionaire, CAPA may be less inclined
to approve concessionaire initiatives and less understanding of problems it
encounters. Azurix believes Desarollos Hidraulicos, the concessionaire, has good
relations with the state's governor elect.

TARIFF RATES

The tariff rates are set by CAPA and are based on the principle of full
recovery of operations and maintenance costs and can be revised to maintain the
economic equilibrium of the concession. There is no provision that tariffs
should provide a return on equity or permit the concessionaire to earn a profit.

Initial tariffs were set when the concessionaire was first awarded the
concession in October 1993. At current levels, the tariffs are sufficient to
cover cost of operations, capital expenditures required under the concession and
return on investment. These expenditures should not necessitate a real tariff
increase over the term of the concession. However, should significant,
unexpected capital expenditures be required, the concessionaire can propose to
CAPA a tariff increase.

CAPA has indicated that it intends to change the tariff rate in the near
term to eliminate the cross-subsidy between water and wastewater. Currently,
wastewater service is charged a flat rate of 20% of the water bill, regardless
of actual usage. This would have the effect of increasing wastewater rates and
reducing water rates. If the concessionaire wants to increase rates in real
terms, it will be required to submit a rate case to CAPA, with supporting
economic and financial documents explaining the reason for the increase. In all
cases, the real rate for the residential and communal customer classes shall not
exceed the combined operation and maintenance cost of supplying those customers.
The concession will be evaluated every five years to determine whether real
tariff increases are justified. However, the concessionaire may propose real
increases at any time, though CAPA's consent must still be obtained.

Under the terms of the concession amendments, the concessionaire is
permitted to disconnect a customer for non-payment.

ENVIRONMENTAL MATTERS

The concessionaire has represented to Azurix that it is and has been in
compliance with all state and federal environmental standards associated with
the operation of the concession and that there are no outstanding non-compliant
environmental issues with the state and federal agencies associated with the
concession's operation. If the representation made by the concessionaire is
incorrect, then any environmental liability will be a liability of the
concessionaire. In any event, the concessionaire and an affiliate of the former
shareholders must indemnify Azurix up to $300,000.

The wastewater plants operated by the concessionaire are designed to
discharge an effluent containing no more than 30 mg/l of total suspended solids
and biochemical oxygen demand. The Mexican federal quality criterion for the
saltwater injection discharge that is operated by the concessionaire is 70 mg/l
of total suspended solids and biochemical oxygen demand. With the completion of
the plant under construction, the existing biosolid management system will need
to be modified or expanded to manage the disposal of the additional volume of
biosolids that will be produced, and other environmental systems will need to be
reevaluated for ongoing operations. The majority of the planned capital
expenditures is dedicated to the improvement of the wastewater collection and
treatment system, and we believe that the amounts planned are sufficient to meet
treatment goals and environmental regulations.

U.S. REGULATORY MATTERS

The business sectors in which we intend to operate in the United States are
generally highly regulated by national, state and local laws and regulations.
Although we do not currently have operational assets in

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the United States, compliance with these regulations will likely be an important
aspect of our operations in the future.

TARIFF RATES

In the United States, the rates for water and wastewater services are
generally subject to state and local laws and regulation. Although the system is
highly fragmented among jurisdictions, most jurisdictions in the United States
utilize "rate of return" economic regulation in setting water and wastewater
rates. Under rate of return economic regulation, the service provider is allowed
to recover its reasonable and necessary operations and maintenance expenses, and
a recovery of and a reasonable return on its invested capital. In most
jurisdictions, a water or wastewater service provider is required to keep a
current set of tariffs on file with the governing regulatory authority. A
service provider generally can charge less than the approved tariffs. Typically,
a service provider cannot change its rates without the approval of the governing
regulatory authority. We can give no assurance regarding our ability to obtain
approvals for rate changes, given the vast number of regulatory authorities with
jurisdiction over water and wastewater service in the United States, and the
fact that decisions regarding rate changes are often subject to political, as
well as economic, factors.

DRINKING WATER QUALITY

The Safe Drinking Water Act directs the EPA to set drinking water standards
for the approximately 55,000 community water supply systems in the United
States. The Safe Drinking Water Act Amendments of 1996 bring important changes
to the regulation and financing of water systems. The amendments have several
potentially significant regulatory initiatives, which include the following:

- Recent adoption of two rules that may require more sophisticated
treatment. First, the disinfectants and disinfection by-products rule,
establishes maximum residual disinfectant levels for chlorination and
maximum contaminant level goals for potentially harmful disinfection
by-products. Second, the enhanced surface water treatment rule focuses on
treatment requirements for waterborne pathogens, particularly
cryptosporidium.

- A requirement that the EPA list 30 previously unregulated contaminants
for monitoring, risk assessment, and potential regulation at least once
every five years. The new Act also specifies that the EPA shall study
radon, arsenic and sulfates and propose rulemakings in 1999, 2000 and
2001, respectively, if the EPA determines that these chemicals threaten
the public health. Such a program poses the risk of additional
contaminants being regulated as the EPA implements this research, with
the attendant risks of potentially increased capital and operational
costs.

- Adoption of regulations to reduce lead and copper in drinking water.
Water providers that exceed specified levels of lead and copper in
drinking water may be required to perform additional monitoring and
develop measures to reduce the lead and copper content.

The EPA has other long-term plans to develop regulations governing the
treatment of drinking water, such as the recycling of filter backwash into
influent streams at public utilities and additional groundwater disinfection. It
is unclear what precise form these and other regulations will take, so potential
regulatory risks and costs of compliance cannot be evaluated at this time. As is
true for any drinking water provider, if we operate water assets in the United
States, we will face the risk that water we will provide could be contaminated,
including for reasons outside our control and such contamination could expose us
to regulatory sanctions and potential liability for injury to persons and
property.

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ENVIRONMENTAL MATTERS

Among other things, environmental laws and regulations in the United States
generally set requirements for:

- The quality of the discharges from treatment facilities

- The handling and disposal of biosolids from treatment facilities

- The management of associated materials and wastes

- Good housekeeping practices for the management and monitoring of the
operations

We intend to invest in companies or projects that operate in material
compliance with environmental laws and regulations. It is impossible, however,
to predict how the precise regulatory framework governing companies in which we
will invest will operate.

Changes in environmental laws and regulations, or in the level of their
enforcement, may adversely impact our financial results. These adverse impacts
could cause our actual financial results to differ materially from those we
project, forecast, estimate or budget. Moreover, changes in these laws and
regulations may require improvements in order to remain in compliance that can
result in additional capital and operating costs. Environmental protection
statutes in the United States typically provide for the imposition of
substantial civil and criminal penalties, as well as the possibility of permit
revocation and corrective action orders, for violations of their requirements.
These laws may also provide for retroactive, strict liability without regard to
a party's negligence or fault.

The Federal Water Pollution Control Act, known as the "Clean Water Act,"
establishes a system of standards, permits and enforcement procedures for the
discharge of pollutants from industrial and municipal wastewater sources. The
law requires permits for discharges from water treatment facilities and sets
treatment standards for industries and wastewater treatment plants. Discharge
permits issued under the Clean Water Act are subject to renewal once every five
years. When discharge permits are renewed and reissued, it is customary for the
EPA or the state agency issuing the permit to impose more stringent discharge
limitations in the new permit. In addition, the EPA and the states have been
establishing new standards for bodies of water that receive wastewater treatment
plant discharges and these new standards may result in the imposition of more
stringent effluent limitations as discharge permits are renewed. Compliance with
these requirements is monitored closely and the Clean Water Act provides the EPA
with an array of enforcement mechanisms for companies that fail to comply,
including penalties and injunctive relief. Additionally, the EPA has recently
published regulations of the use and disposal of biosolids when they are applied
to land or incinerated. Although controls on biosolid disposal may be tightened,
we believe it unlikely that the EPA would take drastic measures such as banning
the land application of biosolids. Although we cannot predict the nature of
these and other regulations under the Clean Water Act, we do not believe that
such regulations will materially harm our business.

Other U.S. environmental laws and regulations may also impact Azurix. These
include the Clean Air Act, the Resource Conservation and Recovery Act, and the
Comprehensive Environmental Response, Compensation and Liability Act. Generally
speaking, responsibility for implementing and enforcing the regulations
promulgated by the EPA under the Clean Air Act and RCRA rests with individual
states, whereas CERCLA is administered by the EPA itself. In some instances,
state regulations have established standards that are more demanding than the
federal standards. Although we anticipate that Azurix's industrial wastewater
treatment services business will focus primarily on the operation and management
of on-site wastewater treatment facilities, Azurix may also operate and manage
facilities that receive and treat third party industrial wastewater that is
generated at an off-site location. Biosolids and other residues resulting from
the treatment of industrial wastewater, particularly wastewater from third party
off-site generators, may be subject to classification as "hazardous waste" under
RCRA and consequently become subject to more stringent handling and disposal
requirements imposed under RCRA.

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We believe that Azurix possesses the expertise necessary to comply with all
U.S. environmental laws applicable to Azurix's operations. We also expect that
our U.S. operations will be subject to a comprehensive environmental auditing
program similar to the program that Wessex has implemented for operations in the
United Kingdom that is designed to provide early identification of potential
environmental problems and to provide reasonable assurance that identified
problems are properly and promptly addressed. Nevertheless, there can be no
assurance that our operations will comply with all environmental laws at all
times.

CANADIAN REGULATORY MATTERS

Although we do not currently operate in Canada, Philip Utilities, which we
have agreed to acquire, has operations in Canada. Water and wastewater treatment
operations in Canada are subject to comprehensive federal, provincial and local
laws, regulations and guidelines pertaining to the provision of drinking water
and wastewater treatment services, as well as protection of the environment.
These laws and implementing regulations and guidelines establish standards for
the quality and quantity of effluent discharged from wastewater treatment
facilities, the handling and disposal of biosolids and other generated wastes
and materials, and the treatment and distribution of drinking water to
customers. Water and wastewater treatment facilities may only be constructed
after required environmental permits, certificates and approvals have been
obtained from appropriate governmental agencies. These facilities must then be
operated in compliance with the terms and conditions found in those permits,
certificates and approvals. Some Canadian provinces also regulate and control
the quality of drinking water, using standards relating to the design,
construction and operation of water facilities that may be more burdensome than
federal requirements. Moreover, there are extensive federal and provincial laws,
regulations and guidelines relating to the proper management and safe control of
biosolids and other wastes and materials that are accumulated at water or
wastewater treatment facilities and require proper disposal. The failure to
comply with these laws, regulations and guidelines or any applicable permits,
certificates and approvals may result in the assessment of fines, penalties or
administrative orders.

We are currently evaluating the regulatory compliance status of a number of
water and wastewater treatment operations in Canada that Azurix hopes to acquire
within the next year. We believe that technical and operating personnel at
Azurix possess the expertise necessary to ensure that any water or wastewater
treatment concessions acquired in Canada will be operated in compliance with
applicable Canadian laws, regulations and guidelines, but there can be no
guarantee that these operations will comply with all environmental laws,
regulations and guidelines at all times. Any new environmental laws, regulations
and guidelines, changes to existing laws, regulations and guidelines, or more
stringent terms and conditions in permits, certificates or approvals relating to
facilities we operate may result in additional regulatory compliance costs that
may or may not be recoverable through rate increases. Nevertheless, we do not
expect any new or changed laws, regulations and guidelines or the modification
of any permits, certificates or approvals to be any more burdensome to the
operations of Azurix than any other water and wastewater treatment services
company performing similar operations in Canada.

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<PAGE> 80

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table provides information regarding our executive officers
and directors.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Rebecca P. Mark...................... 44 Director, Chairman and Chief Executive Officer
Rodney L. Gray....................... 46 Director and Vice Chairman, Finance, Risk
Management and Investments and Chief Financial
Officer
W. Nicholas Hood..................... 63 Director and Vice Chairman
John C. Ale.......................... 44 Executive Director and General Counsel
Alex Kulpecz......................... 45 Executive Director, Europe, Middle East, Asia,
Africa
Amanda K. Martin..................... 38 Executive Director, Americas
Edward N. Robinson................... 53 Executive Director, Strategy and Corporate
Development
Colin F. Skellett.................... 53 Executive Director, Technical and Operating,
Environmental and Safety Services
John H. Duncan....................... 71 Director
Kenneth L. Lay....................... 56 Director
Jeffrey K. Skilling.................. 45 Director
Joseph W. Sutton..................... 51 Director
John Wakeham......................... 66 Director
Herbert S. Winokur, Jr. ............. 55 Director
</TABLE>

Rebecca P. Mark has served as Director, Chairman and Chief Executive
Officer of Azurix since July 1998. Ms. Mark has served as Vice Chairman of Enron
since May 1998, and, until recently, was Chairman of Enron International Inc.
since January 1996 and Chairman and Chief Executive Officer of Enron Development
Corp. since July 1991. She was also Chief Executive Officer of Enron
International from January 1996 to May 1998 and Vice President and Chief
Development Officer of Enron Power Corp. from July 1990 to July 1991. Enron
International Inc., Enron Development Corp. and Enron Power Corp. are wholly
owned subsidiaries of Enron. Ms. Mark is also a Director of Brunswick Corp.

Rodney L. Gray has served as Director of Azurix since July 1998, as Vice
Chairman, Finance, Risk Management and Investments and Chief Financial Officer
of Azurix since November 1998 and Executive Director, Finance, Risk Management
and Investments of Azurix from October 1998 until November 1998. Mr. Gray was
Executive Vice President, Finance of Enron International from January 1997 until
he joined Azurix. In addition, Mr. Gray was Chairman and Chief Executive Officer
of Enron Global Power & Pipelines L.L.C. from June 1995 until November 1997 and
was also President of Enron Global Power & Pipelines L.L.C. from November 1995
to November 1997. Mr. Gray also served as a Managing Director of Enron
Development Corp. from August 1995 through December 1996, as Chairman and Chief
Executive Officer of Enron International from June 1993 to December 1995, and as
Senior Vice President, Finance & Treasurer of Enron from October 1992 through
June 1993. Mr. Gray is also a Director of Harmon Industries Inc.

W. Nicholas Hood has served as Director and Vice Chairman of Azurix since
October 1998 and as Chairman of Wessex since September 1989. From 1987 to 1989,
Mr. Hood served as Chairman of Wessex Water Authority, Wessex's predecessor. He
is Chairman of MHIT plc and is a Non-executive Director of Winterthur Life U.K.
Ltd. and Commercial Union Environment Trust plc, President of the International
Water Services Association and a Member of the Water Training Council. Mr. Hood
is Deputy Chairman

75
<PAGE> 81

\of Business in the Community, a Member of The Prince's Council, Chairman of
@Bristol and a Director of the Harbourside Foundation and of the Harbourside
Center.

John C. Ale has served as Executive Director and General Counsel of Azurix
since December 1998. Prior to joining Azurix, Mr. Ale was with the law firm of
Vinson & Elkins L.L.P. for more than 17 years, and was a partner for more than
12 years. From December 1996 to October 1998, Mr. Ale served as managing partner
of the London office of Vinson & Elkins. From July 1993 to October 1998, he was
chairman of Vinson & Elkins' project finance and development practice. Prior to
joining Vinson & Elkins, Mr. Ale served as law clerk to the Honorable Warren E.
Burger, then Chief Justice of the United States.

Alex Kulpecz has served as Executive Director, Europe, Middle East, Asia,
Africa of Azurix since September 1998. From October 1995 to September 1998, Mr.
Kulpecz served as Director of Development for Russia, Central/Eastern Europe,
Latin America and Africa for Shell International Gas & Power. Prior to that
time, he led the reorganization teams for Shell International's exploration and
production business in The Hague, acted as Senior Management Liaison for Shell
International's oil and gas production business in Europe and the United Kingdom
and held management positions in the Middle East and the United Kingdom.

Amanda K. Martin has served as Executive Director, Americas of Azurix since
September 1998. Commencing in 1991, Ms. Martin served in various positions with
Enron Capital & Trade Resources Corp., including President of Energy and Finance
Services from January 1998 to September 1998, Managing Director and Vice
President of Business Ventures and Asset Management from September 1996 to
January 1998, Vice President of Business Ventures and Asset Management from
April 1994 to September 1996, and Senior Counsel from March 1993 to April 1994.

Edward N. Robinson has served as Executive Director, Strategy and Corporate
Development of Azurix since November 1998. Prior to joining Azurix, Mr. Robinson
served as Member of the Executive Committee from 1992 to 1998, Executive Vice
President and Manager, The Private Bank, from 1995 to 1998 and Executive Vice
President and Manager, Investment Banking from 1992 to 1994 of Chase Bank of
Texas, formerly Texas Commerce Bank. Mr. Robinson also served as Vice President
and then Director from 1983 to 1989 and Managing Director from 1989 to 1992 of
The First Boston Corporation.

Colin F. Skellett has served as Executive Director, Technical and
Operating, Environmental and Safety Services of Azurix since October 1998 and as
Chief Executive of Wessex since January 1995. Mr. Skellett served as Managing
Director of Wessex from September 1989 to January 1995. Mr. Skellett is also
Chairman of Wessex Water Services Ltd. and is the U.K. representative on the
European Union of National Associations of Water Suppliers and Waste Water
Services.

John H. Duncan has served as Director of Azurix since March 1999. Mr.
Duncan's principal occupation has been investments since 1990. Mr. Duncan is
also a Director of Enron, EOTT Energy Corp., the general partner of EOTT Energy
Partners, L.P., Enron Oil & Gas Company, Chase Bank of Texas, National
Association and Group 1 Automotive Inc.

Kenneth L. Lay has served as Director of Azurix since November 1998. Mr.
Lay has been a Director of Enron since 1985 and a Director of Enron Oil & Gas
Company since 1985. For over five years, Mr. Lay has been Chairman of the Board
and Chief Executive Officer of Enron. Mr. Lay is also a Director of Eli Lilly
and Company, Compaq Computer Corporation, EOTT Energy Corp. and Trust Company of
the West.

Jeffrey K. Skilling has served as Director of Azurix since November 1998.
Mr. Skilling has been a Director of Enron since 1997. Since January 1, 1997, Mr.
Skilling has served as President and Chief Operating Officer of Enron. From June
1995 until December 1996, he served as Chief Executive Officer and Managing
Director of Enron Capital & Trade Resources Corp. From August 1990 until June
1995, Mr. Skilling served Enron Capital & Trade Resources Corp. in a variety of
senior managerial positions.

Joseph W. Sutton has served as Director of Azurix since March 1999. Mr.
Sutton has served as President of Enron International, Inc. since January 1996
and its Chief Executive Officer since May 1998.

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<PAGE> 82

From January 1996 to May 1998, he also served as Enron International's Chief
Operating Officer. From 1995 to January 1996, Mr. Sutton served as President and
Chief Operating Officer and from 1992 to 1995 was a Vice President of Enron
Development Corp. Before joining Enron Development Corp., Mr. Sutton served as a
career officer in the U.S. Army.

John Wakeham has served as a Director of Azurix since March 1999. Lord
Wakeham has been a Director of Enron since 1994. Lord Wakeham is a retired
former U.K. Secretary of State for Energy and Leader of the Houses of Commons
and Lords. He served as a Member of Parliament from 1974 until his retirement
from the House of Commons in April 1992. Prior to his government service, Lord
Wakeham managed a large private practice as a chartered accountant. In the U.K.,
he is currently Chairman of the Press Complaints Commission and Chairman or
Director of a number of publicly traded U.K. companies.

Herbert S. Winokur, Jr. has served as a Director of Azurix since April
1999. Mr. Winokur has been a Director of Enron since 1985. Mr. Winokur is
Chairman and Chief Executive Officer of Capricorn Holdings, Inc., a private
investment company, and Managing General Partner of Capricorn Investors, L.P.
and Capricorn Investors II, L.P., private investment partnerships concentrating
on investments in restructure situations, organized by Mr. Winokur in 1987 and
1994, respectively. Prior to his current appointment, Mr. Winokur was Senior
Executive Vice President and a director of Penn Central Corporation. Mr. Winokur
is also a director of NAC Re Corporation, The WMF Group, Ltd., Mrs. Fields
Holding Company, Inc., CCC Information Services Group, Inc. and DynCorp.

BOARD OF DIRECTORS

Our Board of Directors will be divided into three classes serving staggered
terms. Directors in each class will be elected to serve for three-year terms and
until their successors are elected and qualified. Each year, the directors of
one class will stand for election as their terms of office expire. We expect
that, after the offering, , and will be designated
as Class I directors, with their terms of office expiring in 2000; ,
and will be designated as Class II directors, with their
terms of office expiring in 2001; and , and will
be designated as Class III directors, with their terms of office expiring in
2002.

Following the offering, we will appoint two individuals independent of
Azurix, Enron, Marlin Water Trust and Atlantic Water Trust to serve on our Board
of Directors.

The Board of Directors expects to establish an Audit Committee and a
Compensation Committee. The Audit Committee of the Board of Directors will
include at least two independent directors. The Audit Committee will review and
report to the Board of Directors with respect to the selection, retention,
termination and terms of engagement of our independent public accountants, and
maintain communications among the Board of Directors, the independent public
accountants and our internal accounting staff with respect to accounting and
audit procedures. The Audit Committee will also review, with management and our
independent auditors, our annual financial statements, the adequacy of our
internal accounting and control procedures and policies and related matters. The
Compensation Committee will consist of at least two persons who are outside
directors within the meaning of Section 162(m) of the Internal Revenue Code of
1986, as amended. The Compensation Committee will be responsible for making
decisions with respect to the compensation of our executive officers and key
executives. The Board of Directors has established the Stock Plan Committee to
administer our stock plan. Rebecca P. Mark, Kenneth L. Lay and Jeffrey K.
Skilling currently serve on the Stock Plan Committee. The Board of Directors
may, from time to time, establish other committees of the Board of Directors.

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<PAGE> 83

EXECUTIVE COMPENSATION

The following table sets forth compensation information for the year ended
December 31, 1998 for the Chairman and Chief Executive Officer and each of the
four other most highly compensated executive officers of Azurix. These five
individuals are referred to in this prospectus as the "Named Executive
Officers." Because each of these individuals joined Azurix during 1998, the
amounts shown in the table below represent amounts attributable to and paid by
Azurix after each individual joined Azurix.

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
--------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Rebecca P. Mark(1)..................... 1998 $145,306 $ -- $ 65,653(2) --
Chairman and Chief Executive Officer
Rodney L. Gray(1)...................... 1998 $156,269 $101,250 -- --
Vice Chairman, Finance, Risk
Management and Investments and Chief
Financial Officer
Amanda K. Martin(1).................... 1998 $106,999 $181,250 -- $350,000(3)
Executive Director, Americas
Alex Kulpecz(4)........................ 1998 $177,172 $200,000 $188,613(5) $250,000(6)
Executive Director, Europe, Middle
East, Asia, Africa
Colin F. Skellett(7)................... 1998 $105,825 $ 85,000 -- --
Executive Director, Technical and
Operating, Environmental and Safety
Services
</TABLE>

- ---------------

(1) Rebecca P. Mark, Rodney L. Gray and Amanda K. Martin were paid by Enron
and/or its affiliates for the entire year. The salary and bonus amounts
shown in the table are the amounts of their total compensation received from
Enron that were allocated by Enron to Azurix and paid by Azurix to Enron for
services rendered to Azurix. Ms. Mark's bonus arrangement is described below
in "-- Employment Agreements." The bonus amounts allocated to Azurix by
Enron for Mr. Gray and Ms. Martin were based on qualitative criteria and
were awarded in relation to the formation of Azurix's strategic business
development and corporate financing organization, in the case of Mr. Gray,
and Azurix's business development effort for the Americas, in the case of
Ms. Martin.

(2) Includes $62,419 reported as income and paid by Azurix for Ms. Mark for
personal airplane usage.

(3) Represents compensation paid to Ms. Martin for foregoing compensation from
her previous employer, Enron Capital & Trade Resources Corp.

(4) Alex Kulpecz joined Azurix during September 1998. Mr. Kulpecz's bonus was
based on qualitative criteria and was awarded in relation to the formation
of Azurix's London office and business development effort for Europe, the
Middle East, Africa, Asia and the Pacific Rim.

(5) Includes $127,533 for payment of U.K. income taxes.

(6) Represents a sign-on bonus for foregoing compensation from his previous
employer.

(7) Colin F. Skellett joined Azurix in October 1998 in conjunction with the
acquisition of Wessex. Mr. Skellet's bonus was based on qualitative criteria
and was awarded in relation to the formation of Azurix's technical and
operational organization.

EMPLOYMENT AGREEMENTS

Effective May, 1998, Rebecca P. Mark entered into an employment agreement
with Enron through December 31, 2001 as Chairman of Enron International and Vice
Chairman, Enron. The employment agreement was further amended when it was
assigned to, and assumed by both Enron and Azurix effective

78
<PAGE> 84

February 1, 1999, in connection with Ms. Mark's assumption of the role as
Chairman and CEO, Azurix, in addition to her role as Vice Chairman, Enron. The
agreement with Enron and Azurix provides for an annual salary of not less than
$710,000. Under the terms of the agreement, in May, 1998, Ms. Mark was granted
100,000 Enron stock options that have a ten-year term and vest 33 1/3% on each
of January 1, 1999, January 1, 2000 and January 1, 2001, and 350,000 Enron stock
options which have a ten-year term that vest 33 1/3% on each of May 4, 1999, May
4, 2000 and May 4, 2001. The agreement also stipulated Ms. Mark's 1998 bonus
target to be one percent of Enron International's after-tax net income subject
to adjustment in the sole discretion of Enron's Chairman and CEO taking into
consideration after-tax net income and funds flow targets set each year by the
Board of Directors, as well as other performance criteria. The agreement further
stipulates that bonus calculations for 1999 through 2001 will be determined
prospectively. Further, the agreement provides that Ms. Mark is eligible to
participate in either the Enron executive compensation long-term incentive
program or the Azurix stock incentive plan. During the term of this agreement,
Ms. Mark was granted 2,000,000 Azurix stock options from the Azurix stock
incentive plan, effective February 2, 1999, which will vest 25% per year over
the next four-year period. The agreement also provides for full vesting of
specific grants and awards made to Ms. Mark under long term incentive plans
maintained by Enron in the event of involuntary termination, death or disability
and, as amended in February, 1999, precludes full vesting of long term grants
made under the Azurix stock incentive plan in the event of termination. The
agreement as amended provides 100% of base pay and unpaid bonuses through the
contract term in the event of involuntary termination. The employment agreement
contains noncompete provisions in the event of Ms. Mark's termination of
employment.

Effective February 16, 1999, Rodney L. Gray entered into an employment
agreement with Azurix. The agreement, which runs through February 15, 2004 and
entitles Mr. Gray to an annual salary of $430,000, provides that Mr. Gray will
participate in an annual incentive plan with a bonus target of 100% of his
annual base salary. The agreement provides that Mr. Gray is eligible to
participate in the Azurix stock incentive plan. Under his agreement, Mr. Gray
was granted 1,000,000 Azurix stock options, effective February 2, 1999, which
will vest 20% per year over the next five-year period. If Mr. Gray is
involuntarily terminated, which includes a termination by Azurix without cause,
then he will receive a monthly severance payment equal to 100% of his monthly
salary and annual bonus payments until the end of the term of the agreement as
if he had not been terminated. The agreement prohibits Mr. Gray from competing
with Azurix until February 15, 2004.

Amanda K. Martin entered into an employment agreement with Enron Capital &
Trade Resources, which subsequently was assigned to Azurix. The agreement runs
through August 31, 2003 and entitles Ms. Martin to an annual salary of $400,000.
In connection with the transfer of her agreement to Azurix, Ms. Martin received
a bonus of $350,000. The agreement provides that Ms. Martin will participate in
an annual incentive plan with a bonus target of between 100% and 200% of her
annual base salary. The agreement provides that Ms. Martin is eligible to
participate in the Azurix stock incentive plan. Under her agreement, Ms. Martin
was granted 1,000,000 Azurix stock options, effective February 2, 1999, which
will vest 25% per year over the next four-year period. If Ms. Martin is
involuntarily terminated, which includes a termination by Azurix without cause,
then she will receive a monthly severance payment equal to 100% of her monthly
salary and unpaid annual bonuses until the end of the term of the agreement as
if she had not been terminated. In order to receive these payments, Ms. Martin
may not compete with Azurix during the term of the agreement following an
involuntary termination. The agreement also prohibits Ms. Martin from competing
with Azurix until six months after the termination of her employment or the
expiration of the agreement.

Alex Kulpecz entered into an employment agreement with Azurix which runs
through September 14, 2001 and entitles Mr. Kulpecz to an annual salary of
$492,000. In connection with his agreement, Mr. Kulpecz received a sign-on bonus
of $250,000. The agreement provides that Mr. Kulpecz will participate in an
annual incentive plan with a bonus target of 100% of his annual base salary.
Under the terms of the agreement, upon commencing employment, Mr. Kulpecz was
granted 100,000 Enron stock options that have a ten-year term and vest 33 1/3%
on each anniversary of the date of grant and 30,000 Enron stock options which
have a ten-year term and are 100% vested. If Mr. Kulpecz is

79
<PAGE> 85

involuntarily terminated, which includes a termination by Azurix without cause,
then he will receive a monthly severance payment equal to 100% of his monthly
salary until the end of the term of the agreement as if he had not been
terminated plus a pro rata portion of his bonus earned for the year of
termination. In addition, in the case of involuntary termination except if he
has failed to meet performance objectives, Mr. Kulpecz will be entitled to a
payment so that the value of the equity in Enron and Azurix which he has
received pursuant to his employment agreement plus the payment equals one
million dollars. The agreement prohibits Mr. Kulpecz from competing with Azurix
until the later of September 14, 2001 or one year following termination of
employment.

Colin F. Skellett entered into an employment agreement with Wessex, which
entitles Mr. Skellett to an annual salary of $423,300. The agreement provides
that Mr. Skellett is eligible to participate in the Azurix stock incentive plan.
Under his agreement, Mr. Skellet was granted 600,000 Azurix stock options,
effective February 2, 1999, which will vest 33 1/3% per year over the next
three-year period. The employment agreement may be terminated by either Wessex
or Mr. Skellett upon 12 months' notice. The agreement otherwise terminates on
Mr. Skellett's 60th birthday. The agreement provides that Mr. Skellett will
participate in an annual bonus plan. The agreement prohibits Mr. Skellett from
competing with Wessex for one year following termination of employment.

STOCK PLAN

We have adopted a stock incentive plan. Grants of incentive stock options
and nonqualified stock options and awards of restricted stock may be made
pursuant to the stock plan. At any particular time, the number of shares of
common stock issued under the plan plus the number of shares of common stock
issuable upon the exercise of all outstanding stock options under the plan may
not exceed 15% of the total number of shares of common stock then outstanding,
assuming the exercise of all outstanding options. The stock plan will be
administered by the Stock Plan Committee, which consists of Rebecca P. Mark,
Kenneth L. Lay and Jeffrey K. Skilling. The exercise price for an option granted
under the stock plan will be determined by the Stock Plan Committee and will be
no less than the fair market value of the common stock on the date that the
option is granted. If our outstanding common stock is adjusted because of a
recapitalization, stock split, combination of shares, reclassification, stock
dividend or other similar change, the Stock Plan Committee will make appropriate
adjustments to the total number of shares covered by the plan and the exercise
price and number of shares covered by each outstanding option or restricted
stock award.

As long as Enron owns 30% or more of our common stock, if there is a change
in control of Enron, then each outstanding restricted stock award or option,
regardless of vesting, will be surrendered and canceled and each grantee will
receive a cash payment from Azurix. If there is a change in control of Azurix,
then each outstanding restricted stock award or option, regardless of vesting,
will be surrendered and canceled and each grantee will receive a cash payment
from Azurix. In either case, the cash payment for restricted stock awards will
equal the fair market value of a share of our common stock on the date of
cancellation multiplied by the number of shares subject to the restricted stock
award. In either case, the cash payment for canceled options will equal the
difference between the fair market value of a share of our common stock on the
date of cancellation minus the exercise price of the canceled options multiplied
by the number of shares covered by the canceled options. In the case of a change
in control of Azurix by means of a merger, sale or other business combination or
a tender offer, the fair market value of our common stock for purposes of the
calculation set forth in the previous sentence will be the per share price
offered to our stockholders in such transaction.

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<PAGE> 86

STOCK OPTION GRANTS

During 1998, there were no options held, granted or exercised. On February
2, 1999, Azurix granted options to purchase a total of 7,800,150 shares of
common stock. The following table sets forth information regarding options
granted to the Named Executive Officers on February 2, 1999.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF SHARES ASSUMED RATES OF STOCK PRICE
OF COMMON STOCK PERCENT OF TOTAL EXERCISE APPRECIATION FOR OPTION TERM
UNDERLYING OPTIONS OPTIONS GRANTED AT PRICE EXPIRATION ---------------------------------
NAME GRANTED(1) FEBRUARY 2, 1999 ($/SHARE)(2) DATE 0%(3) 5%(3) 10%(3)
---- ------------------ ------------------- ------------ ---------- ----- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Rebecca P. Mark...... 2,000,000 25.6% $16.72 02/02/2009 $0 $21,040,000 $53,300,000
Rodney L. Gray....... 1,000,000 12.8 16.72 02/02/2009 0 10,520,000 26,650,000
Amanda K. Martin..... 1,000,000 12.8 16.72 02/02/2009 0 10,520,000 26,650,000
Alex Kulpecz......... 1,000,000 12.8 16.72 02/02/2009 0 10,520,000 26,650,000
Colin F. Skellett.... 600,000 7.7 16.72 02/02/2009 0 6,312,000 15,990,000
</TABLE>

- ---------------

(1) These options are subject to vesting based on the following schedule:
Rebecca P. Mark -- 25% per year over four years; Rodney L. Gray -- 20% per
year over five years; Amanda K. Martin -- 25% per year over four years; Alex
Kulpecz -- 20% per year over five years; and Colin F. Skellett -- 33 1/3%
per year over three years.

(2) Each of these options was granted pursuant to our stock incentive plan and
is subject to the terms of the stock incentive plan as described above.
These options were granted at an exercise price equal to the fair value of
our common stock as determined by our Board of Directors on the date of the
grant.

(3) The 0%, 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by the rules of the SEC. There can be no assurance
that the actual stock price appreciation over the ten-year option term will
be at the assumed 0%, 5% or 10% levels or at any other defined level. Unless
the market price of the common stock appreciates over the option term, no
value will be realized from the option grants. The potential realizable
value is calculated by assuming that the fair market value of the common
stock on the date of grant of the options appreciates at the indicated rate
for the entire term of the option and that the option is exercised at the
exercise price and sold on the last day at the appreciated price.

In addition to the option grants to the Named Executive Officers in the
table above, Azurix granted options to purchase a total of 2,200,150 shares of
common stock at an exercise price of $16.72 per share to other employees with
vesting schedules generally providing for vesting over three to five years. All
of these options expire ten years after the grant date of February 2, 1999.

In approving the grants described above, the Stock Plan Committee sought to
provide incentives in addition to compensation to Azurix's employees to devote
their utmost effort and skill to the advancement and betterment of Azurix by
providing such employees with an opportunity to participate in the ownership of
Azurix and thereby have an interest in the success and increased value of Azurix
as well as to enhance Azurix's ability to retain the services of its key
employees. As a member of the Stock Plan Committee, Rebecca P. Mark participated
in approving these grants, except with respect to the grant of options to
herself.

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<PAGE> 87

CERTAIN TRANSACTIONS

In 1998, there were significant transactions among us, Enron, Atlantic
Water Trust and Marlin Water Trust. For purposes of governing these ongoing
relationships, we will enter into, or continue in effect, various agreements and
relationships, including those described below. Some of the agreements
summarized below will be included as exhibits to the registration statement of
which this prospectus is a part, and the following summaries are qualified
completely by reference to such exhibits which we incorporate in this prospectus
by reference.

During 1998, Azurix indirectly acquired all of the outstanding ordinary
share capital of Wessex, and Enron contributed to Azurix the outstanding common
stock of a subsidiary that in June 1998 acquired a 32.1% ownership interest in
Obras Sanitarias Mendoza. In December 1998, Enron contributed Azurix to Atlantic
Water Trust and Marlin Water Trust acquired a 50% voting interest in Atlantic
Water Trust. Enron retained a 50% voting interest in Atlantic Water Trust.

On February 25, 1999, in connection with the Cancun acquisition, Enron
advanced to Azurix $15.0 million, which was used by Azurix to fund a loan to
Cancun. On March 24, 1999, Enron paid on behalf of Azurix $13.5 million to fund
the Cancun acquisition which closed on that date.

Enron currently provides office space to Azurix and various services such
as computer hardware and software and support services such as risk management,
accounts payable, payroll and information technology services. Costs are
allocated to Azurix based upon usage, or where no direct method can be
efficiently applied due to administrative burden, upon factors such as
annualized payroll or employee headcount. Employees, other than Wessex
employees, are covered by various employee benefit plans of Enron such as
retirement, stock option, medical, dental, life insurance and other benefit
plans. These costs are allocated to Azurix based upon Enron's costs of
administering and providing the benefit plans.

Enron has paid on behalf of Azurix approximately $70 million to fund our
general, administrative and operating expenses, from our inception through April
30, 1999, in addition to certain capital expenditures. This includes $28.5
million advanced to us by Enron in connection with our investment in Cancun, as
well as advances relating to the services described above. The amount paid by
Enron is non-interest bearing and has no maturity date. We intend to use a
portion of the net proceeds that we receive from the offering to repay this
amount. See "Use of Proceeds."

ACQUISITION OF WESSEX

On October 2, 1998, Azurix, through its indirect wholly owned subsidiary,
Azurix Europe, acquired over 90% of the outstanding ordinary share capital of
Wessex. On that same date, Azurix Europe issued notices to the remaining Wessex
ordinary shareholders, informing them that it intended to exercise its rights
under the English Companies Act to acquire compulsorily all of the outstanding
ordinary shares not held by Azurix Europe. The compulsory share acquisition was
completed in November 1998. The per share price paid to Wessex shareholders was
L6.30. The total cost of the Wessex acquisition, including transaction costs,
was $2.4 billion, plus the assumption of $481.5 million of existing Wessex debt.
The cost included cash consideration paid to Wessex shareholders, net of $1.7
million cash acquired, and the issuance of loan notes to Wessex shareholders in
the face amount of $119.8 million.

The acquisition was financed through capital contributions from Enron Water
(Holding) L.L.C., formerly Azurix's parent company and a wholly owned subsidiary
of Enron, totaling $1.6 billion and the issuance of $0.8 billion in debt by
Azurix Europe. The financing of the Wessex acquisition by Azurix, through Azurix
Europe, was as follows:

- Enron made a $500.2 million capital contribution to Enron Water (Holding)
L.L.C.

- Enron borrowed $1.1 billion under a revolving credit facility, which
Enron loaned to Enron Water (Holding) L.L.C.

- Enron Water (Holding) L.L.C. made a capital contribution of these funds
to Azurix, and Azurix, through a wholly owned subsidiary, made a capital
contribution of these funds to Azurix Europe

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- Enron lent L73 million ($124.4 million) to Azurix Europe under a senior
loan agreement

- Enron lent L72 million ($122.7 million) to Azurix Europe under a
short-term, senior, unsecured credit facility, which loan, together with
$2.1 million of accrued interest, was subsequently repaid with the
proceeds from the sale of U.K. Waste in December 1998

- Azurix Europe borrowed L252 million ($429.3 million) under the existing
senior credit facility

- Azurix Europe issued seven-year, senior, unsecured loan notes in the face
amount of L70.5 million ($119.8 million) to Wessex shareholders who
elected to take loan notes instead of cash

In connection with regulatory clearance of the acquisition of Wessex, Enron
and Wessex's immediate parent, Azurix Europe, agreed to make certain
undertakings regarding the modification of Wessex Water Services' license as a
provider of water and wastewater services. The objective of the modifications
was to allow Wessex to operate as if it is a stand-alone organization and to
ensure that Wessex has sufficient financial and managerial resources.

ACQUISITION OF INTEREST IN ATLANTIC WATER TRUST

In December 1998, Enron contributed Azurix to Atlantic Water Trust, a
Delaware business trust, by contributing Enron Water (Holding) L.L.C. and
merging it into Azurix. In connection with Enron's contribution, Marlin Water
Trust acquired for $1.149 billion a 50% voting interest in Atlantic Water Trust,
with Enron retaining a 50% voting interest. Of the $1.149 billion paid by Marlin
Water Trust, $900 million was used to repay a portion of the indebtedness
incurred by Enron and its affiliates in connection with the Wessex acquisition.
See "Principal and Selling Stockholders -- Atlantic Water Trust."

CONFLICTS OF INTEREST

Atlantic Water Trust currently owns all of Azurix's outstanding common
stock. Following completion of the offering, Atlantic Water Trust will own
approximately % of our outstanding common stock, % if the underwriters'
over-allotment options are exercised in full. Each of Enron and Marlin Water
Trust owns a 50% voting interest in Atlantic Water Trust. To date, Enron has
appointed all of the directors of Atlantic Water Trust and Azurix, although
Marlin Water Trust at any time has the right to elect or replace half of the
directors of Atlantic Water Trust and currently up to half of the Azurix
directors. Following the offering, as long as Atlantic Water Trust owns a
majority of our outstanding common stock, Marlin Water Trust has the right to
direct Atlantic Water Trust to elect or replace a percentage of Azurix's
directors equal to 50% minus the percentage of outstanding common stock held by
persons other than Atlantic Water Trust. Furthermore, Marlin Water Trust, with
the consent of the holders of a majority of our outstanding common stock held by
persons other than Atlantic Water Trust, Enron and its affiliates, has the right
to direct Atlantic Water Trust to elect or replace half of Azurix's directors.
Enron has the right to direct Atlantic Water Trust to elect or replace the other
half of Azurix's directors. As a result, following the offering, Enron and
Marlin Water Trust will continue to exert significant influence over the
policies, management and affairs of Azurix and the outcome of most corporate
actions requiring stockholder approval, including the approval of transactions
involving a change in control of Azurix.

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AGREEMENT REGARDING BUSINESS OPPORTUNITIES AND RELATED MATTERS

Enron and Azurix will enter into an agreement that will limit the scope of
Azurix's business and provide that Enron and its affiliates may engage in
water-related businesses, even if those activities have a competitive impact on
Azurix. In general, Enron will be permitted to engage in any business
whatsoever, including water, wastewater and other businesses competing with
Azurix, and may compete in public tenders against Azurix, provided the business
is conducted and opportunities are identified and developed through Enron's own
personnel and not through Azurix. If an opportunity in the water industry is
presented to a person who is an officer or director of both Enron and Azurix,
the opportunity must first be offered to Azurix, unless water constitutes a
minority of the fair market value of the opportunity, as determined by that
officer or director in good faith based on information available at the time.

In the agreement, Azurix will acknowledge that Enron has fiduciary and
contractual obligations to other persons and entities under existing agreements
and relationships and has agreed that, in the event of a conflict between the
duties of Enron under the agreement and the duties of Enron to third parties
under agreements or relationships that exist on the date of execution of the
agreement, Enron will be entitled to perform its duties to such third parties
without any liability to Azurix.

The agreement will provide that any standard of care, any duty of loyalty
and any other duty imposed by the agreement or under Delaware law or any other
applicable law, rule or regulation shall be modified, waived or limited as
required in order to permit Enron to act under the agreement and to make any
decision pursuant to the authority prescribed in the agreement so long as such
action is reasonably believed by Enron to be in, or not inconsistent with, the
agreement or the interests of Azurix. Azurix has agreed to indemnify Enron and
its officers, directors and employees against any claim that Enron's pursuit of
water business was a breach of any duty owed by Enron to Azurix, provided Enron
has followed the rules described above.

Azurix's purpose clause permits it to engage in the businesses generally
identified in this prospectus, activities incidental to those businesses, and
such other businesses as Atlantic Water Trust may approve in its sole
discretion, or if Atlantic Water Trust ceases to control Azurix, then such other
businesses as Enron may approve in its sole discretion. Under the agreement,
Azurix will agree not to amend its certificate of incorporation to expand its
purpose clause without Atlantic Water Trust's prior written consent or, if
Atlantic Water Trust ceases to control Azurix, Enron's prior written consent.

The agreement will restrict Enron and Azurix from taking action that might
cause either of them to violate any law or that would require either of them to
register as a public utility holding company under the Public Utility Holding
Company Act of 1935.

The agreement will state that whenever a potential conflict of interest
exists or arises between Enron and Azurix any resolution or course of action in
respect of such conflict of interest shall be permitted and deemed approved, and
will not constitute a breach of any duty stated or implied by law or equity, if
the resolution or course of action is authorized by the agreement or, by
operation of the agreement, is deemed to be fair and reasonable to Azurix. The
agreement will state that any conflict of interest and any resolution of such
conflict of interest shall be conclusively deemed fair and reasonable to Azurix
if such conflict of interest or resolution is:

- Approved by special approval (the approval by a majority of the directors
of Azurix not associated with Enron)

- On terms no less favorable to Azurix than those generally being provided
to or available from unrelated third parties

- Fair to Azurix, taking into account the totality of the relationships
between the parties involved (including other transactions that may be
particularly favorable or advantageous to Azurix)

Enron may adopt a resolution or course of action that has not received
special approval. Enron and any person voting in connection with a special
approval will be authorized in connection with its

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determination of what is "fair and reasonable" to Azurix and in connection with
its resolution of any conflict of interest to consider:

- The relative interests of any party to such conflict, agreement,
transaction or situation and the benefits and burdens relating to such
interest

- Any customary or accepted industry practices and any customary or
historical dealings with a particular person

- Any applicable generally accepted accounting or engineering practices or
principles

- Such additional factors as such person determines in its sole discretion
to be relevant, reasonable or appropriate under the circumstances

In the absence of bad faith by Enron, the resolution, action or terms so
made, taken or provided by Enron with respect to such matter shall not
constitute a breach of the agreement or a breach of any standard of care, any
duty of loyalty or any other duty imposed by the agreement or under Delaware law
or any other law, rule or regulation.

Disputes under the agreement are to be resolved through arbitration. The
agreement will continue indefinitely, except that it will expire on the first
date on which both of the following occur:

- Neither Enron nor Atlantic Water Trust directly or indirectly owns or has
the power to vote at least 35% of the shares of Azurix ordinarily
entitled to vote for the election of directors, and

- Neither Enron nor Atlantic Water Trust otherwise controls Azurix.

The mutual covenants and agreements in the agreement will be the
consideration given by each party to the other in support of the agreement. In
addition, the agreement will state that Enron's investment in Atlantic Water
Trust will be predicated on the execution and delivery of an agreement
containing substantially the terms set forth in the agreement.

SERVICES AGREEMENT

We will have an agreement with Enron pursuant to which Enron will provide
various corporate staff and support services to us. These services include
information technology, building maintenance, security and other office services
as well as employee development, training and maintenance of compensation and
other benefits programs. We also may utilize Enron's regulatory affairs,
marketing affairs, treasury and risk assessment and control departments. In
addition, Azurix may continue to participate in Enron's corporate insurance
program. The agreement will provide that we may use the international offices of
Enron and its affiliates for projects, subject to our mutual agreement with
Enron or its affiliates on a project-by-project basis. The agreement will
provide that we will reimburse Enron for direct charges related to the Enron
services and facilities that we use. We will also be allocated an amount for
overhead charges related to Enron corporate staff and support services which we
utilize. This overhead charge will be allocated based upon factors such as
employee headcount, payroll and square footage. Our management believes the
allocation methods and costs are reasonable. We expect to incur costs for
services used under the agreement of approximately $15 million annually. Our
agreement with Enron is for an indefinite term, but either of us may terminate
the agreement on 180 days' notice.

CREDIT AGREEMENT

We intend to enter into a credit agreement with Enron, whereby Enron will
provide funds to us for general, administrative and operating expenses. The
credit agreement will be effective May 1, 1999 and terminate December 15, 2001.
The total commitment under the credit agreement will be $180 million. Advances
under the facility will bear interest at the daily average one-month London
interbank offered rate plus 1.25%. Amounts borrowed under the credit agreement
may be prepaid, in full or in part, at any time during the term of the credit
agreement. Amounts prepaid may be re-borrowed during the term of

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the credit agreement. The principal amount outstanding under the credit
agreement will be limited to no more than:

- $60 million at any time during calendar year 1999

- $120 million at any time during calendar year 2000

- $180 million at any time during calendar year 2001

LICENSE AGREEMENT

Enron will license to Azurix the non-exclusive right to use the phrase "an
Enron Company" and its logo in identifying Azurix as part of the Enron
enterprise for use in its businesses permitted under the business opportunities
agreement described above, so long as Enron or Atlantic Water Trust's ownership
of Azurix is at least 35% or otherwise as the parties may agree. The license is
royalty free, and Azurix bears any costs associated with its use under a related
cost sharing agreement. The license agreement is for a term of one year, and
renews automatically and repetitively for similar terms, unless terminated by
either party upon 30 days' notice or earlier upon uncured default. Following
termination, Azurix must phase out use of existing materials within 90 days.

REGISTRATION RIGHTS AGREEMENT

We will enter into an agreement with Atlantic Water Trust, which will allow
Atlantic Water Trust to request us to register shares of our common stock owned
by Atlantic Water Trust. Atlantic Water Trust will have the right to request one
such registration per annum, plus one additional such registration. In addition,
Atlantic Water Trust will also have the right, which it may exercise at any
time, to include such shares in any registration of common stock made by us in
the future. We will agree to cooperate fully in connection with any such
registration and with any offering made under the registration rights agreement
and to pay all costs and expenses, other than underwriting discounts and
commissions, related to shares sold by Atlantic Water Trust in connection with
any such registration. The rights of Atlantic Water Trust under the registration
rights agreement will be transferable by Atlantic Water Trust. See "Risk
Factors -- Future Sales of our Common Stock May Depress our Stock Price" and
"Shares Eligible for Future Sale."

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information regarding the beneficial
ownership of our common stock as of April 30, 1999, and as adjusted to reflect
the sale of the common stock offered hereby, by (1) the selling stockholder, (2)
all persons known by Azurix to own beneficially more than 5% of the common
stock, (3) each director of Azurix, (4) the Chief Executive Officer and each of
the other Named Executive Officers and (5) all directors and executive officers
as a group. Unless otherwise stated in the notes to the table, each of the
stockholders has sole voting and investment power with respect to the shares of
common stock beneficially owned by them.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING NUMBER OF AFTER THE OFFERING
-------------------------- SHARES BEING -------------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------- ------------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Atlantic Water Trust(1)(2)..........
c/o Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
Enron Corp.(2)(3)................... 100,000,000 100%
1400 Smith Street
Houston, Texas 77002
Marlin Water Trust(2)(4)............
c/o Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
Rebecca P. Mark(5).................. -- -- -- -- --
Rodney L. Gray...................... -- -- -- -- --
W. Nicholas Hood.................... -- -- -- -- --
Alex Kulpecz........................ -- -- -- -- --
Amanda K. Martin.................... -- -- -- -- --
Colin F. Skellett................... -- -- -- -- --
John H. Duncan...................... -- -- -- -- --
Kenneth L. Lay(5)................... -- -- -- -- --
Jeffrey K. Skilling(5).............. -- -- -- -- --
Joseph W. Sutton.................... -- -- -- -- --
John Wakeham........................ -- -- -- -- --
Herbert S. Winokur, Jr. ............ -- -- -- -- --
All directors and executive officers
as a group (14 persons)........... -- -- -- -- --
</TABLE>

- ---------------

(1) Atlantic Water Trust is a Delaware business trust. Atlantic Water Trust
holds 100% of the common stock. Atlantic Water Trust is also the selling
stockholder.

(2) Each of Enron Corp. and Marlin Water Trust has a 50% voting interest in
Atlantic Water Trust, and each may be deemed to beneficially own all of the
Azurix shares owned by Atlantic Water Trust because of certain shared voting
and dispositive power. See " -- Atlantic Water Trust."

(3) Enron Corp. is an Oregon corporation.

(4) Marlin Water Trust is a Delaware business trust.

(5) Does not include 100,000,000 shares owned by Atlantic Water Trust with
respect to which Enron has shared voting and dispositive power. Messrs. Lay
and Skilling and Ms. Mark in their capacities as Chairman of the Board and
Chief Executive Officer, as President and Chief Operating Officer and as
Vice Chairman, respectively, of Enron may be deemed to beneficially own such
shares as a result of their positions with Enron.

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ATLANTIC WATER TRUST

In December 1998, Enron contributed Azurix to Atlantic Water Trust, a
Delaware business trust. The principal purpose of Atlantic Water Trust is to own
equity interests in Azurix and to own Bristol Water Trust, and to engage in
other transactions related to the sale of an interest in Atlantic Water Trust to
Marlin Water Trust. In connection with Enron's contribution of Azurix to
Atlantic Water Trust, Marlin Water Trust acquired for $1.149 billion a 50%
voting interest in Atlantic Water Trust, with Enron retaining a 50% voting
interest. Marlin Water Trust financed the acquisition of its interest in
Atlantic Water Trust by issuing senior notes for $1.024 billion that mature
December 15, 2001, and issuing trust certificates for a total of $125 million.
Currently, five institutional investors and their affiliates hold the trust
certificates of Marlin Water Trust.

Of the $1.149 billion paid by Marlin Water Trust, $900 million was used to
repay a portion of the indebtedness incurred by Enron affiliates in connection
with the acquisition of Wessex. The remaining $249 million was deposited in an
account established by Bristol Water Trust, a wholly owned subsidiary of
Atlantic Water Trust. The funds in this account should generate sufficient
liquidity to fund distributions from Atlantic Water Trust to Marlin Water Trust
that will provide Marlin Water Trust with sufficient funds to service interest
on the senior notes and provide a yield to the trust certificate holders at
least through 2001. Azurix is not required to make any distributions to Atlantic
Water Trust, including any of its proceeds from the offering. Additionally,
neither Azurix, nor any of its subsidiaries, has guaranteed any obligations of
Marlin Water Trust and no assets of Azurix, nor any of its subsidiaries, are
pledged as security for the senior notes of Marlin.

Enron is entitled, with respect to distributions resulting from the sale of
Azurix stock by Atlantic Water Trust, to receive the first $180 million of
distributions by Atlantic Water Trust. After the receipt of $180 million by
Enron, further distributions resulting from the sale of Azurix stock by Atlantic
Water Trust and other non-liquidating distributions are generally to be paid
first to Marlin Water Trust until Marlin Water Trust has received funds equal to
the amount then in its trust account with the remainder to Enron. Liquidation
distributions by Atlantic Water Trust are generally to be paid to Enron and
Marlin Water Trust pro rata based on their then respective trust accounts.

If Atlantic Water Trust fails by December 15, 2001 to make aggregate
distributions to Marlin Water Trust of amounts sufficient to repay the senior
notes of Marlin Water Trust, then Marlin Water Trust has the right to cause
Atlantic Water Trust to liquidate and sell its remaining shares of Azurix. In
order to prevent the liquidation of Atlantic Water Trust by Marlin Water Trust,
Enron has the right to contribute funds generated from Enron equity offerings to
Atlantic Water Trust in order to fund distributions to Marlin. In such event,
Enron's beneficial interest, but not voting interest, in Atlantic Water Trust
would increase and Marlin Water Trust's beneficial interest, but not voting
interest, in Atlantic Water Trust would decrease. Other actions, such as the
refinancing of the senior notes of Marlin Water Trust, might also be taken which
could eliminate the necessity of Atlantic Water Trust selling additional shares
of Azurix. However, Atlantic Water Trust may elect to sell, or be required to
sell, some or all of its remaining shares of Azurix in order to fund Marlin
Water Trust's obligations. The proceeds to Atlantic Water Trust from this
initial public offering are expected to be approximately $400 million, before
deducting underwriting discounts and commissions and estimated expenses and
assuming no exercise of the over-allotment options. After payment of
underwriting discounts and commissions and expenses, $180 million of these
proceeds will be distributed to Enron and the remainder will be distributed to
Marlin Water Trust. The proceeds distributed to Marlin Water Trust are expected
to be used to redeem a portion of the senior notes.

Marlin Water Trust, or the trustee under its senior notes indenture, may
cause the liquidation of Atlantic Water Trust prior to December 15, 2001 if
specific events occur and the senior notes are not repaid from other sources.
These events include: (1) defaults under certain of Azurix's, Enron's or Marlin
Water Trust's debt obligations or (2) a downgrading of Enron senior debt to
below "Baa3" by Moody's Investors Service, Inc., "BBB-" by Standard & Poor's
Ratings Services or "BBB-" by Duff & Phelps

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Credit Rating Co. and a decline in Enron's common stock price below $37.84. The
last sale price of Enron common stock, as reported by the New York Stock
Exchange, on May 4, 1999 was $76.19.

Each of Marlin Water Trust and Enron has the right and power at all times
to appoint up to 50% of the members of the board of directors of Atlantic Water
Trust. Marlin Water Trust's certificateholders are entitled to exercise Marlin
Water Trust's appointment rights. If the Marlin Water Trust certificateholders
defer exercising their appointment rights, Enron has the right to appoint such
members, but Marlin Water Trust has the right, at any time, without cause, to
remove any such members. To date, Enron has appointed all of the directors of
Atlantic Water Trust.

As long as Atlantic Water Trust owns a majority of our outstanding common
stock, Marlin Water Trust has the right to direct Atlantic Water Trust to elect
or replace a percentage of Azurix's directors equal to 50% minus the percentage
of outstanding common stock held by persons other than Atlantic Water Trust.
Furthermore, Marlin Water Trust, with the consent of the holders of a majority
of our outstanding common stock held by persons other than Atlantic Water Trust,
Enron and its affiliates, has the right to direct Atlantic Water Trust to elect
or replace half of Azurix's directors. Enron has the right to direct Atlantic
Water Trust to elect or replace the other half of Azurix's directors. In all
other circumstances, the board of directors of Atlantic Water Trust will direct
the voting of Atlantic Water Trust's Azurix shares. Under the terms of the
Atlantic Water Trust agreement, Enron can be prevented from appointing more than
half of Azurix's directors at any time.

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DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of Azurix consists of 500,000,000 shares of
common stock, par value $0.01 per share, and 50,000,000 shares of preferred
stock, par value $0.01 per share. Prior to the offering, 100,000,000 shares of
common stock were outstanding. No shares of preferred stock have been issued.

The following summarizes important provisions of our capital stock and
describes all material provisions of our certificate of incorporation and
bylaws. This summary is qualified by our certificate of incorporation and
bylaws, copies of which have been filed as exhibits to the registration
statement of which this prospectus is a part and by the provisions of applicable
law.

COMMON STOCK

Following the offering, shares of common stock will be issued and
outstanding. Holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Because holders of common stock do
not have cumulative voting rights, the holders of a majority of the shares of
common stock can elect all of the members of the board of directors standing for
election. Subject to preferences of any preferred stock that may be issued in
the future, the holders of common stock are entitled to receive such dividends
as may be declared by the board of directors. The common stock is entitled to
receive pro rata all of the assets of Azurix available for distribution to its
stockholders. There are no redemption or sinking fund provisions applicable to
the common stock. All outstanding shares of common stock are fully paid and
non-assessable.

PREFERRED STOCK

Subject to the provisions of the certificate of incorporation and
limitations prescribed by law, the board of directors has the authority to issue
up to 50,000,000 shares of preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, dividend rates, conversion rates, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series, which may be superior to those of
the common stock, without further vote or action by the stockholders. There will
be no shares of preferred stock outstanding upon the closing of the offering and
Azurix has no present plans to issue any preferred stock.

One of the effects of undesignated preferred stock may be to enable the
board of directors to render more difficult or to discourage an attempt to
obtain control of Azurix by means of a tender offer, proxy contest, merger or
otherwise, and thereby to protect the continuity of Azurix's management. The
issuance of shares of the preferred stock pursuant to the board of directors'
authority described above may adversely affect the rights of the holders of
common stock. For example, preferred stock issued by Azurix may rank prior to
the common stock as to dividend rights, liquidation preference or both, may have
full or limited voting rights and may be convertible into shares of common
stock. Accordingly, the issuance of shares of preferred stock may discourage
bids for the common stock or may otherwise adversely affect the market price of
the common stock.

DESCRIPTION OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS

CLASSIFIED BOARD OF DIRECTORS AND LIMITATIONS ON REMOVAL OF DIRECTORS

Our board of directors is divided into three classes. The directors of each
class are elected for three-year terms, with the terms of the three classes
staggered so that directors from a single class are elected at each annual
meeting of the stockholders. Until such time, called the "Trigger Date," as
neither Atlantic Water Trust nor Enron together with its subsidiaries owns a
majority of the outstanding voting stock of Azurix, the holders of a majority of
our outstanding voting stock may remove a director with or without cause.
Thereafter, stockholders may remove a director only for cause and to do so, at
least 66 2/3% of the voting power of the outstanding shares of common stock must
vote for removal. In general, after the

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Trigger Date the board of directors, not the stockholders, will have the right
to appoint persons to fill vacancies on the board of directors.

WRITTEN CONSENT OF STOCKHOLDERS

Our certificate of incorporation provides that prior to the Trigger Date
any action required or permitted to be taken by our stockholders may be taken at
a duly called meeting of stockholders or by written consent of stockholders
owning the minimum number of shares required to approve such action. After such
time, any action by our stockholders must be taken at an annual or special
meeting of stockholders. Special meetings of the stockholders may be called only
by the board of directors. These provisions could have the effect of deterring
hostile takeovers or delaying changes in control.

BUSINESS COMBINATIONS UNDER DELAWARE LAW

Under the terms of our certificate of incorporation we have "opted-out" of
Delaware's anti-takeover law. In general, Section 203 of the Delaware corporate
law provides that certain persons who, together with affiliates and associates
owns, or within three years did own, 15% or more of the outstanding voting stock
of a corporation may not engage in certain business combinations with the
corporation for a period of three years after the date on which the person
became an interested stockholder. Section 203 does not include interested
stockholders prior to the time our common stock is listed on the NYSE. This
includes Atlantic Water Trust and Enron. Section 203 defines the term "business
combination" to encompass a wide variety of transactions with or caused by an
interested stockholder including mergers, asset sales and other transactions in
which the interested stockholder receives or could receive a benefit on other
than a pro rata basis with other stockholders. The existence of this provision
would have an anti-takeover effect with respect to transactions not approved in
advance by our Board of Directors, including discouraging takeover attempts that
might result in a premium over the market price for the shares of our common
stock.

ADVANCE NOTICE PROCEDURE FOR STOCKHOLDER PROPOSALS

Our bylaws establish an advance notice procedure for the nomination of
candidates for election as directors as well as for stockholder proposals to be
considered at annual meetings of stockholders. In general, notice of intent to
nominate a director must be delivered to or mailed and received at our principal
executive offices as follows:

- With respect to an election to be held at the annual meeting of
stockholders, 120 days prior to the anniversary date of the proxy
statement for the immediately preceding annual meeting of stockholders.

- With respect to an election to be held at a special meeting of
stockholders for the election of directors, not later than the close of
business of the 10th day following the day on which such notice of the
date of the meeting was mailed or public disclosure of the date of the
meeting was made, whichever first occurs, and must contain specified
information concerning the person to be nominated. Notice of
stockholders' intent to raise business at an annual meeting must be
delivered to or mailed and received at our principal executive offices
not less than 120 days prior to the anniversary date of the proxy
statement for the preceding annual meeting of stockholders. These
procedures may operate to limit the ability of stockholders to bring
business before a stockholders meeting, including with respect to the
nomination of directors of considering any transaction that could result
in a change of control. These advance notice procedures are not
applicable prior to the Trigger Date.

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LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS

Our certificate of incorporation provides that no director shall be
personally liable to Azurix or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability as follows:

- For any breach of the director's duty of loyalty to Azurix or its
stockholders

- For acts or omissions not in good faith or which involve intentional
misconduct or knowing violation of laws

- For unlawful payment of a dividend or unlawful stock purchase or stock
redemption

- For any transaction from which the director derived an improper personal
benefit

The effect of these provisions is to eliminate the rights of Azurix and its
stockholders, through stockholders' derivative suits on behalf of Azurix, to
recover monetary damages against a director for breach of fiduciary duty as a
director, including breaches resulting from grossly negligent behavior, except
in the situations described above. These provisions will not change after the
Trigger Date.

TRANSFER AGENT AND REGISTRATION

The Transfer Agent and Registrar for the common stock is First Chicago
Trust Company.

LISTING

We are applying to list the common stock on the New York Stock Exchange
under the symbol "AZX."

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DESCRIPTION OF INDEBTEDNESS

INDEBTEDNESS OF AZURIX

Enron has funded on behalf of Azurix approximately $70 million to fund our
general, administrative and operating expenses, from our inception through April
30, 1999, in addition to certain capital expenditures. This includes $28.5
million advanced to us by Enron to fund our acquisition of and loan to our
acquisition in Cancun. The amount due to Enron is non-interest bearing and has
no maturity date. We intend to use a portion of the net proceeds that we receive
from the offering to repay these amounts. See "Use of Proceeds."

We intend to enter into a credit agreement with Enron, whereby Enron will
provide funds to us for general, administrative and operating expenses. The
credit agreement will be effective May 1, 1999 and terminate December 15, 2001.
The total commitment under the credit agreement will be $180 million. Advances
under the facility will bear interest at the daily average one-month London
interbank offered rate plus 1.25%. Amounts borrowed under the facility may be
prepaid, in full or in part, at any time during the term of the agreement.
Amounts prepaid may be re-borrowed during the term of the facility. Principal
amount outstanding under the facility will be limited to no more than:

- $60 million at anytime during calendar year 1999

- $120 million at anytime during calendar year 2000

- $180 million at anytime during calendar year 2001

INDEBTEDNESS OF AZURIX EUROPE LTD.

EXISTING SENIOR CREDIT FACILITY

Azurix Europe, an indirect, wholly owned subsidiary of Azurix and the
holding company for Wessex, has an existing senior credit facility with a group
of banks. The existing senior credit facility is currently in the process of
being refinanced with a new senior credit facility described below. The existing
senior credit facility was initially entered into on August 18, 1998 with
Greenwich NatWest and Barclays Capital, as arrangers, and National Westminster
Bank PLC, as agent. The existing senior credit facility consists of a term loan
facility of L194 ($313.1) million. Amounts outstanding under the existing senior
credit facility bear interest at a rate based on the London interbank offered
rate plus a margin. As of April 30, 1999, L42 ($67.8) million in principal was
outstanding under the term loan facility.

Loans made under the term loan facility were used to finance the
acquisition of Wessex. Loans made under the revolving credit facility may be
used to refinance Wessex's credit facilities or for general corporate purposes
up to L60 ($96.8) million outstanding at any time.

Azurix Europe is required to repay L120 ($193.7) million of term loans by
July 24, 2000 and to repay any remaining outstanding amount under the term loan
by July 24, 2003. Generally, amounts repaid under the revolving credit facility
may be re-borrowed. The existing senior credit facility is a secured facility,
and Azurix Europe has pledged all its existing assets, including all the
ordinary shares of Wessex.

CERTAIN COVENANTS. Azurix Europe and its subsidiaries have agreed not to
create or permit to exist any other security interest on any of their assets.
Azurix Europe will not sell, transfer or otherwise dispose of any of the
ordinary shares of Wessex. No borrower under the existing senior credit facility
will sell, transfer, grant or lease or otherwise dispose of all or any part of
its assets. Arm's length disposals are allowed. Azurix Europe will not make any
substantial change to the general nature or scope of its business as a water and
wastewater company in the United Kingdom. Azurix Europe will only conduct
business as a holding company. No borrower under the existing senior credit
facility will enter into any amalgamation, demerger, merger or reconstruction.
No borrower will acquire any assets or business or make any investment if the
assets, business or investment is substantial in relation to Azurix Europe.
Azurix Europe may not declare, recommend, make or pay any dividend, distribution
or payment to any of its shareholders or make any payment in respect of any
subordinated debt until after August 18, 1999 but only as long as

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no default under the existing senior credit facility is then outstanding or will
result from the relevant dividend, distribution or payment and the ratio of
consolidated EBITDA, as defined in the existing senior credit facility, to
consolidated total interest payable is not less than 2.75:1 as of the latest
date on which that ratio has been tested. The existing senior credit facility
also places certain restrictions on the aggregate borrowings plus liabilities
for borrowings of Wessex that Azurix Europe and its subsidiaries may have
outstanding at any time. In addition, the existing senior credit facility
requires that while any acquisition loan notes, as described below, are
outstanding, there must be undrawn capacity under the term loan facility at
least equal to 95% of the aggregate principal amount of acquisition loan notes
outstanding.

FINANCIAL COVENANTS. Azurix Europe is required to maintain the following
financial ratios on a quarterly and annual basis (1) the ratio of consolidated
EBITDA to consolidated net interest payable will be no less than 2.5:1 and (2)
the ratio of debt to total capitalization will not, as of each date on which it
is tested, exceed 50%.

DEFAULT. Each of the following events is an event of default under the
existing senior credit facility:

- A borrower not paying any amount which is due and payable by it within
three business days after notice of non-payment

- Azurix Europe failing to comply with its covenants, or a borrower not
complying with any provision of a finance document or a representation,
warranty or statement made or repeated in any finance document being
materially incorrect and not remedied within 28 days

- A cross-default related to any financial indebtedness of Azurix Europe or
its subsidiaries occurring, including when the aggregate amount of
financial indebtedness is less than L15 ($24.2) million

- Events of insolvency or bankruptcy of a borrower or a material subsidiary
occurring

- Any attachment, or execution affecting any assets of a borrower or a
material subsidiary having an aggregate value of L15 ($24.2) million that
is not discharged within 14 days

- The legal and beneficial ownership of the ordinary share capital of
Azurix Europe held by Enron being less than 20%, and any bank, insurance
company, investment or pension fund or other financial investor owning,
directly or indirectly, or any other person owning, whether directly or
indirectly, more of the legal and beneficial ownership of Azurix Europe
than Enron

- At any time less than 50% of the directors of Azurix Europe are also
directors or senior officers of Enron or any significant operating
subsidiary of Enron

- At any time, any person or persons other than Enron acting in concert
acquiring control of Azurix Europe

- Wessex's license as a water and wastewater company being revoked or
surrendered or ceasing to be held by Wessex Water Ltd or a wholly owned
subsidiary of Wessex Water Ltd or Azurix Europe

- Wessex's license or the rights or obligations under the license being
materially modified in any manner that, in the reasonable opinion of a
majority in interest of the lenders, has a material adverse effect on
Azurix Europe

- Any event or series of events occurring that, in the reasonable opinion
of a majority in interest of the lenders, has a material adverse effect
on the ability of the borrowers or Azurix Europe to perform their or its
payment obligations under the finance documents

NEW SENIOR CREDIT FACILITY

Azurix Europe is currently negotiating with a group of banks for a new
senior credit facility which will replace and refinance outstanding amounts
under the existing senior credit facility. The new senior credit facility is
expected to be entered into in May 1999 with Chase Manhattan Plc and
Westdeutsche Landesbank Girozentrale, as arrangers, Westdeutsche Landesbank
Girozentrale as facility agent and Chase Manhattan Trustees Limited as security
agent. The new senior credit facility will consist of a revolving

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credit facility of L425 ($686.0) million. Amounts outstanding under the new
senior credit facility will bear interest at a rate based on the London
interbank offered rate, plus a margin. If loans outstanding at the time of a new
loan are less than 50% of the total commitment of the facility, then the margin
applied to the new loan will equal 0.75% per annum. If loans outstanding at the
time of a new loan are greater than or equal to 50% of the total commitment of
the facility, then the margin applied to the new loan will equal 1.00% per
annum. Azurix Europe will pay a commitment fee on the undrawn, uncancelled
amount of the facility at the rate of 0.375% per annum. The facility will be for
a period of three years.

It is expected that loans made under the facility will be used to refinance
Azurix Europe's existing indebtedness and may be used further to refinance any
outstanding debt of Azurix Europe and to make loans to affiliates of Azurix
Europe for the purpose of financing acquisitions of and investments in water and
wastewater assets and businesses, including the pending $107 million acquisition
of Philip Utilities. It is intended that of the L425 ($686.0) million facility
amount, L185 ($298.6) million could be used to refinance existing debt of Azurix
Europe and up to L240 ($387.4) million may be lent to affiliates. Intercompany
loans made under the facility will be senior obligations, maturing on or before
the maturity date of the facility, and, if practicable at interest rates at
least equal to the interest rates on the facility. The loans will be guaranteed
by Azurix in favor of Azurix Europe. The affiliates will be direct or indirect
wholly owned subsidiaries of Azurix which have been created as special purpose
vehicles. The facility will be a secured facility, and Azurix Europe will pledge
all its existing assets, including all the ordinary shares of Wessex.

COVENANTS. Azurix Europe will agree that it will not, and will ensure that
its subsidiaries will not, create or permit to exist any other security interest
on any of their assets, except in the ordinary course of business, to secure
project finance indebtedness or other security interests in an aggregate amount
not to exceed L35 ($56.5) million. Azurix Europe will not sell, transfer or
otherwise dispose of any of the ordinary shares of Wessex. Azurix Europe will
also agree that it will not, and will ensure that its subsidiaries will not,
sell, transfer, grant or lease or otherwise dispose of all or any part of its
assets, except in the ordinary course of business or other disposals in an
aggregate amount not to exceed L35 ($56.5) million. Azurix Europe will not make
any substantial change to the general nature or scope of its business as a water
and wastewater company in the United Kingdom. Azurix Europe will only conduct
business as a holding company. Azurix Europe will agree that it will not, and
will ensure that its subsidiaries will not, enter into any amalgamation,
demerger, merger or reconstruction. Azurix Europe will agree that it will not,
and will ensure that its subsidiaries will not, acquire any assets or business
or make any investment if the assets, business or investment is substantial in
relation to Azurix Europe and its group, except in the ordinary course of
business, as a required capital expenditure or other acquisitions in an
aggregate amount not to exceed L10 ($16.1) million. Azurix Europe may not
declare, recommend, make or pay any dividend, distribution or payment to any of
its shareholders and will covenant to ensure that Wessex Water Services will
dividend to Wessex the maximum distribution permissible by the dividend policy,
from time to time, of Wessex Water Services and Wessex will dividend to Azurix
Europe its maximum distributable reserves from time to time. The facility also
will require that the aggregate borrowings plus liabilities for borrowings of
Wessex that Azurix Europe and its subsidiaries may have outstanding at any time
do not exceed L1,050 ($1,694.7) million. All excess cash flow of Azurix Europe
(i.e., all cash flow after deducting interest, taxes and operating expenses)
will be paid into a debt service reserve account. All excess cash flow will be
applied to build up, within six months of closing of the facility, an amount
determined by the security agent to be one year's gross interest payable under
the facility. All amounts credited to the debt service reserve account may be
invested in cash and cash equivalents with minimum credit ratings and, provided
credit enhancement is provided, may be lent by Azurix Europe to certain other
entities, including Azurix and Enron.

FINANCIAL COVENANTS. Azurix Europe will be required to maintain, or ensure
Wessex maintains, the following financial ratios on a quarterly and annual
basis:

- The ratio of consolidated EBITDA to consolidated net interest payable
will be no less than, in the case of Azurix Europe, 2.25:1 and, in the
case of Wessex, 2.5:1

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- The ratio of debt to total capitalization will not, as of each date on
which it is tested, exceed, in the case of Azurix Europe, 50% and, in the
case of Wessex, 55%

- The ratio of dividends received by Azurix Europe to net interest payable
by Azurix Europe will not be less than 1.5:1

Azurix expects it will be in compliance with these covenants.

DEFAULT. Each of the following events is an event of default under the new
senior credit facility:

- Not paying any amount which is due and payable by it within three
business days after notice of non-payment

- Azurix Europe failing to comply with its covenants, or failing to comply
with any provision of a finance document or a representation, warranty or
statement made or repeated in any finance document being materially
incorrect and not remedied within 28 days

- A cross-default related to any financial indebtedness of Azurix Europe or
its subsidiaries occurring, except when the aggregate amount of financial
indebtedness involved in all cross-defaults is less than L15 ($24.2)
million

- Insolvency or bankruptcy of Azurix Europe or a material subsidiary
occurring

- Any attachment, or execution affecting any assets of Azurix Europe or a
material subsidiary having an aggregate value of L15 ($24.2) million that
is not discharged within 14 days or is not being contested in good faith

- At any time Azurix Europe ceases to be a wholly owned subsidiary of
Azurix

- Wessex's license as a water and wastewater company being revoked or
surrendered or ceasing to be held by Wessex Water Ltd or a wholly owned
subsidiary of Azurix Europe, except if the U.K. Water Industry Act 1991
is changed to permit Wessex or one of its subsidiaries to carry on the
water and wastewater business of Wessex Water Ltd to the same extent as
it is currently carried out without the license

- Any event or series of events occurring that, in the reasonable opinion
of a majority in interest of the lenders, has a material adverse effect
on the ability of Azurix Europe to perform its payment obligations under
the finance documents

ACQUISITION LOAN NOTES

In connection with the acquisition of Wessex, Azurix Europe issued U.K.
pound denominated loan notes in a principal amount of L70.5 ($113.8) million to
Wessex shareholders in lieu of cash consideration for the ordinary shares of
Wessex. As of April 30, 1999, L70.5 ($113.8) million principal amount of
acquisition loan notes were outstanding. The acquisition loan notes are
redeemable, at the option of the holder, semiannually beginning September 30,
1999 and ending on September 30, 2005 when the acquisition loan notes mature.
Interest on the acquisition loan notes accrues at the London interbank offered
rate and is payable semiannually. The interest rate for the period the
acquisition loan notes were outstanding during 1998 was 7.125%. Holders of
acquisition loan notes can require a redemption of their notes at par plus
accrued interest in certain insolvency situations and if any principal or
interest payment is not paid within 30 days of its due date.

SENIOR LOAN AGREEMENT -- AFFILIATE NOTE

Bristol Water Trust entered into a L73 ($117.8) million senior loan
agreement with Azurix Europe in December 1998. As of April 30, 1999, L73
($117.8) million was outstanding under the senior loan

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agreement. Bristol Water Trust is a wholly owned subsidiary of Atlantic Water
Trust. The interest rate on this loan is 6.25% per annum payable semiannually.
Repayment of this loan is required by December 12, 2001.

COVENANTS. In addition to agreeing to provide Bristol Water Trust with
quarterly financial information regarding its business and with notice of
defaults or changes in its accounting principles, Azurix Europe has agreed not
to:

- Sell, transfer or otherwise dispose or cease to control the ordinary
shares of Wessex Water Ltd

- Make any substantial change to the general nature or scope of its
business as a water and wastewater company in the U.K.

- Declare, recommend, make or pay any dividend, distribution or payment to
any of its shareholders or make any payment in respect of any
subordinated debt unless no default is then outstanding or will result
from the relevant dividend, distribution or payment

- Amend or replace its articles of association or by-laws in any way which
would materially adversely affect the interests of Bristol Water Trust

FINANCIAL COVENANTS. Azurix Europe has agreed to maintain on a quarterly
and annual basis, the following financial ratios:

- Consolidated EBITDA to consolidated net interest payable of at least
1.75:1

- A ratio of debt to total capitalization equal to or less than 60%

Azurix Europe is currently in compliance with these covenants.

DEFAULT. Each of the following events is an event of default under this
loan agreement:

- Azurix Europe failing to pay any principal amount which is due and
payable by it within three business days after notice of non-payment

- Azurix Europe failing to comply with its covenants or a representation,
warranty or statement made by it being materially incorrect and not
remedied within 28 days

- The debt under the senior secured credit facility or any replacement
facility becoming prematurely due and payable as a result of an event of
default under the relevant credit agreement

- Insolvency of Azurix Europe or a material subsidiary of Azurix Europe

- Wessex's license being revoked or surrendered or ceasing to be held by
Wessex Water Ltd, a wholly owned subsidiary of Wessex Water Ltd or Azurix
Europe, except if the U.K. Water Industry Act 1991 is changed to permit
Wessex or one of its subsidiaries to carry on the water and wastewater
business of Wessex Water Ltd to the same extent as it is currently
carried out without the license

- Wessex's license or the rights or obligations under the license being
materially modified in any manner that, in the reasonable opinion of
Bristol Water Trust has a material adverse effect on Azurix Europe

- Any person other than Wessex Water Ltd or one of its subsidiaries being
authorized to be a water or wastewater company in the area covered by
Wessex's license such that there would be a material adverse effect on
Azurix Europe

If a default occurs, Bristol Water Trust will have the right, by notice to
Azurix Europe at least three business days following the occurrence of the event
of default, to accelerate the payment of all outstanding principal and interest
under this loan agreement.

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INDEBTEDNESS OF WESSEX

BANK FACILITIES

Wessex Water Services is a borrower under bank facilities with three major
banks that provide an aggregate of L75 ($121.1) million of availability for
general corporate purposes. As of April 30, 1999, L75 ($121.1) million was
outstanding under these bank facilities. These bank facilities were entered into
on April 1, 1999 and mature in April 2002. Loans under these credit facilities
accrue interest at the London interbank offered rate plus a margin of 0.275% per
annum. Each of these credit facilities requires Wessex Water Services to pay an
annual commitment fee equal to 0.15% of the available amount of the facility.

Each of these facilities requires Wessex Water Services to maintain a ratio
in excess of 2:1 of earnings before interest received, interest costs,
exceptional charges and tax to interest costs less interest received. Wessex
Water Services is currently in compliance with this covenant. Each of these
facilities provides that each of the following will be an event of default:

- Wessex Water Services failing to pay any amount due and payable under the
facility on its due date

- Wessex Water Services failing to comply with any other obligation under
the facility, unless remedied within 30 days of the breach

- Wessex Water Services providing the bank with materially inaccurate
information

- Wessex Water Services defaulting under any borrowing, where the
outstanding amount exceeds L15 million, such that prepayment of such
borrowing is required

- Wessex Water Services losing its license as the water and wastewater
services provider over a portion of its geographical region such that it
would lose 15% or more of its revenues

- Wessex Water Services ceasing to be a subsidiary of Azurix

In addition, as of April 30, 1999, L24 ($38.7) million was outstanding
under uncommitted credit facilities.

EUROPEAN INVESTMENT BANK LOANS

Wessex Water Services is a borrower under facilities provided by the
European Investment Bank for purposes of financing its capital investment
program. These facilities currently consist of two separate loans with an
aggregate principal balance outstanding as of April 30, 1999 of L41.3 ($66.7)
million, including the effect of currency swap contracts in place as follows:

(1) a U.S. dollar denominated floating rate loan of $49.9 million
repayable in full in October 2001, and

(2) a 25.0 billion Italian lire ($29.7 million) fixed rate loan
repayable in ten semiannual installments through June 2002.

Wessex guarantees the obligations of Wessex Water Services under these
facilities.

The U.S. dollar dominated loan bears interest at London interbank offered
rate less 0.25% per annum. The Italian lire loan bears interest at 11.6%. Each
of these facilities requires Wessex to maintain the following financial
covenants:

- Consolidated net borrowings will not exceed 150% of consolidated net
tangible worth

- Operating profits will be at least 2.0x total interest expense on an
annual basis

- Consolidated net tangible worth will be at least L400 million

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In each of these facilities, Wessex Water Services has agreed that it will
not carry on any business other than the business of providing water and
wastewater services in the area covered by its license and any ancillary
activity. An event of default will occur under each facility, allowing the bank
to require immediate payment, in the following instances:

- If Wessex Water Services or Wessex is bankrupt or insolvent

- If Wessex Water Services ceases to be a subsidiary of Wessex

- If Wessex Water Services loses its license as the water and wastewater
services provider over a portion of its geographical region such that it
would lose 15% or more of its revenues

FINANCE LEASE AGREEMENT

Wessex Water Services is the lessee under a finance lease agreement with
Barclays Mercantile Business Finance Limited pursuant to which L59.7 ($96.4)
million of capital lease obligations (excluding interest on such obligations)
were outstanding as of April 30, 1999. Under the lease agreement, Wessex Water
Services is reimbursed by Barclays for the acquisition cost of machinery and
equipment acquired in connection with its capital expenditure program. Wessex
Water Services then makes periodic rental payments to Barclays. Payments are
made in installments payable semiannually through September 2002. Barclays has a
lien on the property that has been acquired in connection with the leases.

The leasing of the equipment may be terminated at any time in the following
instances:

- Wessex Water Services defaults in making any rental payment

- Wessex Water Services or Wessex is bankrupt or insolvent

- Wessex Water Services sells or mortgages or agrees to sell or mortgage
any of the equipment or otherwise prejudices Barclays' ownership of, and
rights with respect to, the equipment

- Wessex Water Services fails to maintain adequate liability and property
insurance

- Wessex Water Services or Wessex defaults under any other debt agreement,
where the outstanding amount exceeds L5 million, such that repayment of
such debt is required

- Wessex ceases to own a majority of the capital stock of Wessex Water
Services

- A material adverse change occurs to Wessex Water Services which
substantially impairs its ability to perform its obligations under the
lease agreement

Wessex guarantees the obligations of Wessex Water Services under the lease
agreement. As guarantor, Wessex has agreed to maintain the same financial
covenants as required by the European Investment Bank facilities described
above.

SENIOR UNSECURED BONDS

On March 30, 1999, Wessex Water Services issued L300 ($484.2) million
principal amount of 10-year senior unsecured bonds bearing interest at 5.875%
per annum through its wholly owned subsidiary, Wessex Water Services Finance
Plc. Wessex Water Services has unconditionally and irrevocably guaranteed
payment of principal and interest of the bonds. All principal will be due on
March 30, 2009. Wessex Water Services used most of the proceeds from the sale of
the bonds to repay all outstanding amounts under its former bank credit
facilities as well as all outstanding amounts under uncommitted credit
facilities. Any remaining proceeds will be used for general corporate purposes.

The bonds will be redeemed by Wessex Water Services as follows:

- On March 30, 2009 at their principal amount

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- At the option of Wessex Water Services, if it becomes obligated to pay
additional amounts because of a change in law, at their principal amount

- At the option of Wessex Water Services, in whole or in part, at the
higher of the following:

-- their principal amount; or

-- a redemption price, which is calculated based on the published
redemption yield for a reasonably equivalent U.K. Government issued
security with similar maturity and coupon.

Bondholders have the right to require Wessex to buy back their bonds prior
to maturity at a price equal to the principal amount of the bond plus all
accrued but unpaid interest in the following instances:

- Wessex's license as a water and wastewater company is terminated

- Wessex Water Services Finance Plc ceases to be a subsidiary of Wessex
Water Services

- Material changes occur to the rights or benefits of Wessex's license or
legislation is enacted which materially changes the duties or powers of
the Secretary of State for the Environment or the Director General of
Water Services and the rating on the bonds is downgraded below investment
grade

In addition, the bonds could become immediately due and payable if an event
of default occurs. These events include a cross-default by Wessex Water Services
or its subsidiaries under other debt instruments and events of insolvency.

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SHARES ELIGIBLE FOR FUTURE SALE

Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of our common stock in the
public market could adversely affect the market price of our common stock. After
this offering is completed, the number of shares available for future sale into
the public markets will be subject to legal and contractual restrictions, some
of which are described below. The lapsing of these restrictions will permit
sales of substantial amounts of our common stock in the public market or could
create the perception that such sales could occur, which could adversely affect
the market price for our common stock. These factors could also make it more
difficult to raise funds through future offerings of common stock.

Upon the completion of this offering, we will have shares of our
common stock outstanding. Of these shares, the shares sold in this
offering will be freely transferable and may be sold without restriction or
further registration under the Securities Act, except for any shares acquired by
an "affiliate" of Azurix as defined in Rule 144 under the Securities Act. The
remaining shares of common stock outstanding and owned by the selling
stockholder will be "restricted securities," as that term is defined in Rule
144, and may be sold in the future without registration under the Securities Act
to the extent permitted by Rule 144, as described below, or any applicable
exemption under the Securities Act. In addition, shares owned by Atlantic Water
Trust or its transferee may be registered for sale under the Securities Act of
1933 under the terms of its registration rights agreement with us. See "Certain
Transactions -- Registration Rights Agreement" for more information regarding
these registration rights.

RULE 144

In general, under Rule 144, as currently in effect, a person, or persons
whose shares are aggregated, including an affiliate, who has beneficially owned
"restricted securities" for at least one year would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of:

- 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after the offering; or

- The average weekly trading volume of the common stock on the New York
Stock Exchange during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale with the SEC.

Sales under Rule 144 are also subject to certain other requirements
regarding the manner of sale, notice and availability of current public
information about Azurix.

Since Atlantic Water Trust, the selling stockholder, is likely an
"affiliate" of us, subject to its exercise of registration rights described
under "Certain Transactions," the Rule 144 restrictions and requirements would
be applicable to shares of Azurix owned by them for so long as the selling
stockholder retains affiliate status.

RULE 144(k)

Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an "affiliate", is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.

LOCK-UP AGREEMENTS

In connection with the offering, we and the selling stockholder have
agreed, with certain exceptions, not to directly or indirectly engage in the
following activities for a period of 180 days after the date of this prospectus
without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated:

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- Offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, lend or otherwise dispose of or
transfer any shares of common stock or securities convertible into or
exchangeable or exercisable for or repayable with common stock, whether
now owned or thereafter acquired by the person executing the agreement or
with respect to which the person executing the agreement thereafter
acquires the power of disposition, or file a registration statement under
the Securities Act relating to any shares of common stock

- Enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of common stock whether any
such swap or transaction is to be settled by delivery of common stock or
other securities, in cash or otherwise, see "Underwriting -- No Sales of
Similar Securities"

As an exception to these restrictions, we may issue shares of our common
stock or securities convertible or exchangeable into our common stock as payment
of any part of the purchase price for businesses we acquire. However, shares
issued in this manner shall not be transferable during the 180-day lock-up
period. In addition, if Atlantic Water Trust is compelled to sell some or all of
its shares of our common stock in the event of a default under specified debt
obligations or a major decline in the price of Enron's common stock combined
with a downgrading of Enron's senior debt to below investment grade, then such
sale will be permitted. See "Risk Factors -- Future sales of our common stock
may depress our stock price."

STOCK PLAN

After the offering, we intend to file a registration statement covering the
sale of approximately 7.8 million shares of common stock reserved for issuance
under our stock plan.

Upon expiration of the lock-up period, these shares may be sold at any time
subject to compliance with the volume limitations and other restrictions of Rule
144. Options to purchase approximately 7.8 million shares of common stock will
also be outstanding after the offering. Such options generally provide for
incremental vesting over a three to five year period. In addition, more options
may be granted in the future. See "Management -- Stock Plan."

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MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS OF COMMON STOCK

The following is a summary of material U.S. federal income and estate tax
consequences expected to result under current law from the purchase, ownership
and taxable disposition of common stock by non-U.S. holders of common stock. A
"non-U.S. holder" is any person or entity other than:

- A citizen or resident of the United States

- A corporation, partnership or other entity created or organized in or
under the laws of the United States or any state thereof

- An estate, the income of which is includable in gross income for U.S.
federal income tax purposes regardless of its source

- A trust whose administration is subject to the primary supervision of a
United States court and which has one or more U.S. persons who have the
authority to control all substantial decisions of the trust

This summary does not address all of the U.S. federal income and estate tax
considerations that may be relevant to non-U.S. holders in light of their
particular circumstances or to non-U.S. holders that may be subject to special
treatment under United States federal income tax laws. This summary does not
discuss any aspect of state, local or foreign taxation. This summary is based on
current provisions of the Internal Revenue Code of 1986, as amended, Treasury
regulations, judicial opinions, published positions of the U.S. Internal Revenue
Service and other applicable authorities, all of which are subject to change,
possibly with retroactive effect. In this prospectus, the Internal Revenue Code
of 1986, as amended, is called the "Code." Prospective purchasers of common
stock are advised to consult their tax advisors regarding the U.S. federal,
state and local, and non-U.S. income and other tax consequences of acquiring,
holding and disposing of common stock.

DIVIDENDS

Azurix does not currently anticipate paying any dividends. Any dividends
paid to a non-U.S. holder on shares of common stock will be subject to
withholding of U.S. federal income tax at a rate of 30%, unless a lower rate is
prescribed under an applicable tax treaty. U.S. federal income tax withholding
will not be required, however, if the dividends are effectively connected with
the conduct of a trade or business of the non-U.S. holder within the United
States or, in the case of an applicable tax treaty, are attributable to a U.S.
permanent establishment maintained by the non-U.S. holder. Dividends that are
effectively connected with the conduct of a trade or business within the United
States, or are attributable to a U.S. permanent establishment will be subject to
U.S. federal income tax on a net income basis which is not collected by
withholding provided the non-U.S. holder files the appropriate certification
with Azurix or its agent. Any dividends received by a foreign corporation that
are effectively connected with the conduct of a trade or business within the
United States may also be subject to a "branch profits tax" at a rate of 30% or
such lower rate as may be specified by an applicable tax treaty.

For purposes of the withholding tax rules discussed above and for purposes
of determining the applicability of a tax treaty rate under current U.S.
Treasury Regulations, dividends paid to an address outside the United States
will be presumed to be paid to a resident of the country of address, unless the
payor has knowledge to the contrary. Under recently issued U.S. Treasury
Regulations (referred to as "final regulations") that are effective for payments
made after December 31, 1999, a non-U.S. holder of common stock who wishes to
claim the benefit of a tax treaty rate would be required to satisfy applicable

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<PAGE> 109

certification and other requirements. In addition, under the final regulations,
in the case of common stock held by a foreign partnership:

- The certification requirement generally would be applied to the partners
of the partnership.

- The partnership would be required to provide certain information,
including a U.S. taxpayer identification number.

A non-U.S. holder of common stock that is eligible for a reduced rate of
U.S. federal income tax withholding pursuant to a tax treaty may obtain a refund
of any excess amounts currently withheld by filing an appropriate claim for
refund with the Internal Revenue Service.

SALE OR DISPOSITION OF COMMON STOCK

A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of any gain recognized on the sale or other taxable disposition of
common stock so long as:

- The gain is not effectively connected with the conduct of a trade or
business of the non-U.S. holder within the United States nor under an
applicable tax treaty, is attributable to a U.S. permanent establishment
maintained by the non-U.S. holder.

- In the case of a non-U.S. holder who is an individual and holds the
common stock as a capital asset, either:

-- Such holder is not present in the United States for 183 or more days
during the taxable year of the disposition.

-- Such holder does not have a "tax home" in the United States for U.S.
federal income tax purposes nor does such holder maintain an office
or other fixed place of business in the United States to which such
gain is attributable.

- Such non-U.S. holder is not subject to tax pursuant to the provisions of
U.S. federal income tax law applicable to certain U.S. expatriates.

- The common stock continues to be "regularly traded on an established
securities market" for U.S. federal income tax purposes and the non-U.S.
holder has not held, directly or indirectly, at any time during the
five-year period ending on the date of disposition (or, if shorter, the
non-U.S. holder's holding period) more than five percent of the
outstanding common stock.

INFORMATION REPORTING AND BACKUP WITHHOLDING

Azurix must report annually to the Internal Revenue Service and to each
non-U.S. holder the amount of dividends paid to, and the tax withheld with
respect to, each non-U.S. holder. These reporting requirements apply regardless
of whether withholding was reduced by an applicable tax treaty. Copies of these
information returns may also be made available under the provisions of a treaty
or information exchange agreement with the tax authorities in the country in
which the non-U.S. holder resides or is established. Under current law, U.S.
backup withholding tax, which is a withholding tax currently imposed at the rate
of 31% on certain payments to persons who fail to furnish the information
required under U.S. information reporting requirements, generally will not apply
to dividends paid on common stock to a non-U.S. holder at an address outside the
United States unless the payor has knowledge that the payee is a U.S. person.
However, under the final regulations, dividends paid on common stock after
December 31, 1999 may be subject to backup withholding unless applicable
certification requirements are satisfied.

Payment of the proceeds from a sale of common stock to or through a U.S.
office of a broker will be subject to information reporting and backup
withholding unless the owner certifies as to its status as a non-U.S. holder
under penalties of perjury or otherwise establishes an exemption. Payment of the
proceeds from a sale of common stock to or through a non-U.S. office of a broker
generally will not be subject to information reporting or backup withholding.
However, if such broker is a U.S. person, a "controlled foreign corporation" or
a foreign person that derives 50% or more of its gross income from the conduct
of
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<PAGE> 110

a trade or business in the United States, such payment will be subject to
information reporting, but currently not backup withholding, unless such broker
has documentary evidence in its records that the owner is a non-U.S. holder and
certain other conditions are met or the owner otherwise establishes an
exemption.

Any amounts withheld under the backup withholding rules will be credited
against the non-U.S. holder's federal income tax liability, if any, or refunded,
provided the required information is furnished to the Internal Revenue Service.

ESTATE TAX

The fair market value of common stock owned, or treated as owned, by an
individual at the time of his death will be includible in his gross estate for
U.S. federal estate tax purposes and thus may be subject to U.S. estate tax,
even though the individual at the time of death is neither a citizen of nor
domiciled in the United States, unless an applicable estate tax treaty provides
otherwise.

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<PAGE> 111

UNDERWRITING

GENERAL

We intend to offer our common stock in the United States and Canada through
a number of U.S. underwriters and elsewhere through international managers.
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse First Boston
Corporation, Donaldson, Lufkin & Jenrette Securities Corporation, PaineWebber
Incorporated, BT Alex. Brown Incorporated and NationsBanc Montgomery Securities
LLC are acting as U.S. representatives of each of the U.S. underwriters named
below. Under a U.S. purchase agreement among Azurix, the selling stockholder,
Enron and the U.S. underwriters, and concurrently with the sale of
shares of common stock to the international managers, Azurix and the selling
stockholder have agreed to sell to the U.S. underwriters, and each of the U.S.
underwriters severally and not jointly has agreed to purchase from Azurix and
the selling stockholder, the number of shares of common stock set forth opposite
its name below.

<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
- ----------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Credit Suisse First Boston Corporation......................
Donaldson, Lufkin & Jenrette Securities Corporation.........
PaineWebber Incorporated....................................
BT Alex. Brown Incorporated.................................
NationsBanc Montgomery Securities LLC.......................

--------
Total..........................................
========
</TABLE>

Azurix, the selling stockholder and Enron have also entered into an
international purchase agreement with the international managers outside the
United States and Canada for whom Merrill Lynch International, Credit Suisse
First Boston (Europe) Limited, Donaldson, Lufkin & Jenrette International,
PaineWebber International (U.K.) Limited, ABN AMRO Rothschild and HSBC
Securities, Inc. are acting as lead managers. Under the international purchase
agreement, and concurrently with the sale of shares of common stock to
the U.S. underwriters under the U.S. purchase agreement, Azurix and the selling
stockholder have agreed to sell to the international managers, and the
international managers have agreed to purchase from Azurix and the selling
stockholder, an aggregate of shares of common stock. The initial
public offering price per share and the total underwriting discount per share of
common stock are identical under the U.S. purchase agreement and the
international purchase agreement.

In the U.S. purchase agreement and the international purchase agreement,
the U.S. underwriters and the international managers, respectively, have agreed,
under the terms of those agreements, to purchase all of the shares of common
stock being sold under those agreements if any of the shares of our common stock
being sold under those agreements are purchased. In the event of a default by an
underwriter, the U.S. purchase agreement and the international purchase
agreement provide that, in some circumstances, the purchase commitments of
nondefaulting underwriters may be increased or the purchase agreements may be
terminated. The closings for the sale of shares of our common stock to the U.S.
underwriters and the international managers are conditioned upon one another.

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<PAGE> 112

Azurix and Enron have agreed to indemnify the U.S. underwriters and the
international managers against some liabilities, including some liabilities
under the Securities Act, or to contribute to payments the U.S. underwriters and
the international managers may be required to make in respect of those
liabilities.

The shares of common stock are being offered by the underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of legal matters by counsel for the underwriters and other conditions.
The underwriters reserve the right to withdraw, cancel or modify offers and to
reject orders in whole or in part.

COMMISSIONS AND DISCOUNTS

The U.S. representatives have advised Azurix and the selling stockholder
that the U.S. underwriters propose initially to offer the shares of our common
stock to the public at the initial public offering price set forth on the cover
page of this prospectus, and to certain dealers at such price less a concession
not in excess of $ per share of common stock. The U.S. underwriters may
allow, and such dealers may reallow, a discount not in excess of $ per share
of common stock to certain other dealers. After the initial public offering, the
public offering price, concession and discount may be changed.

The following table shows the per share and total public offering price,
the underwriting discount to be paid by Azurix and the selling stockholder to
the U.S. underwriters and the international managers and the proceeds before
expenses to Azurix and the selling stockholder. This information is presented
assuming either no exercise or full exercise by the U.S. underwriters and the
international managers of their over-allotment options.

<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
--------- ------- ------
<S> <C> <C> <C>
Public offering price.................................... $ $ $
Underwriting discount.................................... $ $ $
Proceeds, before expenses, to Azurix..................... $ $ $
Proceeds, before expenses, to the selling stockholder.... $ $ $
</TABLE>

The expenses of this offering, exclusive of the underwriting discount, are
estimated at $ and are payable by Azurix and the selling stockholder.

INTERSYNDICATE AGREEMENT

The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the terms of the intersyndicate agreement, the U.S. underwriters and the
international managers are permitted to sell shares of common stock to each
other for purposes of resale at the public offering price, less an amount not
greater than the selling concession. Under the terms of the intersyndicate
agreement, the U.S. underwriters and any dealer to whom they sell shares of our
common stock will not offer to sell or sell shares of common stock to persons
who are non-U.S. or non-Canadian persons or to persons they believe intend to
resell to persons who are non-U.S. or non-Canadian persons, and the
international managers and any dealer to whom they sell shares of common stock
will not offer to sell or sell shares of common stock to U.S. persons or to
Canadian persons or to persons they believe intend to resell to U.S. persons or
Canadian persons, except in the case of transactions under the terms of the
intersyndicate agreement.

OVER-ALLOTMENT OPTION

The selling stockholder has granted an option to the U.S. underwriters,
exercisable for 30 days after the date of this prospectus, to purchase up to an
aggregate of additional shares of our common stock at the initial
public offering price set forth on the cover page of this prospectus, less the
underwriting discount. The U.S. underwriters may exercise this option solely to
cover over-allotments, if any, made on the sale of our common stock offered
hereby. To the extent that the U.S. underwriters

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<PAGE> 113

exercise this option, each U.S. underwriter will be obligated, subject to
certain conditions, to purchase a number of additional shares of our common
stock proportionate to such U.S. underwriter's initial amount reflected in the
foregoing table.

The selling stockholder also has granted an option to the international
managers, exercisable for 30 days after the date of this prospectus, to purchase
up to an aggregate of additional shares of common stock to cover
over-allotments, if any, on terms similar to those granted to the U.S.
underwriters.

RESERVED SHARES

At our request, the underwriters have reserved for sale, at the initial
public offering price, up to of the shares offered hereby to be sold
to some of our directors, officers, employees, customers and other persons with
whom we have an existing relationship who have expressed an interest in
purchasing our common stock, including certain employees, officers and directors
of Enron and its affiliated companies, business associates and related persons.
The number of shares of our common stock available for sale to the general
public will be reduced to the extent that those persons purchase the reserved
shares. Any reserved shares which are not orally confirmed for purchase within
one day of the pricing of the offering will be offered by the underwriters to
the general public on the same terms as the other shares offered by this
prospectus.

NO SALES OF SIMILAR SECURITIES

Azurix and the selling stockholder have agreed, with certain exceptions,
not to directly or indirectly engage in the following activities for a period of
180 days after the date of this prospectus without the prior written consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated:

- Offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, lend or otherwise dispose of or
transfer any shares of our common stock or securities convertible into or
exchangeable or exercisable for or repayable with our common stock,
whether now owned or later acquired by the person executing the agreement
or with respect to which the person executing the agreement later
acquires the power of disposition, or file a registration statement under
the Securities Act relating to any shares of our common stock

- Enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of our common stock whether
any such swap or transaction is to be settled by delivery of our common
stock or other securities, in cash or otherwise, see "Shares Eligible for
Future Sale"

As an exception to these restrictions, we may issue shares of our common
stock or securities convertible or exchangeable into our common stock as payment
of any part of the purchase price for businesses we acquire. However, shares
issued in this manner shall not be transferable during the 180-day lock-up
period. In addition, if Atlantic Water Trust is compelled to sell some or all of
its shares of our common stock in the event of a default under specified debt
obligations or a major decline in the price of Enron's common stock combined
with a downgrading of Enron's senior debt to below investment grade, then such
sale will be permitted. See "Risk Factors--Future sales of our common stock may
depress our stock price."

NEW YORK STOCK EXCHANGE LISTING

Azurix is applying to list the common stock on the New York Stock Exchange
under the symbol "AZX." In order to meet the requirements for listing of our
common stock on that exchange, the underwriters have undertaken to sell lots of
100 or more shares to a minimum of 2,000 beneficial owners.

Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations among
Azurix, the selling stockholder, Enron, the

108
<PAGE> 114

U.S. representatives and the lead managers. The factors considered in
determining the initial public offering price, in addition to prevailing market
conditions, are the valuation multiples of publicly traded companies that the
U.S. representatives and the lead managers believe to be comparable to us,
including adjusted market value to EBITDA multiples, price to book value
multiples and price to earnings multiples, certain of our financial information,
the history of, and the prospects for, our company and the industry in which we
compete, an assessment of our management, our past and present operations, the
prospects for and timing of our future revenues, the present state of our
development, and the above factors in relation to market values and various
valuation measures of other companies engaged in activities similar to ours.
There can be no assurance that an active trading market will develop for our
common stock or that the common stock will trade in the public market subsequent
to this offering at or above the initial public offering price.

The underwriters do not expect sales of our common stock to any accounts
over which they exercise discretionary authority to exceed 5% of the number of
shares being offered in this offering.

PRICE STABILIZATION AND SHORT POSITIONS

Until the distribution of our common stock is completed, rules of the SEC
may limit the ability of the underwriters and selling group members to bid for
and purchase our common stock. As an exception to these rules, the U.S.
representatives and the lead managers are permitted to engage in certain
transactions that stabilize the price of our common stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of our common stock.

If the underwriters create a short position in our common stock in
connection with this offering, i.e., if they sell more shares of common stock
than are set forth on the cover page of this prospectus, the U.S.
representatives and the lead managers may reduce that short position by
purchasing our common stock in the open market. The U.S. representatives and the
lead managers may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.

PENALTY BIDS

The U.S. representatives and the lead managers may also impose a penalty
bid on underwriters and selling group members. This means that if the U.S.
representatives or the lead managers purchase shares of our common stock in the
open market to reduce the underwriters' short position or to stabilize the price
of our common stock, they may reclaim the amount of the selling concession from
the underwriters and selling group members who sold those shares.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that it
discourages resales of our common stock.

None of Azurix, the selling stockholder, or any of the underwriters makes
any representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of our common stock.
In addition, none of Azurix, the selling stockholder, or any of the underwriters
makes any representation that the U.S. representatives or the lead managers will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.

OTHER RELATIONSHIPS

Some of the underwriters and their affiliates engage in transactions with,
and perform services for, our company, Enron and Enron's affiliates in the
ordinary course of business and have engaged, and may in the future engage, in
commercial banking and investment banking transactions and services with our
company, Enron and Enron's affiliates, for which they have received customary
compensation.

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<PAGE> 115

STAMP TAXES

Purchasers of the shares of common stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price set forth on the cover
page hereof.

LEGAL MATTERS

Legal matters with respect to the validity of the issuance of the shares of
our common stock offered hereby will be passed upon for us by Vinson & Elkins
L.L.P., Houston, Texas. Legal matters relating to our common stock offered
hereby will be passed upon for the U.S. underwriters and the international
managers by Andrews & Kurth L.L.P., Houston, Texas.

EXPERTS

The consolidated financial statements and schedules for Azurix Corp. and
subsidiaries as of December 31, 1998 and for the period from January 29, 1998
(Date of Inception) to December 31, 1998, included in this prospectus and
elsewhere in the registration statement, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.

The consolidated statements of income, changes in stockholders' equity and
cash flows and schedule for Wessex Water Plc (now renamed Wessex Water Ltd)
(predecessor company) for the period from April 1, 1998 to October 2, 1998
included in this prospectus have been audited by Arthur Andersen, independent
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.

The consolidated financial statements and schedule for Wessex Water Plc
(now renamed Wessex Water Ltd) (predecessor company) as of March 31, 1998 and
for the years ended March 31, 1998 and 1997, included in this prospectus, have
been audited by PricewaterhouseCoopers, independent accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of that firm as experts in giving said reports.

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<PAGE> 116

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act, and the rules and regulations
promulgated thereunder, with respect to the common stock offered under this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement and the attached exhibits and schedules. Statements contained in this
prospectus as to the contents of any contract or other document that is filed as
an exhibit to the registration statement are not necessarily complete and each
such statement is qualified in all respects by reference to the full text of
such contract or document.

The registration statement can be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices at Seven World Trade
Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
portion of the registration statement can be obtained from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. You may obtain information on the operation of the Public
Reference Section by calling the SEC at (800) 732-0330. In addition, the
registration statement is publicly available through the SEC's site on the
internet, located at http://www.sec.gov.

Upon completion of this offering, we will be required to comply with the
informational requirements of the Securities and Exchange Act of 1934 and,
accordingly, will file periodic reports, proxy statements and other information
with the SEC. Those reports, proxy statements and other information will be
available for inspection and copying at the regional offices, public reference
facilities and Web site of the SEC referred to above. We intend to furnish our
stockholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm.

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<PAGE> 117

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AZURIX CORP. -- UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
FINANCIAL INFORMATION:
Unaudited Condensed Consolidated Pro Forma Financial
Information............................................ F-2
Unaudited Condensed Consolidated Pro Forma Statement of
Income for the Year Ended December 31, 1998............ F-3
Notes to Unaudited Condensed Consolidated Pro Forma
Statement of Income.................................... F-4
AZURIX CORP. -- CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants.................. F-6
Consolidated Statement of Income for the period from
January 29, 1998 (Date of Inception) to December 31,
1998................................................... F-7
Consolidated Statement of Comprehensive Income (Loss) for
the period from January 29, 1998 (Date of Inception) to
December 31, 1998...................................... F-8
Consolidated Balance Sheet as of December 31, 1998........ F-9
Consolidated Statement of Cash Flows for the period from
January 29, 1998 (Date of Inception) to December 31,
1998................................................... F-10
Consolidated Statement of Changes in Stockholder's Equity
for the period from January 29, 1998 (Date of
Inception) to December 31, 1998........................ F-11
Notes to Consolidated Financial Statements................ F-12
WESSEX WATER PLC (NOW RENAMED WESSEX WATER LTD) (PREDECESSOR
COMPANY) -- CONSOLIDATED FINANCIAL STATEMENTS:
Reports of Independent Accountants........................ F-27
Consolidated Statements of Income for the Six Months Ended
October 2, 1998 and the Years Ended March 31, 1998 and
1997................................................... F-29
Consolidated Balance Sheet at March 31, 1998.............. F-30
Consolidated Statements of Cash Flows for the Six Months
Ended October 2, 1998 and the Years Ended March 31,
1998 and 1997.......................................... F-31
Consolidated Statements of Changes in Stockholders' Equity
for the Six Months Ended October 2, 1998 and the Years
Ended March 31, 1998 and 1997.......................... F-32
Notes to the Consolidated Financial Statements............ F-33
</TABLE>

F-1
<PAGE> 118

AZURIX CORP.

UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
FINANCIAL INFORMATION

The following unaudited condensed consolidated pro forma statement of
income for the year ended December 31, 1998 gives effect to the October 2, 1998
acquisition of Wessex by Azurix ("Wessex Acquisition") and the related
redemption of the preference shares of Wessex and sale of its interest in Wessex
Waste Management Ltd, a joint venture with Waste Management International Plc,
as though each occurred on January 1, 1998. The unaudited condensed consolidated
pro forma statement of income does not include the 1998 results of operations
from Azurix's investment in Obras Sanitarias Mendoza S.A. prior to the date it
was acquired, and does not include any pro forma or historical effect from
Azurix's investment in a water concession for the city of Cancun, Mexico
acquired in 1999 or the proposed acquisition of Philip Utilities Management
Corp.

The unaudited condensed consolidated pro forma statement of income has been
prepared based upon the Azurix and Wessex consolidated statements of income
included elsewhere in this prospectus and has been prepared based upon available
information and certain assumptions that the management of Azurix believes are
reasonable. The unaudited condensed consolidated pro forma statement of income
is for informational purposes only, and does not purport to represent what
Azurix's actual results of operations would actually have been had the Wessex
Acquisition, and the related redemption of the preference shares of Wessex and
sale of its interest in Wessex Waste Management Ltd, a joint venture with Waste
Management International Plc, occurred on January 1, 1998. In addition, the
unaudited condensed consolidated pro forma statement of income is not
necessarily indicative of future results of operations of Azurix and should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of Azurix and Wessex and the related notes thereto included elsewhere in this
prospectus.

F-2
<PAGE> 119

AZURIX CORP.

UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN MILLIONS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
WESSEX PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenues................................ $119.7 $344.5 $ -- $464.2
Operating expenses:
Operations and maintenance...................... 31.6 89.3 120.9
General and administrative...................... 20.3 44.8 (20.7)(a) 44.4
Depreciation and amortization................... 22.2 50.0 16.1(b) 88.3
------ ------ ------ ------
Total operating expenses................ 74.1 184.1 (4.6) 253.6
------ ------ ------ ------
Operating income.................................. 45.6 160.4 4.6 210.6
------ ------ ------ ------
Other income (expense):
Equity in earnings (loss) of unconsolidated
affiliates................................... (0.8) 9.1 (9.1)(c) (0.8)
Interest income................................. 1.3 0.2 -- 1.5
Interest expense, net........................... (16.4) (9.7) (41.5)(d) (67.6)
Other expense................................... (1.2) -- 1.2(e) --
------ ------ ------ ------
Income before income taxes........................ 28.5 160.0 (44.8) 143.7
------ ------ ------ ------
Income tax expense................................ 18.3 53.2 (15.0)(f) 56.5
------ ------ ------ ------
Net income........................................ $ 10.2 $106.8 $(29.8) $ 87.2
====== ====== ====== ======
Earnings per share of common stock -- basic and
diluted......................................... $ 0.10 $ 0.87
====== ======
Weighted average shares outstanding -- basic and
diluted......................................... 100.0 100.0
====== ======
</TABLE>

The accompanying notes are an integral part of this unaudited condensed
consolidated pro forma financial statement.

F-3
<PAGE> 120

AZURIX CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
STATEMENT OF INCOME

The following pro forma adjustments give effect to the Wessex Acquisition,
and the related redemption of the preference shares of Wessex and sale of its
interest in Wessex Waste Management Ltd, a joint venture with Waste Management
International Plc, as though each occurred on January 1, 1998. The historical
results of Wessex for the period prior to the Wessex Acquisition were derived by
combining the Wessex historical audited results for the period April 1, 1998 to
October 2, 1998 and the Wessex historical audited results for the year ended
March 31, 1998, less the historical unaudited results for the nine months ended
December 31, 1997. The unaudited condensed consolidated pro forma statement of
income includes the 1998 results of operations from Azurix's investment in Obras
Sanitarias Mendoza S.A. from the date it was acquired, and does not include any
pro forma or historical effect from Azurix's $13.5 million investment in a water
concession for the city of Cancun, Mexico that closed on March 24, 1999.

The cost of the Wessex Acquisition, including transaction costs, was $2.4
billion. The pro forma adjustments are based on a preliminary purchase price
allocation because Azurix is in the process of finalizing its assessment of the
related fair values. This preliminary purchase price allocation includes
tangible assets of $2.7 billion, goodwill of $0.9 billion, liabilities assumed
of $1.1 billion and redeemable preferred stock of $0.1 billion. Azurix does not
believe the final evaluation of these assessments will materially affect the
allocation of the purchase price.

The historical results of operations for Azurix are for the period from
January 29, 1998 (Date of Inception) to December 31, 1998. However,
substantially all of Azurix's results of operations occurred during the fourth
quarter of 1998, subsequent to the Wessex Acquisition.

(a) To adjust Wessex historical general and administrative expense for
costs incurred by Wessex prior to the Wessex Acquisition, but directly related
to the Wessex Acquisition.

(b) To adjust historical Wessex depreciation of tangible assets and
amortization of goodwill acquired in the Wessex Acquisition for the period
during 1998 prior to the Wessex Acquisition. The adjustment to depreciation and
amortization was based on a preliminary purchase price allocation. Goodwill is
being amortized over 40 years.

(c) To adjust historical equity earnings from Wessex's historical results
to reflect the sale of its interest in Wessex Waste Management Ltd for $337.9
million.

(d) To record the following:

(1) Interest expense for the period January 1, 1998 to October 2, 1998
on U.K. pounds sterling denominated loan notes issued to Wessex
shareholders to finance the Wessex Acquisition. The average balance
outstanding was $116.4 million, adjusted for foreign currency exchange
rates, and an average interest rate of 7.8% was assumed;

(2) Interest expense for the period January 1, 1998 to October 2, 1998
on U.K. pounds sterling denominated affiliate note payable used to finance
the Wessex Acquisition in the amount of $120.5 million, adjusted for
average foreign currency exchange rates, at an assumed interest rate of
6.25%;

(3) Interest expense for the period January 1, 1998 to October 2, 1998
on U.K. pounds sterling denominated funds borrowed under a five year bank
credit facility used to finance the Wessex Acquisition less a portion of
the proceeds received from the sale of its interest in Wessex Waste
Management Ltd that were used to paydown such borrowings. The average
balance outstanding was $209.7 million, adjusted for foreign currency
exchange rates, and an average interest rate of 8.2% was assumed;

F-4
<PAGE> 121

(4) Interest expense for the period January 1, 1998 to December 9,
1998 on U.K. pounds sterling denominated funds borrowed to redeem Wessex's
preference shares. The weighted average funds borrowed was $215.5 million,
adjusted for foreign currency exchange rates, and an average interest rate
of 8.1% was assumed.

(e) To reflect the reduction in dividends related to the redemption of the
Wessex preference shares.

(f) To record the tax impact of the pro forma adjustments described above
at the U.K. statutory rate of 31%, excluding non-deductible goodwill
amortization.

F-5
<PAGE> 122

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholder of Azurix Corp.:

We have audited the accompanying consolidated balance sheet of Azurix Corp.
(a Delaware corporation) and subsidiaries as of December 31, 1998, and the
related consolidated statements of income, comprehensive income (loss), cash
flows and changes in stockholder's equity for the period from January 29, 1998
(Date of Inception) to December 31, 1998. These financial statements are the
responsibility of Azurix Corp.'s management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Azurix Corp. and
subsidiaries as of December 31, 1998, and the results of their operations, cash
flows and changes in stockholder's equity for the period from January 29, 1998
(Date of Inception) to December 31, 1998, in conformity with generally accepted
accounting principles.

Arthur Andersen LLP

Houston, Texas
February 22, 1999

F-6
<PAGE> 123

AZURIX CORP.

CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
JANUARY 29, 1998
(DATE OF INCEPTION)
TO DECEMBER 31,
1998
-------------------
<S> <C>
Operating revenues.......................................... $119.7
Operating expenses:
Operations and maintenance................................ 31.6
General and administrative................................ 20.3
Depreciation and amortization............................. 22.2
------
Total operating expenses.......................... 74.1
------
Operating income............................................ 45.6
------
Other income (expense):
Equity in loss of unconsolidated affiliates............... (0.8)
Interest income........................................... 1.3
Interest expense, net..................................... (16.4)
Other expense............................................. (1.2)
------
Income before income taxes.................................. 28.5
------
Income tax expense.......................................... 18.3
------
Net income.................................................. $ 10.2
======
Earnings per share of common stock -- basic and diluted..... $ 0.10
======
Weighted average shares outstanding -- basic and diluted.... 100.0
======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-7
<PAGE> 124

AZURIX CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(IN MILLIONS)

<TABLE>
<CAPTION>
JANUARY 29, 1998
(DATE OF INCEPTION)
TO DECEMBER 31,
1998
-------------------
<S> <C>
Net income.................................................. $ 10.2
Other comprehensive income:
Foreign currency translation adjustment................... (36.7)
------
Comprehensive income (loss)................................. $(26.5)
======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-8
<PAGE> 125

AZURIX CORP.

CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 5.3
Trade receivables (net of allowance for doubtful accounts
of $6.3)............................................... 63.7
Unbilled receivables...................................... 24.3
Other..................................................... 38.5
--------
Total current assets.............................. 131.8
--------
Property, plant and equipment, at cost...................... 2,271.1
Less accumulated depreciation............................... (16.7)
--------
Property, plant and equipment, net........................ 2,254.4
--------
Investments in unconsolidated affiliates.................... 74.3
Goodwill, net............................................... 877.6
Other assets................................................ 20.2
--------
Total Assets...................................... $3,358.3
========

LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
Accounts payable -- affiliates............................ $ 20.0
Accounts payable and accruals............................. 101.8
Deferred income........................................... 71.0
Accrued taxes............................................. 31.8
Accrued interest.......................................... 9.8
Current maturities of long-term debt...................... 27.0
--------
Total current liabilities......................... 261.4
--------
Note payable -- affiliate................................... 121.4
Long-term debt.............................................. 912.1
Deferred taxes.............................................. 404.4
Other long-term liabilities................................. 13.5
--------
Total liabilities................................. 1,712.8
--------
Commitments and contingencies (Note 15)
Stockholder's equity:
Common stock, $0.01 par value, 500,000,000 shares
authorized, 100,000,000 shares issued and
outstanding............................................ 1.0
Additional paid-in capital................................ 1,671.0
Retained earnings......................................... 10.2
Cumulative foreign currency translation adjustment........ (36.7)
--------
Total stockholder's equity........................ 1,645.5
--------
Total Liabilities and Stockholder's Equity........ $3,358.3
========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-9
<PAGE> 126

AZURIX CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)

<TABLE>
<CAPTION>
JANUARY 29, 1998
(DATE OF INCEPTION)
TO DECEMBER 31,
1998
-------------------
<S> <C>
Operating Activities:
Net income................................................ $ 10.2
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization.......................... 22.2
Amortization of deferred financing cost................ 0.6
Deferred income taxes.................................. 13.4
Equity in loss of unconsolidated affiliates............ 0.8
Changes in operating assets and liabilities:
Increase in trade receivables and other current
assets.............................................. (17.1)
Decrease in accounts payable and accruals............ (25.7)
Increase in other assets............................. (2.5)
Increase in other long-term liabilities.............. 1.3
Other................................................ 1.2
---------
Net cash provided by operating activities................... 4.4
---------
Investing Activities:
Capital expenditures...................................... (63.2)
Business acquisition, net of cash acquired................ (2,270.8)
Proceeds from the sale of equity investment............... 337.9
Other..................................................... 13.5
---------
Net cash used in investing activities....................... (1,982.6)
---------
Financing Activities:
Proceeds from short-term borrowings, net of repayments.... 160.8
Proceeds from long-term borrowings........................ 550.8
Repayments of long-term borrowings........................ (226.2)
Issuance of common stock and capital contributed.......... 1,600.2
Redemption of subsidiary preference shares................ (106.4)
Dividends paid on subsidiary preference shares............ (1.7)
---------
Net cash provided by financing activities................... 1,977.5
---------
Effect of exchange rate changes on cash..................... 6.0
---------
Change in cash and cash equivalents......................... 5.3
---------
Cash and cash equivalents, January 29, 1998 (Date of
Inception)................................................ --
---------
Cash and cash equivalents, December 31, 1998................ $ 5.3
=========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-10
<PAGE> 127

AZURIX CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
(IN MILLIONS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
CUMULATIVE
ADDITIONAL FOREIGN CURRENCY
COMMON PAID-IN RETAINED TRANSLATION
STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL
------ ---------- -------- ---------------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 29, 1998 (Date of
Inception)........................... $ -- $ -- $ -- $ -- $ --
Issuance of 100,000,000 shares of
common stock...................... 1.0 -- -- -- 1.0
Capital contributions................ -- 1,599.2 -- -- 1,599.2
Subsidiary stock contributed......... -- 71.8 -- -- 71.8
Foreign currency translation
adjustment........................ -- -- -- (36.7) (36.7)
Net income........................... -- -- 10.2 -- 10.2
---- -------- ----- ------ --------
Balance at December 31, 1998........... $1.0 $1,671.0 $10.2 $(36.7) $1,645.5
==== ======== ===== ====== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-11
<PAGE> 128

AZURIX CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

Azurix Corp. was formed by Enron Corp. ("Enron") on January 29, 1998 ("Date
of Inception"). Azurix Corp. and its consolidated subsidiaries (collectively
"Azurix") are engaged in the business of acquiring, owning, operating and
managing water and wastewater assets, providing water and wastewater related
services and managing and developing resources in the global water industry.
Azurix is a wholly owned subsidiary of Atlantic Water Trust ("Atlantic Water")
in which Enron and Marlin Water Trust each hold a 50% voting interest. During
1998, Azurix indirectly acquired all of the outstanding ordinary share capital
of Wessex Water Plc ("Wessex") (see Note 2) and Enron contributed to Azurix the
outstanding common stock of a subsidiary that in June 1998 acquired a 32.1%
ownership interest in Obras Sanitarias Mendoza S.A. ("OSM"). Wessex and OSM
provide water and wastewater treatment services in southwestern England and the
Province of Mendoza, Argentina, respectively.

Azurix entered into an agreement on December 19, 1998 to purchase 49.9% of
an entity whose principal asset is the water concession for the city of Cancun,
Mexico ("Cancun"). This agreement was not binding until certain material
conditions were met, and these conditions were met subsequent to December 31,
1998. The purchase price is $13.5 million and Azurix has agreed to provide up to
$25.0 million in debt financing. The acquisition is subject to certain
governmental approvals and is scheduled to close in March 1999.

Azurix Corp. was incorporated on January 29, 1998, and as a result, the
Consolidated Statement of Income, Consolidated Statement of Comprehensive Income
(Loss), Consolidated Statement of Cash Flows and Consolidated Statement of
Changes in Stockholder's Equity are from the Date of Inception to December 31,
1998. However, substantially all of Azurix's results of operations, cash flows
and equity transactions occurred during the fourth quarter of 1998, subsequent
to the Wessex acquisition.

CONSOLIDATION POLICY AND USE OF ESTIMATES

The consolidated financial statements include the accounts of all
majority-owned subsidiaries and are prepared in accordance with generally
accepted accounting principles in the United States ("U.S."). All significant
intercompany balances and transactions have been eliminated in consolidation.
Azurix uses the equity method of accounting for all investments where it owns
less than a majority of the voting stock but is able to exercise significant
influence over the operating and financial policies of the investee.

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

REVENUE RECOGNITION

Operating revenue represents income earned in the ordinary course of
business, excluding value added tax. Revenue for metered customers is recognized
based on actual usage and accrued based on the estimated amount of water sold
but not billed as of the balance sheet date. Revenue for non-metered customers,
who pay an annual fixed charge based on the rateable value of their property, is
recognized uniformly over the year.

F-12
<PAGE> 129
AZURIX CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DERIVATIVE FINANCIAL INSTRUMENTS

Azurix utilizes derivative financial instrument contracts for non-trading
purposes to manage exposure to fluctuations in interest rates and foreign
currency exchange rates. Hedge accounting is utilized in non-trading activities
where there is a high correlation of price movements in the derivative and the
contract is designated as a hedge. In instances where the anticipated
correlation of price movements no longer exists, hedge accounting is terminated
and future changes in the value of the derivative financial instruments are
recognized as gains or losses to net income.

Interest rate swaps involve the exchange of amounts based on a fixed
interest rate for amounts based on variable interest rates over the life of the
contract without an exchange of the notional amount upon which payments are
based. The difference to be received or paid is recognized in income over the
life of the contracts as adjustments to interest expense.

Currency swap contracts are denominated in one foreign currency and are to
be repaid in another currency. These contracts are designated as hedges of firm
commitments to pay interest and principal on debt, which would otherwise expose
Azurix to foreign currency risk.

The fair values of the swap contracts are not recognized in the financial
statements. The income and cash flow impact of financial instruments is
reflected as an adjustment of the hedged item. Gains and losses on terminations
of interest rate and currency swap contracts are deferred as an adjustment to
the carrying amount of the outstanding obligation and amortized as an adjustment
to interest expense related to the obligation over the remaining term of the
original contract life of the terminated swap contract. In the event of early
extinguishment of the obligation, any realized or unrealized gain or loss from
the swap would be recognized in net income at the time of extinguishment.

INCOME TAXES

Azurix accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. For U.S. tax purposes, Azurix is
presently a member of Enron's consolidated group and is included in Enron's
consolidated federal income tax return. Members of the consolidated group are
charged with the amount of income tax expense (benefit) determined as if they
filed separate federal income tax returns. There is no formal tax sharing
arrangement between Enron and Azurix.

EARNINGS PER COMMON SHARE

SFAS No. 128, "Earnings Per Share," requires dual presentation of earnings
per common share and earnings per common share assuming dilution on the face of
the income statement. Basic earnings per share is computed by dividing the net
income available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per common share is
computed by adjusting basic earnings per share for the net income and share
effect of the potential conversion to common shares of all dilutive securities.
For the year ending December 31, 1998, Azurix did not have any securities
outstanding that could have been potentially converted into common shares,
therefore, basic and diluted earnings per share are the same.

CASH EQUIVALENTS

Azurix considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
F-13
<PAGE> 130
AZURIX CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost. Cost of acquired property,
plant and equipment includes an allocation of the purchase price based on the
asset's fair market value. Cost of property, plant and equipment placed in
service includes direct charges for material, labor and services and indirect
charges related to construction, such as engineering, supervision, payroll taxes
and employee benefits. The October 1998 acquisition of Wessex represents
substantially all of the property, plant and equipment as of December 31, 1998
(see Note 2). Additions, replacements, modifications and enhancements to units
of property are capitalized. Major improvements to leasehold properties are
amortized over the shorter of the asset life or the life of the respective
lease. Repairs, maintenance and minor replacements are charged to operations and
maintenance expense as incurred. Interest capitalized is based on the average
value of construction work in progress at Azurix's average borrowing rate during
the period. The amount of interest capitalized during 1998 was approximately
$2.3 million.

Azurix's infrastructure assets comprise a network of systems of mains and
sewers, impounding and pumped raw water storage reservoirs, dams, sludge
pipelines and infrastructure investigations and studies.

The cost of property, plant and equipment is charged to depreciation using
the straight-line method over the estimated useful lives of the assets.
Depreciation is computed based on estimated useful lives as follows:

<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Buildings and operational structures........................ 15 to 80
Infrastructure.............................................. 115
Plant machinery and vehicles................................ 3 to 30
Other assets................................................ 4 to 15
</TABLE>

LONG-LIVED ASSETS

In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," long-lived
assets held and used by Azurix are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. For purposes of evaluating the recoverability, a test is
performed comparing the estimated future undiscounted cash flows associated with
the asset to the asset's carrying amount, including allocated goodwill, to
determine if a write-down to market value or discounted cash flow value is
required.

GOODWILL

Goodwill represents the excess of purchase price and related costs over the
value assigned to the net assets of businesses acquired (see Note 2). Goodwill
is amortized on a straight-line basis over the estimated useful life, not to
exceed 40 years. Accumulated amortization of goodwill at December 31, 1998 was
$5.5 million.

OTHER ASSETS

Other assets consist primarily of deferred charges, such as financing costs
and external costs of acquisition activities. Deferred financing charges are
amortized to interest expense over the lives of the related debt issuances and
external acquisition costs are capitalized as a cost of successful acquisitions
or expensed during the period in which it is determined that the project is
unsuccessful or the pursuit is terminated.

F-14
<PAGE> 131
AZURIX CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DEFERRED INCOME

Azurix bills certain customers in advance of providing water and wastewater
services and classifies these amounts as "Deferred income" on the Consolidated
Balance Sheet until earned.

PENSION BENEFITS

The pension plans maintained by Wessex (see Note 12) are of the defined
benefit type, and are valued by an independent actuary. Current service costs
for the plans are accrued in the period to which they relate. Prior service
costs and actuarial gains and losses, if any, relating to amendments to the
plans, are recognized on a basis designed to spread the costs over the remaining
average service lives of employees.

FOREIGN CURRENCY TRANSLATION

The functional currency for Azurix's foreign operations is the applicable
local currency. The translation from the applicable foreign currencies to U.S.
dollars is performed for balance sheet accounts using the current exchange rates
in effect at the balance sheet date and for revenue and expense accounts, using
the weighted average exchange rate during the period or, where known or
determinable, at the rate on the date of the transaction for significant items.
The resulting translation adjustments are recorded in comprehensive income as a
component of stockholder's equity and are included in income only upon the sale
or liquidation of the underlying investments.

ENVIRONMENTAL COSTS

Environmental expenditures that relate to current operations are expensed
as incurred. Expenditures providing a future benefit are capitalized as
appropriate. Remediation costs that relate to an existing condition caused by
past operations are accrued when it is probable that these costs will be
incurred and can be reasonably estimated.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires an entity to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Azurix is currently evaluating and has not yet
determined the effect that the adoption of SFAS No. 133 will have on its
financial statements.

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which requires that costs for start-up activities and organization
costs be expensed as incurred and not capitalized as had previously been
allowed. SOP 98-5 is applicable to all financial statements for fiscal years
beginning after December 15, 1998 and initial adoption is required to be
reflected as a cumulative effect of accounting change. Azurix adopted the
treatment prescribed by SOP 98-5 in 1998, the year of Azurix's inception, and
therefore there is no cumulative effect.

SEGMENT, GEOGRAPHIC AND QUARTERLY REPORTING

The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," which is effective for fiscal years beginning after
December 31, 1997, and establishes
F-15
<PAGE> 132
AZURIX CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

standards for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports. Operating segments are defined as components of an enterprise
about which separate financial information is available and evaluated regularly
by the chief operating decision maker, or decision making group, in deciding how
to allocate resources and in assessing performance. The operating subsidiaries
of Azurix in 1998 operated in one segment and were substantially located in one
geographic region. In addition, Azurix's operations began in the fourth quarter
of 1998 and therefore separate quarterly disclosures have been omitted.

NOTE 2 -- BUSINESS ACQUISITION

On October 2, 1998 ("Wessex Acquisition Date"), Azurix, through its
indirect wholly owned subsidiary Azurix Europe Ltd ("Azurix Europe"), acquired
over 90% of the outstanding ordinary share capital of Wessex. On that same date,
Azurix Europe issued notices to the remaining Wessex ordinary shareholders,
informing them that it intended to exercise its rights under the English
Companies Act to acquire compulsorily all of the outstanding ordinary shares.
The compulsory share acquisition was completed in November 1998. The cost of the
Wessex acquisition, including transaction costs was $2.4 billion. The cost
included a combination of cash consideration paid to Wessex shareholders, net of
$1.7 million cash acquired, and the issuance of loan notes to Wessex
shareholders in the face amount of $119.8 million (see Note 7). On October 2,
1998, Wessex had cumulative mandatorily redeemable preference shares
outstanding. These were redeemed by Wessex in December 1998.

The purchase method of accounting was utilized, and accordingly, the assets
and liabilities of Wessex have been recorded at their estimated fair values on
the date of acquisition. The excess of the purchase price over the fair values
of the net assets acquired has been recorded as goodwill, and is being amortized
on the straight-line basis over 40 years. The results of operations of Wessex
have been included in the consolidated financial statements since the date of
acquisition. Assets acquired, liabilities assumed, debt issued and consideration
paid (which includes proceeds from borrowings by Azurix Europe), as a result of
the Wessex acquisition are detailed below. The allocation of the purchase price
to the net assets acquired is preliminary because Azurix is in the process of
finalizing its assessment of the related fair values. Azurix does not believe
the final evaluation of these assessments will materially affect the allocation
of the purchase price. The preliminary allocation of the purchase price is as
follows:

<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Fair value of assets acquired............................... $ 2,738.7
Goodwill.................................................... 903.9
Fair value of liabilities assumed........................... (1,141.0)
Mandatorily redeemable preferred stock assumed.............. (109.3)
---------
Total purchase price.............................. $ 2,392.3
=========
</TABLE>

The following unaudited pro forma information presents summarized
consolidated results of operations of Azurix as if the Wessex acquisition had
occurred on January 1, 1998:

<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT
PER SHARE DATA)
--------------------
<S> <C>
Revenues.................................................... $464.2
Net income.................................................. 87.2
Basic and diluted earnings per share........................ 0.87
</TABLE>

These unaudited pro forma results of operations have been prepared for
illustrative purposes only and include certain adjustments in addition to the
pre-acquisition historical results of Wessex, such as

F-16
<PAGE> 133
AZURIX CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

additional amortization expense as a result of goodwill, increased depreciation
expense resulting from allocation of fair market value to fixed assets acquired,
increased interest expense on acquisition debt and preference share redemption
and the sale of Wessex's interest in UK Waste (see Note 3). The unaudited pro
forma financial information is not necessarily indicative of the results of
operations that would have occurred had the Wessex acquisition occurred on the
date indicated, and should not be viewed as indicative of operations in future
periods.

NOTE 3 -- SALE OF ACQUIRED EQUITY INVESTMENT

On November 30, 1998, Azurix, sold its interest in Wessex Waste Management
Ltd, a joint venture with Waste Management International Plc ("WMI") that does
business as UK Waste, to WMI for $337.9 million. Azurix's interest in UK Waste
was acquired in the Wessex acquisition (see Note 2). UK Waste provides solid
waste collection, treatment and recycling services throughout the United Kingdom
("U.K.").

The value allocated to the equity investment in purchase accounting was
based on the cash flows during the period UK Waste was owned by Azurix,
including incremental debt costs incurred during the holding period. Azurix's
results of operations do not reflect the equity earnings of UK Waste during the
ownership period of $2.5 million and no adjustments to the carrying amount of
the investment were necessary. Accordingly, Azurix recorded no gain or loss from
the sale.

NOTE 4 -- OTHER CURRENT ASSETS

Other current assets at December 31, 1998 is comprised of the following:

<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Prepayments................................................. $18.6
Other receivables........................................... 11.7
Other....................................................... 8.2
-----
$38.5
=====
</TABLE>

NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at December 31, 1998 is comprised of the
following:

<TABLE>
<CAPTION>
PROPERTY, PLANT
ACCUMULATED AND EQUIPMENT,
HISTORICAL COST DEPRECIATION NET
--------------- ------------ ---------------
(IN MILLIONS)
<S> <C> <C> <C>
Buildings and operational structures......... $ 494.2 $ (2.6) $ 491.6
Infrastructure............................... 1,184.9 (2.7) 1,182.2
Plant machinery and vehicles................. 412.3 (9.7) 402.6
Construction work-in-progress................ 154.7 -- 154.7
Other assets................................. 25.0 (1.7) 23.3
-------- ------ --------
Total.............................. $2,271.1 $(16.7) $2,254.4
======== ====== ========
</TABLE>

NOTE 6 -- SHORT-TERM DEBT

As of December 31, 1998, Azurix had $424.0 million outstanding from credit
facilities with major commercial banks. Of this amount, $399.1 million relates
to committed credit facilities and the remaining $24.9 million relates to credit
facilities that are on an uncommitted basis. Interest accrues on the committed
credit facilities and the uncommitted facilities based on LIBOR plus 0.18% and
LIBOR plus a negotiated margin, respectively. The weighted average interest rate
on short-term bank borrowings

F-17
<PAGE> 134
AZURIX CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

outstanding as of December 31, 1998 was 6.66%. Azurix pays commitment fees of
0.09% on the unused portion of committed lines of credit. The facilities expire
in April 1999. Azurix intends to refinance the $424.0 million of short-term bank
borrowings with long-term debt. If the refinancing is not completed, Azurix will
use amounts available under the Senior Credit Facility (see Note 7) to refinance
the short-term bank borrowings on a long-term basis and accordingly, has
reclassified its short-term bank borrowings as long-term debt.

NOTE 7 -- LONG-TERM DEBT AND AFFILIATE NOTE PAYABLE

The components of long-term debt are as follows:

<TABLE>
<CAPTION>
FACE VALUE AND
CARRYING AMOUNT
---------------
(IN MILLIONS)
<S> <C>
Amounts reclassified from short-term debt (see Note 6)...... $424.0
Senior Credit Facility...................................... 219.5
Loan Notes.................................................. 117.2
EIB credit facilities....................................... 68.7
Capital lease obligation.................................... 109.7
------
939.1
Less current maturities..................................... (27.0)
------
Total long-term debt.............................. $912.1
======
</TABLE>

Azurix entered into a United Kingdom pounds sterling ("U.K. Pounds
Sterling") denominated senior secured bank credit facility in August 1998, as
amended ("Senior Credit Facility"). At December 31, 1998, it consisted of a term
loan facility of $322.6 million and a revolving credit facility of $575.3
million bearing interest at a rate of LIBOR plus 0.625%, which was 6.9% at
December 31, 1998. The amounts outstanding at December 31, 1998 were $211.2
million and $8.3 million, under the term loan facility and the revolving credit
facility, respectively. The remaining term loan capacity of $111.4 million is
used to secure a substantial portion of the Loan Notes, described below. The
term loan facility requires repayment of $199.5 million by July 24, 2000, and
repayment of any remaining outstanding term loans in July 2003. The revolving
credit facility terminates in July 2003. Azurix may borrow up to $99.8 million
of the revolving credit facility balance available for general corporate
purposes. Azurix has pledged all of a subsidiary's existing assets, including
all of the ordinary shares of Wessex, under this facility. The unused borrowing
capacity under the revolving credit facility at December 31, 1998 was $567.0
million. Azurix incurs commitment fees of 0.3125% on the unused portion of this
facility, which are recorded as interest expense.

Azurix issued U.K. Pounds Sterling denominated loan notes of $117.2 million
face value, as of December 31, 1998, to Wessex shareholders in lieu of cash
consideration for the ordinary shares purchased in the Wessex acquisition ("Loan
Notes") (see Note 2). The notes are redeemable, at the option of the holder,
semi-annually beginning September 30, 1999, with final redemption occurring
September 30, 2005. The Loan Notes may be redeemed at the holders' option within
one year, and therefore, are potential current obligations. If redeemed by the
holders' prior to maturity, Azurix will utilize available capacity on the Senior
Credit Facility to refinance the Loan Notes on a long-term basis, and
accordingly, the Loan Notes are classified as long-term debt. Interest on the
Loan Notes accrues at LIBOR and is payable semi-annually. The LIBOR rate for the
period the Loan Notes were outstanding during 1998 was 7.125%.

The European Investment Bank ("EIB") credit facilities consist of two
separate loans, one of which has a floating interest rate based on LIBOR less
0.25%, and the other has a fixed interest rate of 11.6%. The floating rate
obligation, due October 2001, has an outstanding balance of $49.9 million at

F-18
<PAGE> 135
AZURIX CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 1998 and is U.S. dollar denominated. The fixed rate loan,
denominated in Italian lire, has an outstanding balance of $18.8 million at
December 31, 1998 and is payable in semiannual installments through June 2002.

The U.K. Pounds Sterling denominated capital lease obligation provides for
semi-annual payments. At December 31, 1998, future minimum lease payments total
$129.1 million, including $19.4 million representing interest. Currently, $158.3
million of historical cost and $21.5 million of related accumulated amortization
is recorded under a capital lease and included in property, plant and equipment.

Each of these financing agreements contains certain restrictive covenants,
including among other things, limitations on borrowings, the maintenance of
certain financial ratios such as interest coverage, net worth and debt to equity
and contracts to perform or refrain from undertaking certain acts. The financing
contracts include standard events of default, including non-payment,
cross-defaults and insolvency. Azurix is currently in compliance with these
covenants.

Long-term borrowing and capital lease obligation maturities over the next
five years are $27.0 million in 1999, $230.0 million in 2000, $84.6 million in
2001, $36.3 million in 2002 and $561.2 million in 2003.

Azurix has executed interest rate and currency swap contracts related to
its outstanding debt (see Note 8).

Azurix has an affiliate note payable of $121.4 million outstanding at
December 31, 1998 (see Note 11).

NOTE 8 -- FINANCIAL INSTRUMENTS

Azurix uses derivative financial instruments in the normal course of its
business for purposes other than trading. These financial instruments include
interest rate and currency swap contracts. Azurix has U.K. Pounds Sterling ("L")
interest rate swap contracts having a total notional principal amount of $833.6
million. Interest rate swap contracts relating to notional principal amounts of
$665.1 million, $149.7 million and $18.8 million terminate in 2000, 2001 and
2002, respectively. Azurix also has cross-currency swap contracts to exchange
U.S. dollars of $49.9 million to U.K. Pounds Sterling of L30 million, which
expires in 2001, and Italian lire of 25.0 billion to U.K. Pounds Sterling of
L11.3 million, which expires in 2002.

The carrying amount of cash and cash equivalents, trade accounts receivable
(net of an allowance for doubtful accounts) and accounts payable and accruals
approximates their fair value due to their short-term nature. The fair value of
long-term debt and affiliate long-term debt is based on the quoted market prices
for the same or similar issues or on the current rates offered to Azurix for
debt of the same remaining maturities. The fair value of currency swap and
interest rate swap contracts was determined based on a model which estimates the
fair value of these swap contracts using market rates at December 31, 1998 or
was based on quoted market prices for similar instruments with similar
maturities. Judgment is necessarily required in interpreting market data and the
use of different market assumptions or estimation

F-19
<PAGE> 136
AZURIX CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

methodologies may affect the estimated fair value amounts. The comparison of
estimated fair value and carrying amount are as follows:

<TABLE>
<CAPTION>
ESTIMATED
FAIR CARRYING
VALUE AMOUNT
--------- --------
(IN MILLIONS)
<S> <C> <C>
Note payable -- affiliate................................... $121.9 $121.4
Long-term debt(1)........................................... 960.9 936.5
Derivatives:
Interest rate swaps....................................... (9.1) --
Currency swaps............................................ 7.2 2.6
</TABLE>

- ---------------

(1) The sum of the carrying amount for long-term debt and the currency swaps, as
indicated above, equals long-term debt including current maturities (see
Note 7).

Azurix is exposed to certain risks due to the nature of derivative
financial instruments. In the event of non-performance by third parties, the
amounts of interest rate and currency swap contracts are potentially subject to
credit risk. Third parties to these contracts are major commercial banks with
high-quality credit ratings. Accordingly, Azurix does not anticipate
non-performance by any of these counterparties on these financial instruments.
Azurix is exposed to market risk in the form of foreign exchange rate and
interest rate risks. Several variable and fixed rate loans in foreign currencies
are hedged through a combination of cross-currency swaps and interest rate
swaps.

NOTE 9 -- INCOME TAXES

The components of income before income taxes from Date of Inception through
December 31, 1998 are as follows:

<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
United States............................................... $(14.7)
Foreign..................................................... 43.2
------
$ 28.5
======
</TABLE>

Total income tax expense (benefit) from Date of Inception through December
31, 1998 is summarized as follows:

<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Current tax expense (benefit):
Federal................................................... $ --
State..................................................... --
Foreign................................................... 4.9
-----
4.9
-----
Deferred tax expense (benefit):
Federal................................................... --
State..................................................... --
Foreign................................................... 13.4
-----
13.4
-----
Total income tax expense (benefit)................ $18.3
=====
</TABLE>

F-20
<PAGE> 137
AZURIX CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The differences between taxes computed at the U.S. federal statutory tax
rate and Azurix's effective income tax rate from Date of Inception through
December 31, 1998 are as follows:

<TABLE>
<CAPTION>
AMOUNT PERCENT
------------- -------
(IN MILLIONS)
<S> <C> <C>
Statutory federal income tax provision...................... $10.0 35.0%
U.S. loss not benefited..................................... 5.1 17.9
U.K. subsidiary company loss not benefited.................. 2.4 8.4
Nondeductible goodwill amortization......................... 1.7 6.0
Consolidated foreign earnings taxed at other than the U.S.
rate...................................................... (1.8) (6.3)
Equity loss of foreign investment........................... 0.4 1.4
Other....................................................... 0.5 1.8
----- ----
$18.3 64.2%
===== ====
</TABLE>

The principal components of Azurix's net deferred income tax liability at
December 31, 1998 was as follows:

<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Deferred income tax assets:
U.K. Advance Corporation Tax ("ACT") receivable........... $ 83.1
U.S. net operating loss carryforward...................... 5.1
U.K. net operating loss carryforward...................... 3.5
Other..................................................... 5.9
Valuation allowance....................................... (8.6)
-------
Total deferred tax assets......................... 89.0
-------
Deferred income tax liabilities:
Depreciation, depletion and amortization.................. (490.6)
Pension plan differences.................................. (1.8)
Other..................................................... (1.0)
-------
Total deferred tax liabilities.................... (493.4)
-------
Net deferred tax assets (liabilities)............. $(404.4)
=======
</TABLE>

Azurix has U.K. ACT credit carryforwards at December 31, 1998 of
approximately $83.1 million that can be used to offset U.K. taxes payable in
future years. At December 31, 1998, the U.K. ACT credit has an indefinite
carryforward period. At December 31, 1998, Azurix has a U.S. tax loss
carryforward of approximately $14.7 million that will expire in 2018. Management
believes that sufficient uncertainty exists regarding the realizability of the
U.S. loss carryforwards, such that a valuation is appropriate. Such deferred tax
benefits will be reassessed as future business activity occurs. At December 31,
1998, Azurix has U.K. subsidiary company loss carryforwards of approximately
$11.8 million that can be carried forward for an indefinite period. However, due
to restrictions on the use of such loss carryforwards, the benefits have not
been reflected in Azurix's results of operations.

U.S. and foreign income taxes have been provided for earnings of foreign
subsidiary and affiliate companies that are expected to be remitted to the U.S.
Foreign subsidiaries' and affiliates' cumulative undistributed earnings of
approximately $43.2 million are considered to be indefinitely reinvested outside
the U.S. and, accordingly, no U.S. income taxes have been provided thereon. In
the event of a distribution of those earnings in the form of dividends, Azurix
may be subject to both foreign withholding taxes and U.S. income taxes net of
allowable foreign tax credits.

F-21
<PAGE> 138
AZURIX CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10 -- SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for taxes and interest expense is as follows:

<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Utility taxes(1)............................................ $81.7
Interest (net of amounts capitalized)....................... 9.6
</TABLE>

- ---------------

(1) One-time tax levied on private utilities by the U.K. government. This amount
was recorded to Wessex's net income in 1997.

NON-CASH TRANSACTIONS

During 1998, Azurix issued debt in the form of the Loan Notes in connection
with the Wessex acquisition (see Note 7). During 1998, Azurix received a capital
contribution from Enron of the outstanding stock of a subsidiary that holds an
interest in OSM. The transfer was recorded at the book value of Enron of $71.8
million.

NOTE 11 -- RELATED PARTY TRANSACTIONS

During 1998, Azurix entered into a U.K. Pounds Sterling denominated loan
with Enron for $119.7 million. Interest of $2.1 million accrued during the
period the loan was outstanding at LIBOR plus 0.8%. The principal and accrued
interest were repaid to Enron in 1998.

Enron will exert influence over the policies, management and affairs of
Azurix. Certain individuals who serve as officers and directors of Enron also
serve as directors of Azurix. The directors and officers of Enron have fiduciary
duties to manage Enron, including its investments in subsidiaries and affiliates
in a manner beneficial to Enron and its stockholders. Similarly, the directors
and officers of Azurix have fiduciary duties to manage Azurix in a manner
beneficial to Azurix and its stockholders.

Enron and Azurix propose to enter into an agreement that addresses the
scope of Azurix's business and it is anticipated that it will provide that
certain activities in which Enron and its affiliates may engage are permitted,
even if those activities have a competitive impact on Azurix. In general, it is
anticipated that Enron will be permitted to engage in any business whatsoever,
including water, wastewater and other businesses competing with Azurix, and may
compete in public tenders against Azurix, provided the business is conducted and
opportunities are identified and developed through Enron's own personnel and not
through Azurix. The agreement is expected to contain other provisions regarding
the activities to be performed by Azurix and Enron's involvement in those
activities.

Enron provides office space (see Note 15) to Azurix and various services
such as computer hardware and software and support services such as risk
management, accounts payable, payroll and information technology services. Costs
are allocated to Azurix based upon usage, or where no direct method can be
efficiently applied due to administrative burden, upon factors such as
annualized payroll or employee headcount.

Employees, other than Wessex employees, are covered by various employee
benefit plans of Enron such as retirement, stock option, medical, dental, life
insurance and other benefit plans. These costs are allocated to Azurix based
upon Enron's costs of administering and providing the benefit plans. During 1998
the expense recorded under the plan arrangements was approximately $1.4 million.

During 1998, Enron advanced to Azurix $17.7 million related to office space
and other services provided by Enron and costs of various benefit plans for
certain employees, each described above. This amount is reported in the
Consolidated Balance Sheet as a component of "Accounts payable -- affiliates."

F-22
<PAGE> 139
AZURIX CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Management believes the above allocation methods and costs are reasonable.

A director of a subsidiary of Wessex owns certain assets utilized in the
subsidiary's operations. The subsidiary was charged $0.1 million for the use of
those assets during the period Azurix owned Wessex.

BRISTOL WATER TRUST

During 1998, Azurix entered into a U.K. Pounds Sterling denominated senior
loan agreement with Bristol Water Trust, as amended and restated, an affiliate
company wholly owned by Atlantic Water. The note accrues interest at 6.25% per
annum and is payable semi-annually, beginning June 1999. Under the note
agreement maturing December 2001, prepayment is allowed in whole or part at any
time. The principal balance outstanding at December 31, 1998 was $121.4 million.
Interest expense recorded for 1998 was $1.9 million.

NOTE 12 -- PENSION BENEFITS

Wessex maintains three defined benefit pension plans that cover
substantially all of its employees. The assets are held in separate trustee
administered funds. The pension cost charged to the consolidated statement of
income has been determined on the advice of independent qualified actuaries and
is accrued over the service lives of the employees expected to be eligible to
receive such benefits.

The following weighted average assumptions were used in determining the
funded status and pension charge for the period October 2, 1998 through December
31, 1998:

<TABLE>
<CAPTION>
PERCENT
-------
<S> <C>
Discount rate............................................... 5.8%
Expected return on plan assets.............................. 6.8%
Rate of compensation increase............................... 4.3%
Pension increases........................................... 2.5%
</TABLE>

The plan's funded status and related pension accrual as of December 31,
1998 are as follows:

<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Change in benefit obligation:
Benefit obligation at Wessex Acquisition Date............. $231.5
Service cost........................................... 1.5
Interest cost.......................................... 3.4
Plan participants' contributions....................... 0.5
Actuarial loss......................................... 16.7
Benefits paid.......................................... (2.2)
Exchange difference.................................... (5.2)
------
Benefit obligation at end of period............... $246.2
======
</TABLE>

F-23
<PAGE> 140
AZURIX CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Change in plan assets:
Fair value of plan assets at Wessex Acquisition Date...... $237.3
Actual return on plan assets........................... 27.7
Employer contribution.................................. 1.3
Plan participants' contribution........................ 0.5
Benefits paid.......................................... (2.2)
Exchange difference.................................... (5.4)
------
Fair value of plan assets at end of period........ $259.2
======
Funded status:
Fair value of plan assets.............................. $259.2
Projected benefit obligation........................... 246.2
------
Funded status.......................................... 13.0
Unrecognized net actuarial loss........................ (6.9)
------
Prepaid benefit cost.............................. $ 6.1
======
</TABLE>

Net periodic benefit cost includes the following components:

<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Service cost.............................................. $ 1.5
Interest cost............................................. 3.4
Expected return on plan assets............................ (4.0)
------
Net periodic benefit cost................................. $ 0.9
======
</TABLE>

Two of the three pension plans have an aggregate prepaid benefit cost of
$7.6 million that is included in "Other assets" on the Consolidated Balance
Sheet and the remaining plan has an accrued benefit obligation of $1.5 million
that is included in "Other long-term liabilities" on the Consolidated Balance
Sheet.

NOTE 13 -- STOCKHOLDER'S EQUITY

COMMON STOCK

During 1998, Azurix issued 1,000 shares of $1.00 par value common stock. On
February 2, 1999, Azurix effected a 100,000-for-one stock split and restated the
par value to $0.01 that resulted in 100 million shares issued and outstanding.
Share and per share data for 1998 presented herein has been adjusted to give
effect to this split as if it had occurred on the Date of Inception.

ADDITIONAL PAID-IN CAPITAL

During 1998, Azurix received cash contributions of approximately $1.6
billion. In addition, Azurix received a capital contribution from Enron of the
outstanding stock of a subsidiary that holds a 32.1% ownership interest in OSM.
The transfer was recorded at Enron's book value of $71.8 million.

STOCK INCENTIVE PLAN

In February 1999, Azurix established a stock incentive plan (the "Plan")
which provides for the granting or awarding of stock options and restricted
stock to directors, officers and key employees of Azurix. At any particular
time, the number of shares of common stock issued under the Plan may not exceed
15% of the total number of shares of common stock outstanding. Under the Plan,
Azurix granted

F-24
<PAGE> 141
AZURIX CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

options to purchase 7.8 million shares of its common stock, at an exercise price
per share of $16.72. The options vest from three to five years after the grant
date and expire ten years after the grant date.

NOTE 14 -- RESTRICTED NET ASSETS OF SUBSIDIARIES

Certain subsidiaries of Azurix Corp. have governmental and regulatory
restrictions or approvals required in order to pay dividends or make
intercompany loans and advances to it. The amount of restricted net assets of
Azurix Corp. subsidiaries at December 31, 1998 is approximately $1.5 billion.

NOTE 15 -- COMMITMENTS AND CONTINGENCIES

Azurix leases office space from Enron under a lease obligating only Enron
and specific subsidiaries and affiliates (see Note 11). Azurix has no
contractual obligation under these office lease agreements but pays to Enron the
amount determined in the lease or the contract rate applied to square footage
occupied. Azurix accrued rent expense to Enron for office space totaling $0.3
million in 1998.

Azurix leases property under various operating leases. Future minimum
operating lease payments as of December 31, 1998, in the aggregate and for each
of the five succeeding fiscal years, are as follows:

<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
1999........................................................ $0.7
2000........................................................ 0.5
2001........................................................ 0.5
2002........................................................ 0.3
2003........................................................ 0.8
----
Total minimum lease payments................................ $2.8
====
</TABLE>

Azurix has contractual commitments for capital expenditures to be incurred
after December 31, 1998 of $130.2 million.

Azurix is involved in various claims and lawsuits incidental to its
business. Although no assurances can be given, Azurix believes that the ultimate
resolution of such items will not have a material effect on its results of
operations or financial position.

Azurix is subject to extensive federal, foreign, state and local
environmental laws and regulations. We anticipate future changes in, or
decisions affecting, regulatory regimes that will serve to expand or tighten
regulatory controls. Some of these changes or decisions could have a material
adverse effect on our financial position and results of operations.

A substantial portion of Azurix's revenues are subject to governmental
regulation of the rates that it may charge to its customers. The U.K. government
is currently conducting a periodic review of the price limits for water and
sewerage companies in England and Wales that is expected to result in new price
limits for the period from April 1, 2000 through 2005 that will be lower than
current price limits. Although we are unable to predict the precise outcome of
the current U.K. rate review, it is likely to significantly reduce Wessex's
revenues and earnings, but should not have a material adverse effect on Azurix's
financial position.

F-25
<PAGE> 142
AZURIX CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 16 -- EVENTS SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED)

On February 25, 1999, in connection with the Cancun acquisition, Azurix
funded $15.0 million of the $25.0 million in debt financing it had agreed to
provide (see Note 1). The Cancun acquisition closed on March 24, 1999.

In March 1999, Azurix filed a registration statement with the Securities
and Exchange Commission for an underwritten initial public offering of shares of
common stock.

Azurix entered into an agreement on March 25, 1999 to acquire 100% of the
stock of Canadian-based Philip Utilities Management Corporation ("PUMC") for
$107 million. PUMC is a water and wastewater services company in the U.S. and
Canada that provides operations and management, engineering, residuals
management and underground infrastructure development services for municipal
water and wastewater facilities. The acquisition is subject to regulatory and
municipal approvals and other third party consents and is expected to close in
the second quarter of 1999.

On March 30, 1999, Azurix completed a U.K. Pounds Sterling denominated bond
offering in the amount of $483.5 million. Net proceeds of $477.7 million were
primarily used to refinance the $448.4 million of short-term bank borrowings
(see Note 6) that were outstanding on that date. The bonds mature March 30,
2009. Interest of 5.875% is payable annually.

F-26
<PAGE> 143

REPORT OF INDEPENDENT ACCOUNTANTS

To the stockholder of Wessex Water Ltd (formerly Wessex Water Plc):

We have audited the accompanying consolidated statements of income, changes
in stockholders' equity and cash flows of Wessex Water Plc (now renamed Wessex
Water Ltd) (predecessor company) (the "Company") and subsidiaries for the period
from April 1, 1998 to October 2, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations, cash flows and changes in
stockholders' equity of Wessex Water Plc (now renamed Wessex Water Ltd)
(predecessor company) and subsidiaries for the period from April 1, 1998 to
October 2, 1998 in conformity with generally accepted accounting principles.

Arthur Andersen

London, England
March 12, 1999

F-27
<PAGE> 144

REPORT OF INDEPENDENT ACCOUNTANTS

To the stockholder of Wessex Water Ltd (formerly Wessex Water Plc)

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Wessex Water Plc
(now renamed Wessex Water Ltd) and its subsidiaries (the "Company") at March 31,
1998, and the results of their operations and their cash flows for each of the
two years in the period ended March 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PRICEWATERHOUSECOOPERS
CHARTERED ACCOUNTANTS
Bristol, England
March 12, 1999

F-28
<PAGE> 145

WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED OCTOBER 2, 1998 AND THE YEARS ENDED MARCH 31, 1998 AND
1997
(TRANSLATED INTO USD -- SEE NOTE 1)

<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED MARCH 31,
OCTOBER 2, --------------------
1998 1998 1997
---------- ------- -------
IN MILLIONS USD
(EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C>
Operating revenues.......................................... $233.8 $436.6 $403.1
Operating expenses:
Operations and maintenance................................ 61.7 110.9 102.4
General and administrative................................ 36.4 29.1 32.2
Depreciation and amortization............................. 35.2 64.3 58.0
------ ------ ------
Operating income............................................ 100.5 232.3 210.5
------ ------ ------
Other income (expense):
Interest income........................................... 0.2 4.4 23.0
Interest expense.......................................... (6.3) (13.0) (12.8)
Equity earnings........................................... 5.8 13.3 14.7
------ ------ ------
Income before taxes......................................... 100.2 237.0 235.4
------ ------ ------
Taxation on ordinary activities............................. 28.4 58.0 82.4
Utility tax................................................. -- 162.3 --
------ ------ ------
Net income.................................................. 71.8 16.7 153.0
Dividends on preference shares.............................. 7.7 15.1 13.5
------ ------ ------
Net income attributable to common stockholders.............. $ 64.1 $ 1.6 $139.5
====== ====== ======
Basic earnings per share.................................... $ 0.30 $ 0.01 $ 0.65
====== ====== ======
Diluted earnings per share.................................. $ 0.30 $ 0.01 $ 0.55
====== ====== ======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-29
<PAGE> 146

WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

CONSOLIDATED BALANCE SHEET
AT MARCH 31, 1998
(TRANSLATED INTO USD -- SEE NOTE 1)

<TABLE>
<CAPTION>
MARCH 31,
1998
-------------
IN MILLIONS
USD, EXCEPT
SHARE AMOUNTS
-------------
<S> <C>
ASSETS

Current Assets
Cash and cash equivalents................................. $ 1.8
Trade receivables (net of allowance for doubtful accounts
of $5.9)................................................ 43.5
Unbilled receivables...................................... 29.7
Other current assets...................................... 19.5
--------
Total current assets............................... 94.5
--------
Property, Plant and Equipment
Cost...................................................... 2,487.4
Less-accumulated depreciation............................. (549.9)
--------
Property, plant and equipment, net........................ 1,937.5
--------
Investments and Other Assets
Investment in equity method investee...................... 311.2
Goodwill, net of accumulated amortization................. 21.6
Other..................................................... 7.5
--------
Total Assets....................................... $2,372.3
========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Borrowings from banks..................................... $ 82.7
Current portion of long-term debt......................... 38.3
Accounts payable and accruals............................. 227.5
Amounts due to equity method investee..................... 6.2
Advances from customers................................... 23.7
Proposed dividend......................................... 23.1
--------
Total current liabilities.......................... 401.5
--------
Long-Term Debt.............................................. 169.7
Deferred Credits and Other Liabilities
Deferred income taxes..................................... 306.5
Other..................................................... 6.1
--------
Total long-term liabilities........................ 482.3
--------
Commitments and Contingent Liabilities (Note 18)
Redeemable Preference Shares (Authorized -- 310,000,000;
issued and paid 308,984,402 shares of 50p each, redeemable
at par)................................................... 259.0
--------
Stockholders' Equity:
Common stock (Authorized: 346,666,670; issued and paid:
212,677,552 shares of 60p).............................. 188.3
Additional paid-in capital................................ 80.6
Accumulated other comprehensive income.................... 182.0
Retained earnings......................................... 778.6
--------
Total stockholders' equity......................... 1,229.5
--------
Total Liabilities and Stockholders' Equity......... $2,372.3
========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-30
<PAGE> 147

WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED OCTOBER 2, 1998 AND THE YEARS ENDED MARCH 31, 1998 AND
1997
(TRANSLATED INTO USD -- SEE NOTE 1)

<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED MARCH 31,
OCTOBER 2, ---------------------
1998 1998 1997
---------- --------- --------
IN MILLIONS USD
----------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income.................................................. $ 71.8 $ 16.7 $153.0
Adjustments required to reflect cash flows from operating
activities:
Income and expense items not involving cash flows:
Share in profits of equity method investee, net of related
taxes.................................................. (3.1) (6.7) (9.5)
Depreciation and amortization............................. 35.2 64.3 58.0
Deferred taxes............................................ 23.2 24.9 (2.1)
Loss on disposal of fixed assets.......................... 0.8 2.5 1.3
Other..................................................... 0.1 0.5 (1.8)
------- ------- ------
128.0 102.2 198.9
------- ------- ------
Changes in operating asset and liability items:
(Increase) decrease in trade accounts receivable.......... 6.9 (4.8) 2.2
(Increase) in prepayments................................. (0.3) (0.8) (6.5)
(Increase) decrease in other current assets............... (8.3) 22.3 3.6
Increase (decrease) in advances from customers............ 2.5 1.1 (3.0)
Increase in accounts payable and accruals................. 3.4 5.0 51.1
------- ------- ------
4.2 22.8 47.4
------- ------- ------
Net cash provided by operating activities................... 132.2 125.0 246.3
------- ------- ------
Investing Activities:
Purchase of fixed assets.................................. (108.9) (198.6) (149.1)
Decrease in short-term investments........................ -- -- 49.6
Other..................................................... 0.5 3.6 1.7
------- ------- ------
Net cash used in investing activities....................... (108.4) (195.0) (97.8)
------- ------- ------
Financing Activities:
Repurchase of ordinary shares............................. -- -- (300.8)
Repurchase of preference shares........................... (143.4) -- --
Short-term loans received................................. 177.5 80.7 --
Repayment of lease obligations............................ (8.7) (15.6) (12.8)
Dividends paid............................................ (51.4) (65.7) (62.9)
Other..................................................... 2.4 7.4 3.5
------- ------- ------
Net cash (used in) provided by financing activities......... (23.6) 6.8 (373.0)
------- ------- ------
Effect of exchange rate changes on cash balances............ (0.3) (1.3) 19.1
------- ------- ------
Decrease in cash and cash equivalents....................... (0.1) (64.5) (205.4)
Balance of cash and cash equivalents at beginning of
period.................................................... 1.8 66.3 271.7
------- ------- ------
Balance of cash and cash equivalents at end of period....... $ 1.7 $ 1.8 $ 66.3
======= ======= ======
Supplemental Cash Flow Items:
Interest paid (net of amounts capitalized)................ $ 8.6 $ 12.3 $ 12.5
Income taxes paid......................................... 5.3 86.5 21.6
Utility tax paid.......................................... -- 83.1 --
Non-Cash Investing and Financing Activities:
Scrip dividends........................................... 37.4 9.8 4.4
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-31
<PAGE> 148

WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED OCTOBER 2, 1998 AND THE YEARS ENDED MARCH 31, 1998 AND
1997
(TRANSLATED INTO USD -- SEE NOTE 1)
(IN MILLIONS USD)

<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE
STOCK CAPITAL INCOME EARNINGS TOTAL INCOME
------ ---------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996.................. $228.3 $ 13.8 $ 54.1 $1,058.2 $1,354.4
Net income............................... 153.0 153.0 $153.0
Other comprehensive income:
Translation differences............... 104.3 104.3 104.3
Unrealized gain on listed
investment.......................... (0.3) (0.3) (0.3)
------
Total comprehensive income....... $257.0
======
Shares issued............................ 2.4 6.8 9.2
Repurchase of shares..................... (45.5) (255.3) (300.8)
Amount transferred to capital reserve.... 45.5 (45.5) --
Dividends................................ (68.3) (68.3)
------ ------ ------ -------- --------
Balance at March 31, 1997.................. 185.2 66.1 158.1 842.1 1,251.5
Net income............................... 16.7 16.7 $ 16.7
Other comprehensive income:
Translation differences............... 22.8 22.8 22.8
Unrealized gain on listed
investment.......................... 1.1 1.1 1.1
------
Total comprehensive income....... $ 40.6
======
Shares issued............................ 3.1 14.5 17.6
Dividends................................ (80.2) (80.2)
------ ------ ------ -------- --------
Balance at March 31, 1998.................. 188.3 80.6 182.0 778.6 1,229.5
Net income............................... 71.8 71.8 $ 71.8
Other comprehensive income:
Translation differences............... 18.8 18.8 18.8
Unrealized gain on listed
investment.......................... (0.2) (0.2) (0.2)
------
Total comprehensive income....... $ 90.4
======
Shares issued............................ 5.1 33.8 38.9
Dividends................................ (57.1) (57.1)
Amount transferred to capital reserve.... 151.0 (151.0)
------ ------ ------ -------- --------
Balance at October 2, 1998................. $193.4 $265.4 $200.6 $ 642.3 $1,301.7
====== ====== ====== ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-32
<PAGE> 149

WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying consolidated financial statements include the operations
of Wessex Water Plc (now renamed Wessex Water Ltd) and its subsidiaries
("Wessex"). On October 2, 1998, Wessex was purchased by Azurix Europe Ltd, a
wholly owned subsidiary of Azurix Corp. ("Azurix"). The financial statements of
Wessex have been prepared for the purpose of presenting the financial statements
of the predecessor company of Azurix.

These financial statements have been prepared in accordance with generally
accepted accounting principles in the United States ("US GAAP"). The functional
currency of Wessex is pounds sterling ("GBP"). These accounts have been
presented using US dollars ("USD") as the reporting currency by translating the
functional currency financial statements using the current rate methodology
described in the Statement of Financial Accounting Standard ("SFAS") 52,
"Foreign Currency Translation."

The period from April 1 to October 2, 1998 will hereafter be referred to as
the "six months ended October 2, 1998."

NATURE OF OPERATIONS

Wessex Water Plc was incorporated on April 1, 1989. On September 1, 1989,
Wessex Water Plc acquired the entire issued share capital of Wessex Water
Services Ltd, a company formed to continue the business of Wessex Water
Authority, as a result of the privatization by the UK government of the water
industry in England and Wales. The acquisition was effected through the issue of
49,998 Wessex shares to the Secretary of State for the Environment which were
credited as fully paid. The assets and liabilities acquired by Wessex were
recorded at book value as Wessex was owned by the UK government at the date of
the transfer making the transaction an exchange between entities under common
control. Wessex's principal activity is the provision of water supply and
wastewater services in southwestern England through its wholly owned subsidiary,
Wessex Water Services Ltd. Wessex's other business activities include SC
Technology AG ("SC Technology"), which does business as Swiss Combi and sells
and operates sludge drying plants.

Wessex Water Services Ltd is licensed to operate as a water and sewerage
company in its region, subject to regulation of its water supply and wastewater
treatment services by government agencies including the Office of Water Services
and the Drinking Water Inspectorate. Wessex is subject to regulation of the
rates it may charge for its regulated water supply and wastewater treatment
businesses.

BASIS OF CONSOLIDATION

The consolidated financial statements include the financial statements of
Wessex Water Plc and all its majority owned and controlled subsidiaries. All
inter-company transactions are eliminated as part of the consolidation process.

Investments in companies in which Wessex owns 20 percent to 50 percent of
the voting stock and has significant influence are accounted for using the
equity method with Wessex's share of profits and losses included in the
consolidated income statement. Wessex's share of post-acquisition retained
profits/losses is added to/deducted from the cost of the investee in the
consolidated balance sheet.

F-33
<PAGE> 150
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

USE OF ESTIMATES

Preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

FOREIGN CURRENCIES

On consolidation, assets and liabilities of subsidiaries denominated in
foreign currencies, where the local currency is the functional currency, have
been translated at year-end rates. Income and expense items are translated using
the annual weighted average rates of exchange or, where known or determinable,
at the rate on the date of the transaction for significant items. Adjustments
arising from the translation have been recorded in other comprehensive income
and are included in income only upon sale or liquidation of the underlying
investments.

Transactions in currencies other than the functional currency are recorded
at the rate of exchange at the date of the transaction. Assets and liabilities
in currencies other than the functional currency are translated at year-end
rates. Any resulting exchange differences are taken to the consolidated income
statement.

The exchange rates used to translate the GBP functional currency financial
statements to USD were:

<TABLE>
<CAPTION>
USD PER GBP
-----------
<S> <C> <C>
Period from April 1 to October 2, 1998...................... Average 1.6536
As of March 31, 1998........................................ Year end 1.6765
Year ended March 31, 1998................................... Average 1.6413
Year ended March 31, 1997................................... Average 1.5853
</TABLE>

CASH AND CASH EQUIVALENTS

Cash and cash equivalents represent cash and short-term highly liquid
investments with original maturities of three months or less.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment assets are stated at historical cost, less
accumulated depreciation. Depreciation is charged on a straight-line basis over
the estimated useful lives of the respective assets, based on the following
useful lives:

<TABLE>
<CAPTION>
YEARS
-------
<S> <C>
Buildings and operational structures........................ 15 - 80
Infrastructure assets....................................... 85
Plant, machinery and vehicles............................... 3 - 30
Other assets................................................ 4 - 15
</TABLE>

Major improvements to leasehold properties are amortized over the shorter
of the asset life and the life of the respective lease.

F-34
<PAGE> 151
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Interest is capitalized on qualifying assets during the time required to
prepare the assets for their intended use using Wessex's weighted average
borrowing rate. The capitalized interest is amortized over the life of the
assets.

GOODWILL

Goodwill is the excess of the purchase price over the fair value of the
identifiable assets acquired less the liabilities assumed of the acquired
company. Goodwill is capitalized and amortized over its estimated useful life
which ranges from twenty years (SC Technology) to forty years (Wessex Waste
Management Ltd.).

LEASES

Assets held under finance lease agreements are treated as tangible assets
and the present value of the related lease payments is recorded as a liability.
Costs for operating leases are charged to the income statement in the period
incurred.

LONG-LIVED ASSETS

Wessex evaluates the carrying value of long-lived assets to be held and
used, including goodwill and other intangible assets, when events and
circumstances warrant such a review. The carrying value of a long-lived asset is
considered impaired when the estimated undiscounted cash flow from such an asset
is less than its carrying value. In that event, a loss is recognized based on
the amount by which the carrying value exceeds the estimated fair market value
of the long-lived asset. Fair market value is determined primarily using the
estimated cash flows discounted at a rate commensurate with the risk involved.

TAXATION

Provision is made for all taxes payable in respect of profit earned in the
year. Deferred income tax is provided using the liability method for all
temporary differences arising between the tax basis of assets and liabilities
and their carrying value for financial reporting purposes, using the enacted tax
rate. Deferred tax assets are reduced by a valuation allowance to the extent
that it is more likely than not that all or part of the asset will not be
realized. No deferred tax liability has been recognized for undistributed
earnings of domestic subsidiaries since such earnings can be transferred to the
parent company without tax consequences.

REVENUE RECOGNITION

For metered customers, Wessex recognizes revenue based on actual usage and
accrues revenue for the estimated amount of water sold but not billed as of the
balance sheet date. The revenue for non-metered customers, who pay an annual
fixed charge based on the rateable value of their property, is recognized
uniformly over the year.

PENSIONS

Current service costs for defined benefit plans are accrued in the period
to which they relate. Prior service costs, if any, relating to amendments of the
plans, are recognized over the remaining average service lives of those
employees. The pension schemes are of the defined benefit type, which are
externally funded and valued by an independent actuary.

F-35
<PAGE> 152
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INVESTMENTS IN EQUITY SECURITIES

Available-for-sale securities are reported at fair value and individual
securities are classified as a current or non-current asset, as appropriate.
Unrealized holding gains and losses for all available-for-sale securities are
reported net, as a separate component of other comprehensive income, a part of
stockholders' equity, until the gains and losses are realized.

DERIVATIVE FINANCIAL INSTRUMENTS

Wessex uses cross-currency and interest rate swaps for the purpose of
hedging specific exposures as part of its risk management program and holds all
derivatives for purposes other than trading. Deferral (hedge) accounting is
applied only if the derivative reduces the risk of the underlying hedged item
and is designated at inception as a hedge with respect to the underlying hedged
item. Additionally, the derivative must result in cash flows that are expected
to be inversely correlated to those of the underlying hedged item. Under hedge
accounting, the changes in market value of the derivatives and the hedged assets
or liabilities are deferred and recognized in net income in the same period. If
Wessex's use of derivatives did not qualify for hedge accounting treatment, the
derivative would be recorded at fair value with changes in fair value recognized
in net income.

EARNINGS PER SHARE

Basic earnings per share is based on the earnings from continuing
operations available to common stockholders divided by the weighted average
number of shares outstanding during each period. Diluted earnings per share is
calculated in the same manner as basic earnings per share except that the
numerator is increased by the amount of dividends payable to the holders of
convertible securities and the denominator is increased, using the treasury
stock method, to include the number of additional ordinary shares that would
have been outstanding, assuming the exercise of all employee stock options and
the conversion of all convertible securities that would have had a dilutive
effect on basic earnings per share.

ENVIRONMENTAL COSTS

Environmental expenditures that relate to current operations are expensed.
Expenditures providing a future benefit are capitalized as appropriate.
Remediation costs that relate to an existing condition caused by past operations
are accrued when it is probable that these costs will be incurred and can be
reasonably estimated.

STOCK-BASED COMPENSATION

Wessex follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and related interpretations in accounting
for its employee stock options. Under APB 25, compensation expense is recorded
when the exercise price of employee stock options is less than the fair value of
the underlying stock on the measurement date.

ACCOUNTING STANDARDS ISSUED

In June 1998, the FASB issued SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS 133 requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet at fair value. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after

F-36
<PAGE> 153
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

June 15, 1999. Wessex is currently evaluating, and has not yet determined, the
effect that the adoption of SFAS 133 will have on its financial statements.

In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which requires that costs for start-up activities and
organization costs be expensed as incurred and not capitalized as had previously
been allowed. SOP 98-5 is applicable to all financial statements for fiscal
years beginning after December 15, 1998 and initial adoption is required to be
reflected as a cumulative effect of an accounting change. The adoption of SOP
98-5 is not expected to have a material effect on Wessex's financial position or
results of operations.

NOTE 2 -- INTEREST EXPENSE

<TABLE>
<CAPTION>
SIX
MONTHS YEAR ENDED
ENDED MARCH 31,
OCTOBER 2, ---------------
1998 1998 1997
----------- ------ ------
(IN MILLIONS OF US DOLLARS)
<S> <C> <C> <C>
Gross interest expense...................................... $11.3 $21.4 $18.7
Interest capitalized........................................ (5.0) (8.4) (5.9)
----- ----- -----
Net interest expense........................................ $ 6.3 $13.0 $12.8
===== ===== =====
</TABLE>

NOTE 3 -- OTHER CURRENT ASSETS

<TABLE>
<CAPTION>
MARCH 31,
1998
---------
(IN MILLIONS OF
US DOLLARS)
<S> <C>
Other receivables........................................... $ 8.0
Available-for-sale securities............................... 4.7
Prepayments................................................. 3.5
Other....................................................... 3.3
-----
$19.5
=====
</TABLE>

F-37
<PAGE> 154
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
BUILDINGS PLANT TOTAL
AND MACHINERY PROPERTY,
OPERATIONAL INFRASTRUCTURE AND OTHER CONSTRUCTION- PLANT &
STRUCTURES ASSETS VEHICLES ASSETS IN-PROGRESS EQUIPMENT
----------- -------------- --------- ------ ------------- ---------
(IN MILLIONS OF US DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Cost:
March 31, 1997............. $573.5 $ 961.2 $ 594.1 $42.9 $ 87.7 $2,259.4
Additions.................. 25.6 61.0 39.4 3.8 82.9 212.7
Transfers.................. 0.7 26.9 12.8 6.9 (47.3) --
Disposals.................. (0.5) -- (26.3) (5.5) -- (32.3)
Translation differences.... 11.6 20.5 12.0 1.0 2.5 47.6
------ -------- ------- ----- ------ --------
March 31, 1998............... $610.9 $1,069.6 $ 632.0 $49.1 $125.8 $2,487.4
====== ======== ======= ===== ====== ========
Accumulated depreciation:
March 31, 1997............. $ 96.4 $ 169.4 $ 214.5 $24.7 $ -- $ 505.0
Additions.................. 10.5 11.8 34.6 6.1 -- 63.0
Disposals.................. (0.2) -- (22.8) (5.6) -- (28.6)
Translation differences.... 2.1 3.5 4.5 0.4 -- 10.5
------ -------- ------- ----- ------ --------
March 31, 1998............... $108.8 $ 184.7 $ 230.8 $25.6 $ -- $ 549.9
====== ======== ======= ===== ====== ========
Net book value:
March 31, 1998............. $502.1 $ 884.9 $ 401.2 $23.5 $125.8 $1,937.5
====== ======== ======= ===== ====== ========
</TABLE>

Included in property, plant and equipment are the following amounts
relating to capital leases:

The net book value of property, plant and equipment as of March 31, 1998
includes interest capitalized of $62.5 million.

NOTE 5 -- GOODWILL

Goodwill arising on the acquisition of SC Technology on January 3, 1996 was
$24.3 million, with an annual amortization charge of $1.2 million. Accumulated
amortization as of March 31, 1998 is $2.7 million.

F-38
<PAGE> 155
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6 -- INVESTMENT IN EQUITY METHOD INVESTEE

At March 31, 1998, Wessex had a 50.0% share of Wessex Waste Management Ltd,
holding Class B shares of L1 each. Wessex Waste Management Ltd trades as UK
Waste through its wholly owned subsidiaries. UK Waste collects, recycles and
disposes of waste from commercial and domestic customers.

<TABLE>
<CAPTION>
(IN MILLIONS OF
US DOLLARS)
<S> <C>
Investment at cost, April 1, 1997
Share in net identifiable assets acquired................... $ 48.3
Goodwill.................................................... 225.2
------
Cost........................................................ 273.5
Less: Accumulated amortization of goodwill.................. (30.9)
Share of retained profit.................................... 63.3
Translation difference...................................... 5.3
------
Book value at March 31, 1998................................ $311.2
======
</TABLE>

Summarized financial information for Wessex Waste Management Ltd is
presented below. At March 31, 1998, Wessex's share of earnings and of the net
assets of Wessex Waste Management Ltd was 50.0%.

<TABLE>
<CAPTION>
MARCH 31,
1998
---------
(IN MILLIONS OF
US DOLLARS)
<S> <C>
Current assets.............................................. $ 89.9
Non-current assets.......................................... 643.3
------
Total assets...................................... $733.2
======
Current liabilities......................................... $ 74.3
Non-current liabilities..................................... 36.5
Stockholders' equity........................................ 622.4
------
Total liabilities and stockholders' equity........ $733.2
======
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED MARCH 31,
OCTOBER 2, ---------------
1998 1998 1997
---------- ------ ------
(IN MILLIONS OF US DOLLARS)
<S> <C> <C> <C>
Revenues................................................. $145.2 $285.1 $237.8
Operating profit......................................... 10.6 25.1 28.7
Net income before tax.................................... 11.6 26.6 29.4
</TABLE>

F-39
<PAGE> 156
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7 -- ACCOUNTS PAYABLE AND ACCRUALS

<TABLE>
<CAPTION>
MARCH 31,
1998
---------------
(IN MILLIONS OF
US DOLLARS)
<S> <C>
Trade accounts payable...................................... $ 8.4
Capital expenditure accruals................................ 56.0
Corporation tax............................................. 16.8
Advance corporation tax..................................... 19.3
Utility tax................................................. 83.0
Accruals.................................................... 42.7
Other....................................................... 1.3
------
Total............................................. $227.5
======
</TABLE>

NOTE 8 -- BORROWINGS FROM BANKS

<TABLE>
<CAPTION>
MARCH 31,
1998
---------------
(IN MILLIONS OF
US DOLLARS)
<S> <C>
Bank overnight credit facility.............................. $24.0
Revolving line of credit.................................... 58.7
-----
Total............................................. $82.7
=====
</TABLE>

Wessex has an overnight overdraft facility with two banks. In addition,
Wessex maintains a credit agreement with a syndicate of banks which provides
$402 million, denominated in GBP, of committed lines of credit which expire on
April 21, 1999. The interest rate on draw-downs is LIBOR plus 0.18%. Wessex pays
commitment fees of 0.09% on the unused portion of the lines of credit. The
weighted average effective interest rate at March 31, 1998 on short-term
borrowings is 7.75%.

NOTE 9 -- LONG-TERM DEBT

<TABLE>
<CAPTION>
MARCH 31,
1998
----------------
(IN MILLIONS OF
US DOLLARS)
<S> <C>
European Investment Bank ("EIB") loan #1 -- USD, variable
interest rate of 6 month LIBOR minus 0.25% due October
2001...................................................... $ 50.3
EIB loan #2 -- Italian lire, fixed interest rate of 11.6%
due June 2002............................................. 24.5
EIB loan #3 -- Ecu, fixed interest rate of 5.7% due December
1998...................................................... 12.7
Capital lease, fixed interest rate of 8.06% due September
2002...................................................... 120.0
Other long-term debt........................................ 0.5
------
208.0
Less: Current portion included in current liabilities....... (38.3)
------
Total............................................. $169.7
======
</TABLE>

F-40
<PAGE> 157
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Minimum annual principal payments due on long-term debt are as follows:

<TABLE>
<S> <C>
Year ending March 31:
1999...................................................... $ 38.3
2000...................................................... 29.0
2001...................................................... 32.9
2002...................................................... 87.5
2003...................................................... 20.3
------
Total............................................. $208.0
======
</TABLE>

The three EIB currency term loans which are due and payable from 1998
through June 2002 have both fixed and variable interest rates in their
respective currencies with semiannual interest payments. Using a combination of
interest rate swaps and currency swaps these rates are changed to variable and
fixed GBP interest rates.

Wessex's term loans and credit facilities are subject to certain financial
covenants, including the maintenance of minimum interest cover, maximum gearing
levels and minimum net worth.

NOTE 10 -- FINANCIAL INSTRUMENTS

Wessex uses a variety of financial instruments denominated in foreign
currencies, at both floating and fixed interest rates, to finance its
operations. Wessex manages the risk arising on these instruments by entering
into cross-currency and interest rate swaps.

FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying amount of short-term financial instruments including cash and
cash equivalents, accounts receivable, accounts payable, and all other
short-term financial assets and liabilities, including bank debt, approximates
fair value due to the short maturity of those instruments.

The fair value of preference shares with mandatory redemption requirements
and long-term debt are estimated using discounted cash flow analyses based on
Wessex's current incremental financing rates for similar types of securities.
The fair value of currency swaps and interest rate swaps was determined based on
a model which estimates the fair value of these swap contracts using market
rates at March 31, 1998 or was based on quoted market prices for similar
instruments with similar maturities. A comparison of the carrying value and fair
value of these instruments is included below:

<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------
ESTIMATED CARRYING
FAIR VALUE AMOUNT
---------- --------
(IN MILLIONS OF
US DOLLARS)
<S> <C> <C>
Long-term debt (including current portion).................. $ 79.2 $ 78.4
Preference shares with mandatory redemption................. 272.2 259.0
Derivatives:
Interest rate swaps....................................... (9.0) --
Currency swaps............................................ 14.2 9.6
</TABLE>

CERTAIN RISKS AND CONCENTRATIONS

Wessex's cash equivalents consist primarily of short-term money market
deposits. Wessex has deposited its cash equivalents with reputable financial
institutions and believes the risk of loss to be
F-41
<PAGE> 158
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

remote. Wessex has accounts receivable from customers concentrated in
southwestern England with no single customer accounting for more than 10% of
sales.

Wessex is exposed to credit risk in the event of non-performance by
counterparties to interest rate and cross-currency swap contracts. However,
because Wessex deals only with major commercial banks with high-quality credit
ratings, it does not anticipate non-performance by any of these counterparties.

Wessex is exposed to market risk in the form of foreign exchange rate and
interest rate risks. Wessex has one consolidated foreign subsidiary, which has a
functional currency of Swiss francs. On consolidation the functional currency
accounts are translated to the reporting currency with translation gains and
losses recorded in other comprehensive income. Wessex has several variable and
fixed rate loans in foreign currencies which are fully hedged through a
combination of cross-currency swaps and interest rate swaps. In addition, Wessex
is subject to foreign currency risk on translation from its functional currency
(GBP) to the reporting currency (USD).

NOTE 11 -- STOCKHOLDERS' EQUITY

ORDINARY SHARES

As of March 31, 1996, there were 214,417,242 issued and paid ordinary
shares of 60p each. During fiscal 1997, Wessex repurchased 722,771 ordinary
shares at L3.55 per share and 6,675,068 shares at L3.80 per share. Also during
fiscal 1997, 783,967 shares were issued to existing stockholders in lieu of a
cash dividend, 1,510,118 shares were issued under the stock-based compensation
plans and 193,756 shares were issued under the profit-sharing scheme.

During fiscal 1998, 1,359,267 shares were issued to existing stockholders
in lieu of a cash dividend, 1,673,643 shares were issued under the stock-based
compensation plans and 137,398 shares were issued under the profit-sharing
scheme.

CLASS B AND C ORDINARY SHARES

As of March 31, 1996 there were 30,225,106 issued and paid B ordinary
shares of 60p each and 13,285,088 C ordinary shares of 60p each. During fiscal
1997 Wessex repurchased all issued B and C ordinary shares at L3.55 per share.
On September 10, 1997, the authorized but unissued B and C ordinary shares were
redesignated as authorized ordinary shares of 60p each.

ACCUMULATED OTHER COMPREHENSIVE INCOME

Other comprehensive income at March 31, 1998 comprises the foreign currency
translation reserve of $178.8 million and unrealized gains on available-for-sale
securities of $3.2 million. The majority of the foreign currency translation
reserve is generated by the translation of the GBP functional currency financial
statements into the USD reporting currency.

PROFIT-SHARING STOCK PLAN

Wessex operates a profit-sharing stock plan whereby employees can apply for
free shares and also purchase shares. If the employee purchases shares, Wessex
matches the number of shares purchased up to a set limit. The fair market value
of the free and matching shares on the grant date is written off to the income
statement in the year of issue. Employees are entitled to all dividends on these
shares when issued. At March 31, 1998, 452,623 ordinary shares were held by
Wessex Water Trustee Company Ltd on behalf

F-42
<PAGE> 159
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of employees who were beneficially entitled to the shares under this plan. The
market value of these shares at March 31, 1998 was $3.9 million.

STOCK OPTIONS

Wessex applies APB 25 in accounting for its stock-based compensation plans
("share option plans"). Accordingly, compensation expense of $0.2 million, $0.2
million and $0.3 million was recorded for the six months ended October 2, 1998
and for the years ended March 31, 1998 and 1997, respectively.

Wessex has two share option plans. The first is a savings-related share
option plan, based on save-as-you-earn contracts, under which options were
granted between August 1991 and August 1997 at prices between L1.47 and L3.58
per share. At March 31, 1998, there were options outstanding in respect of
2,367,465 shares, exercisable between April 1, 1998 and February 28, 2005. The
second share option plan is an executive share option plan whereby options
outstanding in respect of 762,116 ordinary shares were granted at prices between
L1.85 and L3.16 per share. These options are exercisable between April 1, 1998
and August 1, 2004.

Details of the share option plans are summarized in the table below:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE
OPTIONS SHARES (IN GBP)
- ------- ---------- --------------
<S> <C> <C>
Outstanding at March 31, 1996............................... 5,678,630 2.20
Granted..................................................... 509,463 2.80
Exercised................................................... (1,531,156) 1.66
Forfeited................................................... (126,011) 2.20
---------- ----
Outstanding at March 31, 1997............................... 4,530,926 2.46
---------- ----
Granted..................................................... 477,003 3.58
Exercised................................................... (1,673,259) 2.36
Forfeited................................................... (205,089) 2.49
---------- ----
Outstanding at March 31, 1998............................... 3,129,581 2.68
---------- ----
Granted..................................................... 371,597 3.64
Exercised................................................... (320,197) 2.62
Forfeited................................................... (24,688) 2.73
---------- ----
Outstanding at October 2, 1998.............................. 3,156,293 2.80
---------- ----
Exercisable at March 31, 1997............................... 1,061,306 2.46
Exercisable at March 31, 1998............................... 762,116 3.11
Exercisable at October 2, 1998.............................. 629,674 3.10
</TABLE>

The exercise price of the savings-related share options granted was 20%
below market price.

F-43
<PAGE> 160
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information about options outstanding as at
March 31, 1998:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
NUMBER LIFE NUMBER
RANGE OF EXERCISE PRICES (GBP) OUTSTANDING (YEARS) EXERCISABLE
- ------------------------------ ----------- ------------ -----------
<S> <C> <C> <C>
1.00 - 1.49......................................... 235,152 0.50 --
1.50 - 1.99......................................... 248,246 1.62 13,372
2.00 - 2.49......................................... 1,003,938 2.17 4,772
2.50 - 2.99......................................... 430,808 3.29 --
3.00 - 3.49......................................... 743,972 5.94 743,972
3.50 - 3.99......................................... 467,465 4.22 --
</TABLE>

If Wessex had elected to recognize compensation expense based on the fair
value of the stock options at the grant date in accordance with SFAS 123,
"Accounting for Stock Based Compensation," compensation expense of $0.3 million,
$0.5 million, and $0.3 million would have been recorded for the six months ended
October 2, 1998 and for the years ended March 31, 1998 and 1997, respectively.
Net income would have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED MARCH 31,
OCTOBER 2, --------------
1998 1998 1997
---------- ----- ------
(IN MILLIONS OF US DOLLARS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income:
As reported............................................... $71.8 $16.7 $153.0
Pro forma................................................. 71.7 16.4 153.0
Basic earnings per share:
As reported............................................... $0.30 $0.01 $ 0.65
Pro forma................................................. 0.30 0.01 0.65
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants for the six months ended October 2, 1998 and for the years ended March
31, 1998 and 1997:

<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED MARCH 31,
OCTOBER 2, ---------------------
1998 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Dividend yield.............................................. 4.1% 3.3% 4.4%
Expected volatility......................................... 21% 22% 23%
Risk-free interest rate..................................... 6.3% 7.1% 7.2%
Expected lives.............................................. 4.9 years 4.8 years 4.8 years
Weighted average option price (GBP)......................... 3.64 3.58 2.80
Weighted average fair market value at date of grant (GBP)... 1.24 1.42 1.03
</TABLE>

NOTE 12 -- REDEEMABLE PREFERENCE SHARES

On September 7, 1995, a bonus issue of 308,984,402 fully paid 50p
cumulative redeemable preference shares was made to holders of record as of
August 31, 1995 of B and C ordinary shares on a one-for-one

F-44
<PAGE> 161
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

basis; 310,000,000 of these shares were authorized. The preference shares were
originally redeemable at par in four equal tranches on the dividend payment date
in each of the years 1998, 1999, 2000 and 2001. The preference dividend is paid
annually in arrears at a gross dividend rate, fixed in advance, of 12 month
LIBOR plus 0.5%. Preference shares have priority on winding up, but are
non-voting unless a resolution is passed to vary their rights.

Beginning in September 1998, Wessex redeemed all of its 308,984,402
cumulative redeemable preference shares at the par value of 50p per share. This
was pursuant to resolutions passed by its stockholders on July 29, 1998 and
November 23, 1998 to cancel the preference shares by repaying capital to the
preference stockholders.

NOTE 13 -- EARNINGS PER SHARE

Reconciliation of the numerator and denominator as used in the calculation
of earnings per share:

<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED MARCH 31,
OCTOBER 2, ---------------
NUMERATOR (IN MILLIONS OF US DOLLARS) 1998 1998 1997
- ------------------------------------- ---------- ------ ------
<S> <C> <C> <C>
Basic
Net income attributable to ordinary stockholders....... $ 64.1 $ 1.6 $139.5
Dividends paid to convertible stockholders............. -- -- 0.6
------ ------ ------
Diluted
Net income available to ordinary and convertible
stockholders........................................ $ 64.1 $ 1.6 $140.1
====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
DENOMINATOR (IN MILLIONS)
- -------------------------
<S> <C> <C> <C>
Basic
Weighted average shares outstanding during year........ 213.0 211.3 214.7
Effect of dilutive securities:
Stock options....................................... 1.5 1.4 2.0
Convertible securities.............................. -- -- 38.0
------ ------ ------
Diluted.................................................. 214.5 212.7 254.7
====== ====== ======
</TABLE>

The UK Finance (No. 2) Act 1997 required the payment of utility tax, which
for Wessex Water Plc was $162.3 million, and was charged in full in the results
for the year ended March 31, 1998. The adjusted earnings per share adding back
this utility tax would have been:

<TABLE>
<CAPTION>
YEAR
ENDED
MARCH 31,
1998
---------
<S> <C>
Basic....................................................... $0.78
Diluted..................................................... 0.77
</TABLE>

F-45
<PAGE> 162
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 14 -- INCOME TAXES

Total income tax expense is summarized as follows:

<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED MARCH 31,
OCTOBER 2, --------------
1998 1998 1997
---------- ------ -----
(IN MILLIONS OF US DOLLARS)
<S> <C> <C> <C>
Current tax............................................... $ 3.0 $ 26.5 $79.3
Deferred tax.............................................. 23.2 24.9 (2.1)
Share of tax of equity method investee.................... 2.2 6.6 5.2
Utility tax............................................... -- 162.3 --
----- ------ -----
Total income tax expense........................ $28.4 $220.3 $82.4
===== ====== =====
</TABLE>

The differences between taxes computed at the statutory tax rate and
Wessex's effective income tax rate are as follows:

<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED MARCH 31,
OCTOBER 2, --------------
1998 1998 1997
---------- ------ -----
(IN MILLIONS OF US DOLLARS
EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Tax at statutory tax rate 31% (1997: 33%)................ $ 31.1 $ 73.5 $77.7
Change in tax rate....................................... (12.7) (22.6) --
Non-deductible expenses.................................. 7.9 1.6 1.6
Equity investee.......................................... 0.5 2.5 0.4
Other.................................................... 1.6 3.0 2.7
------ ------ -----
Total before utility tax....................... 28.4 58.0 82.4
------ ------ -----
Utility tax.............................................. -- 162.3 --
------ ------ -----
Total.......................................... $ 28.4 $220.3 $82.4
====== ====== =====
Effective rate before utility tax........................ 28% 24% 35%
Effective rate after utility tax......................... 28% 93% 35%
</TABLE>

The change in tax rate from 33% to 31% effective from April 1, 1997 was
enacted on July 31, 1997. The subsequent reduction in the tax rate from 31% to
30% effective from April 1, 1999 was enacted on July 31, 1998.

F-46
<PAGE> 163
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The principal components of Wessex's net deferred liability are as follows:

<TABLE>
<CAPTION>
MARCH 31,
1998
--------------
(IN MILLIONS
OF US DOLLARS)
<S> <C>
Deferred tax assets:
Advance corporation tax recoverable....................... $114.2
Other temporary differences............................... 7.7
------
Total deferred tax asset.......................... 121.9
------
Deferred tax liabilities:
Accelerated capital allowances............................ 371.5
Other temporary differences............................... 56.9
------
Total deferred tax liability...................... 428.4
------
Net deferred tax liability.................................. $306.5
======
</TABLE>

NOTE 15 -- PENSIONS

The defined benefit schemes which cover the majority of staff are the
Wessex Water Pension Scheme ("WWPS"), the Wessex Water Mirror Image Pension
Scheme ("WWMIS") and the Wessex Water Executive Pension Scheme ("WWEPS"). The
assets are held in separate trustee-administered funds. The pension cost charged
to the income statement has been determined on the advice of independent
qualified actuaries and is accrued over the service lives of the employees
expected to be eligible to receive such benefits.

The following assumptions were used in determining the funded status and
pension charge for each period, and are determined as of the beginning of the
period:

<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED MARCH 31,
OCTOBER 2, -----------
1998 1998 1997
---------- ---- ----
<S> <C> <C> <C>
Discount rate............................................... 6.5% 8.3% 9.0%
Yield on government bonds................................... 6.0 7.6 8.5
Expected return on plan assets.............................. 7.5 8.5 9.0
Rate of compensation increase............................... 5.0 6.0 6.5
Pension increases after April 5, 1997....................... 3.0 4.0 4.5
</TABLE>

F-47
<PAGE> 164
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The plan's funded status and related pension accrual at March 31, 1998 are
as follows:

<TABLE>
<CAPTION>
MARCH 31,
1998
---------------
(IN MILLIONS OF
US DOLLARS)
<S> <C>
Change in benefit obligation
Benefit obligation at beginning of year................... $ 186.8
Service cost.............................................. 4.6
Interest cost............................................. 15.4
Plan participants' contributions.......................... 2.1
Termination costs......................................... 1.3
Actuarial losses.......................................... 25.9
Benefits paid............................................. (9.4)
Exchange movement......................................... 4.6
-------
Benefit obligation at end of year......................... $ 231.3
=======
Change in plan assets
Fair value of plan assets at beginning of year............ $ 211.6
Actual return on plan assets.............................. 44.8
Employer's contribution................................... 3.6
Plan participants' contribution........................... 2.1
Benefits paid............................................. (9.4)
Exchange difference....................................... 5.0
-------
Fair value of plan assets at end of year.................. $ 257.7
=======
Fair value of plan assets................................. $ 257.7
Projected benefit obligation.............................. (231.3)
-------
Funded status............................................. 26.4
Unrecognized transition asset............................. (6.2)
Unrecognized net actuarial gain........................... (16.6)
Unrecognized prior service cost........................... 7.8
-------
Prepaid benefit cost...................................... $ 11.4
=======
</TABLE>

Net periodic benefit cost includes the following components:

<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED MARCH 31,
OCTOBER 2, ---------------
1998 1998 1997
---------- ------ ------
(IN MILLIONS OF US DOLLARS)
<S> <C> <C> <C>
Service cost............................................. $ 3.1 $ 4.6 $ 4.4
Interest cost............................................ 7.4 15.4 14.3
Expected return on plan assets........................... (9.4) (17.9) (16.9)
Recognition of transition asset.......................... (0.5) (1.0) (1.0)
Amortization of prior service cost....................... 0.3 0.7 0.6
Recognized actuarial gain................................ -- -- (0.3)
Curtailments............................................. -- 1.3 1.6
----- ------ ------
Net periodic benefit cost................................ $ 0.9 $ 3.1 $ 2.7
===== ====== ======
</TABLE>

F-48
<PAGE> 165
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The prepaid benefit accrual is included within other non-current assets in
the balance sheet. The net periodic benefit cost is included within operating
expenses in the income statement.

NOTE 16 -- SEGMENT AND GEOGRAPHIC INFORMATION

Wessex's principal business is the provision of water supply and wastewater
services in southwestern England. For management reporting purposes the
operations are divided into three service categories: regulated water services,
unregulated water services and SC Technology. Regulated water services accounted
for approximately 91%, 93% and 93% of revenues for the six months ended October
2, 1998, and for the years ended March 31, 1998 and 1997, respectively. Wessex's
management regularly reviews financial information relating to these three
service categories. The financial information provided to and reviewed by the
chief operating decision maker does not include balance sheet information by
segment. The financial management information is prepared using UK generally
accepted accounting principles which differ in certain significant respects from
US generally accepted accounting principles.

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED YEAR ENDED
OCTOBER 2, 1998 MARCH 31, 1998 MARCH 31, 1997
-------------------------- -------------------------- --------------------------
REGULATED REGULATED REGULATED
WATER WATER WATER
SERVICES OTHER TOTAL SERVICES OTHER TOTAL SERVICES OTHER TOTAL
--------- ----- ------ --------- ----- ------ --------- ----- ------
(IN MILLIONS OF US DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External revenue................ $213.6 $20.2 $233.8 $404.3 $32.3 $436.6 $375.7 $27.4 $403.1
Intersegment revenue............ -- 2.1 2.1 -- -- -- -- -- --
------ ----- ------ ------ ----- ------ ------ ----- ------
Total revenue................... 213.6 22.3 235.9 404.3 32.3 436.6 375.7 27.4 403.1
Segment result.................. 95.2 5.3 100.5 221.1 10.3 231.4 204.5 8.7 213.2
Depreciation.................... 27.4 0.5 27.9 51.4 0.5 51.9 45.6 0.5 46.1
</TABLE>

Reconciliation of segment results to income before taxes:

<TABLE>
<CAPTION>
SIX
MONTHS
ENDED YEAR ENDED MARCH 31,
OCTOBER 2, ---------------------
1998 1998 1997
---------- -------- --------
(IN MILLIONS OF US DOLLARS)
<S> <C> <C> <C>
Total segment result for reportable segments........... $100.5 $231.4 $213.2
Intersegment profit.................................. (0.3) -- --
Head office charges.................................. (2.8) (5.1) (7.6)
US GAAP adjustments:
Infrastructure renewals charge.................... 8.3 16.2 15.2
Depreciation on infrastructure assets............. (6.3) (11.8) (10.5)
Other............................................. 1.1 1.6 0.2
------ ------ ------
US GAAP operating profit............................. 100.5 232.3 210.5
Share in results of equity method investee........... 5.8 13.3 14.7
Net interest income (expense)........................ (6.1) (8.6) 10.2
------ ------ ------
Income before tax.................................... $100.2 $237.0 $235.4
====== ====== ======
</TABLE>

F-49
<PAGE> 166
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 17 -- RELATED PARTY TRANSACTIONS

At March 31, 1998,Wessex had a 50.0% interest in Wessex Waste Management
Ltd. This investment is further described in Note 6. Waste Management (UK)
Holdings Ltd, a subsidiary of Waste Management International, is the other 50.0%
owner of Wessex Waste Management Ltd. Related party transactions with Wessex
Waste Management Ltd and Waste Management International group companies for the
six months ended October 2, 1998 and for the years ended March 31, 1998 and 1997
were as follows:

(a) In fiscal 1997, Wessex stock options granted to UK Waste
Management Holdings in respect of 10,605,303 ordinary shares were
cancelled.

(b) Also in fiscal 1997, Wessex repurchased 722,771 ordinary shares,
30,225,106 B ordinary shares and 13,285,088 C ordinary shares from UK Waste
Management Holdings at a total cost of $254.3 million.

(d) Wessex provided guarantees on loans issued by Wessex Waste
Management Ltd. The maximum liability as of March 31, 1998 was $7.0
million.

Other related party transactions are as follows:

(e) A director of SC Technology owns certain of the assets at the
company's operation in Biel, Switzerland, for which a charge was made to SC
Technology of $0.2 million, $0.3 million and $0.5 million for the six
months ended October 2, 1998 and for the years ended March 31, 1998 and
1997, respectively.

NOTE 18 -- COMMITMENTS AND CONTINGENCIES

LEASES

Wessex leases certain property, plant and equipment. Commitments for
minimum rentals under non-cancelable leases as at March 31, 1998 are as follows:

<TABLE>
<CAPTION>
OPERATING
LEASES
---------------
(IN MILLIONS OF
US DOLLARS)
<S> <C>
For the years ending March 31:
1999........................................................ $0.7
2000........................................................ 0.5
2001........................................................ 0.5
2002........................................................ 0.5
2003........................................................ 0.3
Thereafter.................................................. 0.9
----
Total minimum lease payments................................ $3.4
====
</TABLE>

Rent expense amounted to approximately $0.3 million, $0.5 million and $0.5
million for the six months ended October 2, 1998 and for the years ended March
31, 1998 and 1997, respectively.

F-50
<PAGE> 167
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CAPITAL EXPENDITURES

Capital expenditure contracted but not provided at March 31, 1998 was $79.1
million.

GUARANTEES

Wessex Water Plc has acted as guarantor for certain borrowing facilities
made available to Wessex Water Services Ltd. As part of the banking
arrangements, Wessex Water Plc has entered into a cross-undertaking with Wessex
Water Services Ltd in relation to the latter's overdraft and related facilities.

At March 31, 1998, Wessex Water Plc had provided guarantees on loans issued
by Wessex Waste Management Ltd, the maximum liability at March 31, 1998 being
$7.0 million.

Wessex Water Plc has provided performance guarantees on behalf SC
Technology on the tendering of contracts. The maximum liability as of March 31,
1998 was $4.9 million.

NOTE 19 -- SUBSEQUENT EVENTS

On Friday July 24, 1998 Enron Corp. ("Enron") of Houston, Texas, United
States, made a cash offer of 630p per share for the shares of Wessex. This offer
was recommended to the stockholders by the Board of Directors of Wessex. The
offer ran to August 28, 1998, but was extended to September 18, 1998 to allow
the Secretary of State for Trade and Industry to consider if there should be an
investigation by the Monopolies and Mergers Commission ("MMC"). On September 10,
1998 it was announced that there would be no reference to the MMC. On September
21, 1998 Enron announced that the offer had become unconditional, having
received by September 18, 1998 acceptances representing 87.2 percent of all
ordinary shares.

On October 2, 1998 Enron announced that it had received acceptances
representing more than 90 percent of all ordinary shares. On that same date
notices were issued to the remaining Wessex ordinary shareholders, informing
them that Enron intended to exercise its rights under Section 429 of the
Companies Act 1985 to acquire compulsorily all of the outstanding ordinary
shares. The compulsory share acquisition was completed in November 1998. Offer
documents were also sent to the stock option holders in the Savings-Related
Share Option Scheme. The options outstanding under this scheme and the Executive
Share Option Scheme were either exercised and the shares acquired by Enron, or
compensation was paid to settle the liabilities under the schemes. All stock
option schemes are now closed.

On November 30, 1998, Wessex sold its interest in Wessex Waste Management
Ltd to Waste Management International for $337.9 million.

In December 1998, all of the remaining 128,339,909 redeemable preference
shares were redeemed and Wessex Water Plc changed its name to Wessex Water Ltd.

F-51
<PAGE> 168

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

THROUGH AND INCLUDING , 1999 (THE 25TH DAY AFTER THE DATE
OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

[AZURIX LOGO]

COMMON STOCK

---------------------
PROSPECTUS
---------------------

MERRILL LYNCH & CO.

CREDIT SUISSE FIRST BOSTON

DONALDSON, LUFKIN & JENRETTE

PAINEWEBBER INCORPORATED

BT ALEX. BROWN

NATIONSBANC MONTGOMERY SECURITIES LLC

, 1999

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 169

[ALTERNATE PAGES OF INTERNATIONAL PROSPECTUS]
<PAGE> 170

[ALTERNATE COVER FOR INTERNATIONAL PROSPECTUS]

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED MAY 5, 1999

PROSPECTUS
- ----------------

[AZURIX LOGO]

COMMON STOCK
----------------------

The international managers will offer shares outside the United
States and Canada and the U.S. underwriters will offer shares in the
United States and Canada.

We expect the public offering price to be between $ and $ per
share. Prior to the public offering, there has been no public market for the
common stock. We are applying to list the common stock on the New York Stock
Exchange under the trading symbol "AZX."

INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 8 OF THIS PROSPECTUS.

----------------------

The international managers may also purchase up to an additional
shares from the selling stockholder at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments. The U.S. underwriters may similarly purchase up to an aggregate
of an additional shares from the selling stockholder.

The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
----------------------
MERRILL LYNCH INTERNATIONAL

CREDIT SUISSE FIRST BOSTON

DONALDSON, LUFKIN & JENRETTE

PAINEWEBBER INTERNATIONAL

ABN AMRO ROTHSCHILD HSBC MARKETS

----------------------

The date of this prospectus is , 1999.
<PAGE> 171

[ALTERNATE PAGES FOR INTERNATIONAL PROSPECTUS]

UNDERWRITING

GENERAL

We intend to offer our common stock outside of the United States and Canada
through a number of international managers and elsewhere through U.S.
underwriters. Merrill Lynch International, Credit Suisse First Boston (Europe)
Limited, Donaldson, Lufkin & Jenrette International, PaineWebber International
(U.K.) Limited, ABN AMRO Rothschild and HSBC Securities, Inc. are acting as lead
managers of each of the international managers named below. Under an
international purchase agreement among Azurix, the selling stockholder, Enron
and the international managers, and concurrently with the sale of
shares of common stock to the U.S. underwriters, Azurix and the selling
stockholder have agreed to sell to the international managers, and each of the
international managers severally and not jointly has agreed to purchase from
Azurix and the selling stockholder, the number of shares of common stock set
forth opposite its name below.

<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGERS SHARES
<S> <C>
Merrill Lynch International.................................
Credit Suisse First Boston (Europe) Limited.................
Donaldson, Lufkin & Jenrette International..................
PaineWebber International (U.K.) Limited....................
ABN AMRO Rothschild.........................................
HSBC Securities, Inc........................................

--------
Total..........................................
========
</TABLE>

Azurix, the selling stockholder and Enron have also entered into a U.S.
purchase agreement with certain U.S. underwriters in the United States and
Canada for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit
Suisse First Boston Corporation, Donaldson, Lufkin & Jenrette Securities
Corporation, PaineWebber Incorporated, BT Alex. Brown Incorporated and
NationsBanc Montgomery Securities LLC are acting as U.S. representatives. Under
the U.S. purchase agreement, and concurrently with the sale of shares
of common stock to the international managers under the international purchase
agreement, Azurix and the selling stockholder have agreed to sell to the U.S.
underwriters, and each of the U.S. underwriters severally and not jointly has
agreed to purchase from Azurix and the selling stockholder, an aggregate of
shares of common stock. The initial public offering price per share
and the total underwriting discount per share of common stock are identical
under the international purchase agreement and the U.S. purchase agreement.

In the international purchase agreement and the U.S. purchase agreement,
the international managers and the U.S. underwriters, respectively, have agreed,
under the terms of those agreements, to purchase all of the shares of our common
stock being sold under those agreements if any of the shares of common stock
being sold under those agreements are purchased. In the event of a default by an
underwriter, the international purchase agreement and the U.S. purchase
agreement provide that, in some circumstances, the purchase commitments of
nondefaulting underwriters may be increased or the purchase agreements may be
terminated. The closings for the sale of shares of our common stock to the
international managers and the U.S. underwriters are conditioned upon one
another.

Azurix and Enron have agreed to indemnify the international managers and
the U.S. underwriters against some liabilities, including some liabilities under
the Securities Act, or to contribute to payments

<PAGE> 172

the international managers and the U.S. underwriters may be required to make in
respect of those liabilities.

The shares of common stock are being offered by the underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of legal matters by counsel for the underwriters and certain other
conditions. The underwriters reserve the right to withdraw, cancel or modify
offers and to reject orders in whole or in part.

COMMISSIONS AND DISCOUNTS

The lead managers have advised Azurix and the selling stockholder that the
international managers propose initially to offer the shares of our common stock
to the public at the initial public offering price set forth on the cover page
of this prospectus, and to certain dealers at such price less a concession not
in excess of $ per share of common stock. The international managers may
allow, and such dealers may reallow, a discount not in excess of $ per share
of common stock to certain other dealers. After the initial public offering, the
public offering price, concession and discount may be changed.

The following table shows the per share and total public offering price,
the underwriting discount to be paid by Azurix and the selling stockholder to
the international managers and the U.S. underwriters and the proceeds before
expenses to Azurix and the selling stockholder. This information is presented
assuming either no exercise or full exercise by the international managers and
the U.S. underwriters of their over-allotment options.

The expenses of this offering, exclusive of the underwriting discount, are
estimated at $ and are payable by Azurix and the selling stockholder.

INTERSYNDICATE AGREEMENT

The international managers and the U.S. underwriters have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the terms of the intersyndicate agreement, the international managers and
the U.S. underwriters are permitted to sell shares of common stock to each other
for purposes of resale at the public offering price, less an amount not greater
than the selling concession. Under the terms of the intersyndicate agreement,
the U.S. underwriters and any dealer to whom they sell shares of our common
stock will not offer to sell or sell shares of common stock to persons who are
non-U.S. or non-Canadian persons or to persons they believe intend to resell to
persons who are non-U.S. or non-Canadian persons, and the international managers
and any dealer to whom they sell shares of common stock will not offer to sell
or sell shares of common stock to U.S. persons or to Canadian persons or to
persons they believe intend to resell to U.S. persons or Canadian persons,
except in the case of transactions under the terms of the intersyndicate
agreement.

OVER-ALLOTMENT OPTION

The selling stockholder has granted an option to the international
managers, exercisable for 30 days after the date of this prospectus, to purchase
up to an aggregate of additional shares of our common stock at the
public offering price set forth on the cover page of this prospectus, less the
underwriting discount. The international managers may exercise this option
solely to cover over-allotments, if any, made on the sale of our common stock
offered hereby. To the extent that the international managers exercise this
option, each international manager will be obligated, subject to certain
conditions, to purchase a number of additional shares of our common stock
proportionate to such international manager's initial amount reflected in the
foregoing table.
<PAGE> 173

The selling stockholder also has granted an option to the U.S.
underwriters, exercisable for 30 days after the date of this prospectus, to
purchase up to an aggregate of additional shares of common stock to
cover over-allotments, if any, on terms similar to those granted to the
international managers.

RESERVED SHARES

NO SALES OF SIMILAR SECURITIES

- Offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, lend or otherwise dispose of or
transfer any shares of our common stock or securities convertible into or
exchangeable or exercisable for or repayable with our common stock,
whether now owned or later acquired by the person executing the agreement
or with respect to which the person executing the agreement later
acquires the power of disposition, or file a registration statement under
the Securities Act relating to any shares of our common stock

As an exception to these restrictions we may issue shares of our common
stock or securities convertible or exchangeable into our common stock as payment
of any part of the purchase price for businesses we acquire. However, shares
issued in this manner shall not be transferable during the 180-day lock-up
period. In addition, if Atlantic Water Trust is compelled to sell some or all of
its shares of our common stock in the event of a default under specified debt
obligations or a major decline in the price of Enron's common stock combined
with a downgrading of Enron's senior debt to below investment grade, then such
sale will be permitted. See "Risk Factors -- Future sales of our common stock
may depress our stock price."

NEW YORK STOCK EXCHANGE LISTING

Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations among
Azurix, the selling stockholder, Enron, the lead managers and the U.S.
representatives. The factors to be considered in determining the initial public
offering price, in addition to prevailing market conditions, are the valuation
multiples of publicly traded companies that the lead managers and the U.S.
representatives believe to be comparable to us, including adjusted market value
to EBITDA multiples, price to book value multiples and price to earnings
multiples, certain of our financial information, the history of, and the
prospects for, our company and the industry in which we compete, an assessment
of our management, our past and present operations, the prospects for and timing
of our future revenues, the present state of our development, and the above
factors in relation

<PAGE> 174

to market values and various valuation measures of other companies engaged in
activities similar to ours. There can be no assurance that an active trading
market will develop for the common stock or that the common stock will trade in
the public market subsequent to this offering at or above the initial public
offering price.

The underwriters do not expect sales of our common stock to any accounts
over which they exercise discretionary authority to exceed 5% of the number of
shares being offered in this offering.

PRICE STABILIZATION AND SHORT POSITIONS

Until the distribution of our common stock is completed, rules of the SEC
may limit the ability of the underwriters and selling group members to bid for
and purchase our common stock. As an exception to these rules, the lead managers
and the U.S. representatives are permitted to engage in certain transactions
that stabilize the price of our common stock. Such transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of our
common stock.

If the underwriters create a short position in our common stock in
connection with this offering, i.e., if they sell more shares of common stock
than are set forth on the cover page of this prospectus, the lead managers and
the U.S. representatives may reduce that short position by purchasing our common
stock in the open market. The lead managers and the U.S. representatives may
also elect to reduce any short position by exercising all or part of the
over-allotment option described above.

PENALTY BIDS

The lead managers and the U.S. representatives may also impose a penalty
bid on underwriters and selling group members. This means that if the lead
managers or the U.S. representatives purchase shares of our common stock in the
open market to reduce the underwriters' short position or to stabilize the price
of our common stock, they may reclaim the amount of the selling concession from
the underwriters and selling group members who sold those shares.

None of Azurix, the selling stockholder, or any of the underwriters makes
any representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of our common stock.
In addition, none of Azurix, the selling stockholder, or any of the underwriters
makes any representation that the lead managers or the U.S. representatives will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.

OTHER RELATIONSHIPS

STAMP TAXES

LIMITATIONS ON SALES IN THE UNITED KINGDOM

Each international manager has agreed that:

- It has not offered or sold and, prior to the expiration of the period of
six months from the closing date, will not offer or sell any shares of
our common stock to persons in the United Kingdom,

<PAGE> 175

except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for
the purposes of their businesses or otherwise in circumstances which do
not constitute an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995;

- It has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to our common stock in, from or otherwise involving the United
Kingdom; and

- It has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the
issuance of our common stock to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such
document may otherwise lawfully be issued or passed on.

No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of common
stock, or the possession, circulation or distribution of this prospectus or any
other material relating to us or shares of our common stock in any jurisdiction
where action for that purpose is required. Accordingly, the shares of our common
stock may not be offered or sold, directly or indirectly, and neither this
prospectus nor any other offering material or advertisements in connection with
the shares of our common stock may be distributed or published, in or from any
country or jurisdiction except in compliance with any applicable rules and
regulations of any such country or jurisdiction.

LEGAL MATTERS

Legal matters with respect to the validity of the issuance of the shares of
our common stock offered hereby will be passed upon for us by Vinson & Elkins
L.L.P., Houston, Texas. Legal matters relating to our common stock offered
hereby will be passed upon for the international managers and the U.S.
underwriters by Andrews & Kurth L.L.P., Houston, Texas.

EXPERTS

<PAGE> 176

[ALTERNATE BACK COVER FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

THROUGH AND INCLUDING , 1999 (THE 25TH DAY AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

[AZURIX LOGO]

COMMON STOCK

---------------------
PROSPECTUS
---------------------

MERRILL LYNCH INTERNATIONAL

CREDIT SUISSE FIRST BOSTON

DONALDSON, LUFKIN & JENRETTE

PAINEWEBBER INTERNATIONAL

ABN AMRO ROTHSCHILD

HSBC MARKETS

, 1999

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 177

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth fees payable to the Securities and Exchange
Commission and the New York Stock Exchange, and other estimated expenses
expected to be incurred in connection with issuance and distribution of
securities being registered. All such fees and expenses shall be paid by Azurix
and the selling stockholder.

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $239,775
NYSE Fee....................................................
NASD Fee.................................................... 30,500
Transfer Agent Fees and Expenses............................
Printing Fees and Expenses..................................
Legal Fees and Expenses.....................................
Accounting Fees and Expenses................................
Miscellaneous...............................................
--------
Total............................................. $
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law ("DGCL") provides that
a corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or such other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.

Azurix's certificate of incorporation and bylaws provide that
indemnification shall be to the fullest extent permitted by the DGCL for all
current or former directors or officers of the company.

As permitted by the DGCL, the certificate of incorporation provides that
directors of Azurix shall have no personal liability to Azurix or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except (1) for any breach of the director's duty of loyalty to Azurix or its
stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violations
II-1
<PAGE> 178

of law, (3) under Section 174 of the DGCL or (4) for any transaction from which
a director derived an improper personal benefit.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

On January 29, 1998, Azurix issued 1,000 shares to Enron in an exempt
transaction pursuant to Section 4(2) of the Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits. See the Exhibit Index following the signature pages to this
Registration Statement.

(b) Financial Statement Schedules. See Reports of Independent Public
Accountants and Independent Accountants included herein on Pages S-1 to S-3,
Schedule I -- Condensed Financial Information of Registrant included herein
beginning on Page S-4 and Schedule II -- Valuation and Qualifying Accounts
included herein on Page S-8.

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes:

(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described
in Item 14, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

(b) To provide to the underwriter(s) at the closing specified in the
underwriting agreements, certificates in such denominations and registered
in such names as required by the underwriter(s) to permit prompt delivery
to each purchaser.

(c) For purpose of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.

(d) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-2
<PAGE> 179

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Houston, in the State of Texas, on May 5, 1999.

AZURIX CORP.

By: /s/ REBECCA P. MARK
----------------------------------
Name: Rebecca P. Mark
Title: Director, Chairman and Chief
Executive Officer

Pursuant to the requirements of the Act, this Amendment No. 1 to
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>

/s/ REBECCA P. MARK Director, Chairman and Chief May 5, 1999
- ----------------------------------------------------- Executive Officer
Rebecca P. Mark (Principal Executive Officer)

/s/ RODNEY L. GRAY Director and Vice Chairman, May 5, 1999
- ----------------------------------------------------- Finance, Risk Management
Rodney L. Gray and Investments and
Chief Financial Officer
(Principal Financial Officer)

/s/ RODNEY L. FALDYN Chief Accounting Officer May 5, 1999
- ----------------------------------------------------- (Principal Accounting Officer)
Rodney L. Faldyn

* Director May 5, 1999
- -----------------------------------------------------
John H. Duncan

* Director May 5, 1999
- -----------------------------------------------------
W. Nicholas Hood

* Director May 5, 1999
- -----------------------------------------------------
Kenneth L. Lay

* Director May 5, 1999
- -----------------------------------------------------
Jeffrey K. Skilling

* Director May 5, 1999
- -----------------------------------------------------
Joseph W. Sutton

* Director May 5, 1999
- -----------------------------------------------------
John Wakeham

* Director May 5, 1999
- -----------------------------------------------------
Herbert S. Winokur, Jr.
</TABLE>

* By: /s/ RODNEY L. GRAY

-------------------------------

Rodney L. Gray,

as attorney-in-fact

II-3
<PAGE> 180

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

ON FINANCIAL STATEMENT SCHEDULES

To the stockholder of Azurix Corp.:

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Azurix Corp. and subsidiaries as of
December 31, 1998 and for the period from January 29, 1998 (Date of Inception)
to December 31, 1998 included in this registration statement and have issued our
report thereon dated February 22, 1999. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. Schedule
I and Schedule II (as related to Azurix Corp. for the period from January 29,
1998 (Date of Inception) to December 31, 1998) listed in Item 16(b) are the
responsibility of Azurix Corp.'s management and are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

/s/ ARTHUR ANDERSEN LLP

------------------------------------
Arthur Andersen LLP

Houston, Texas
February 22, 1999

S-1
<PAGE> 181

REPORT OF INDEPENDENT ACCOUNTANTS

ON FINANCIAL STATEMENT SCHEDULE

To Wessex Water Ltd (formerly Wessex Water Plc):

We have audited in accordance with generally accepted auditing standards,
the consolidated statements of income, changes in stockholders' equity and cash
flows of Wessex Water Ltd (formerly Wessex Water Plc) and subsidiaries for the
period from April 1, 1998 to October 2, 1998 included in this registration
statement and have issued our report thereon dated March 12, 1999. Our audit was
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. Schedule II listed in Item 16(b) as related to Wessex Water
Ltd (formerly Wessex Water Plc) for the period from April 1, 1998 to October 2,
1998 is the responsibility of the company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

/s/ ARTHUR ANDERSEN

----------------------------------------

Arthur Andersen

London, England

March 12, 1999

S-2
<PAGE> 182

REPORT OF INDEPENDENT ACCOUNTANTS

To the stockholder of Wessex Water Ltd (formerly Wessex Water Plc)

In connection with our audits on the consolidated financial statements of Wessex
Water Plc (now renamed Wessex Water Ltd) and its subsidiaries (the "Company") at
March 31, 1998 and for each of the two years in the period ended March 31, 1998,
which financial statements are included in this Registration Statement, we have
also audited Schedule II listed in Item 16(b) as it relates to Wessex Water Ltd
(formerly Wessex Water Plc) for each of the two years in the period ended March
31, 1998. In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.

/s/ PRICEWATERHOUSECOOPERS

- ---------------------------------------------------------

PRICEWATERHOUSECOOPERS

CHARTERED ACCOUNTANTS

Bristol, England

March 12, 1999

S-3
<PAGE> 183

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT

AZURIX CORP.
STATEMENT OF INCOME

<TABLE>
<CAPTION>
JANUARY 29, 1998
(DATE OF INCEPTION)
TO DECEMBER 31,
1998
---------------------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C>

Operating revenues.......................................... $ --
---------
Operating expenses:
Operations and maintenance................................ 2.3
General and administrative................................ 12.3
Depreciation and amortization............................. 0.1
---------
Total operating expenses.......................... 14.7
---------
Equity in earnings of consolidated affiliates............... 26.0
Other....................................................... (1.1)
---------
Net income.................................................. $ 10.2
=========
Earnings per share of common stock -- basic and diluted..... $ 0.10
=========
Weighted average shares outstanding -- basic and diluted.... 100.0
=========
</TABLE>

The accompanying note is an integral part of these condensed financial
statements.

S-4
<PAGE> 184

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT

AZURIX CORP.
CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
(IN MILLIONS)
<S> <C>
ASSETS
Investment in subsidiary.................................... $1,593.3
Investment in unconsolidated affiliates..................... 73.5
Other non-current assets.................................... 4.2
--------
Total Assets...................................... $1,671.0
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable -- affiliates.............................. $ 18.0
Accounts payable and accruals............................... 7.5
Stockholder's equity:
Additional paid-in capital................................ 1,671.0
Cumulative foreign currency translation adjustment........ (36.7)
Other..................................................... 11.2
--------
Total stockholder's equity............................. 1,645.5
--------
Total Liabilities and Stockholder's Equity........ $1,671.0
========
</TABLE>

The accompanying note is an integral part of these condensed financial
statements.

S-5
<PAGE> 185

SCHEDULE I

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT

AZURIX CORP.
STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
JANUARY 29, 1998
(DATE OF INCEPTION)
TO DECEMBER 31,
1998
---------------------
(IN MILLIONS)
<S> <C>
Cash provided by operating activities....................... $ --
Investing Activities:
Investment in subsidiary.................................. (1,600.2)
---------
Net cash used in investing activities....................... (1,600.2)
---------
Financing Activities:
Issuance of common stock and capital contributed.......... 1,600.2
---------
Net cash provided by financing activities................... 1,600.2
---------
Change in cash and cash equivalents......................... --
Cash and cash equivalents, January 29, 1998 (Date of
Inception)................................................ --
---------
Cash and cash equivalents, December 31, 1998................ $ --
=========
</TABLE>

The accompanying note is an integral part of these condensed financial
statements.

S-6
<PAGE> 186

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT

NOTE TO FINANCIAL STATEMENTS

These condensed financial statements of Azurix Corp. reflect parent company
only financial information and should be read in conjunction with the
consolidated financial statements of Azurix Corp. presented elsewhere in this
document.

Azurix Corp., as the parent company, has no material contingencies,
long-term obligations or guarantees and has not received any cash dividends from
its consolidated subsidiaries or unconsolidated affiliates since its date of
inception on January 29, 1998.

S-7
<PAGE> 187

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

(IN MILLIONS)

AZURIX CORP.

<TABLE>
<CAPTION>
ADDITION
BALANCE AT RELATED TO ADDITIONS
JANUARY 29, 1998 ACQUISITION CHARGED TO CURRENCY
(DATE OF OF WESSEX COSTS AND EXCHANGE BALANCE AT
INCEPTION) WATER PLC EXPENSES WRITEOFFS DIFFERENCE DECEMBER 31, 1998
---------------- ----------- ---------- --------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts................ $ -- 4.9 1.7 (0.2) (0.1) $6.3

</TABLE>

WESSEX WATER PLC

(NOW RENAMED WESSEX WATER LTD)

<TABLE>
<CAPTION>
ADDITIONS
CHARGED TO CURRENCY
BALANCE AT COSTS AND EXCHANGE BALANCE AT
MARCH 31, 1998 EXPENSES WRITEOFFS DIFFERENCE OCTOBER 2, 1998
---------------- ---------- --------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts..... $5.9 1.7 (2.7) -- $4.9
</TABLE>

<TABLE>
<CAPTION>
ADDITIONS
CHARGED TO CURRENCY
BALANCE AT COSTS AND EXCHANGE BALANCE AT
MARCH 31, 1997 EXPENSES WRITEOFFS DIFFERENCE MARCH 31, 1998
---------------- ---------- --------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts..... $4.3 4.4 (3.0) 0.2 $5.9
</TABLE>

<TABLE>
<CAPTION>
ADDITIONS
CHARGED TO CURRENCY
BALANCE AT COSTS AND EXCHANGE BALANCE AT
MARCH 31, 1996 EXPENSES WRITEOFFS DIFFERENCE MARCH 31, 1997
---------------- ---------- --------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts..... $7.0 3.3 (6.5) 0.5 $4.3
</TABLE>

S-8
<PAGE> 188

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT AND DESCRIPTION
------- ------------------------
<C> <S>
*1.1 -- Form of U.S. Purchase Agreement
*1.2 -- Form of International Purchase Agreement
*3.1 -- Form of Amended and Restated Certificate of Incorporation
*3.2 -- Form of Amended and Restated ByLaws
*5.1 -- Opinion of Vinson & Elkins L.L.P.
10.1 -- Instrument of Appointment as a Water and Sewerage
Undertaker, dated August 1989, as amended, of Wessex
Water Services Limited
*10.2 -- L425,000,000 Credit Facility, dated May , 1999, for
Azurix Europe Ltd. arranged by Chase Manhattan Plc and
Westdeutsche Landesbank Girozentrale
10.3 -- L73,000,000 Amended and Restated Credit Facility
Agreement, dated December 17, 1998, for Azurix Europe
Ltd. and Bristol Water Trust
**10.4 -- Azurix Corp. 1999 Stock Plan, dated February 2, 1999
*10.5 -- Registration Rights Agreement
*10.6 -- Business Opportunity Agreement
*10.7 -- Services Agreement
*10.8 -- License Agreement
**10.9 -- Employment Agreement of Rebecca P. Mark, effective May 4,
1998, with Enron Corp. and First Amendment, effective
February 1, 1999, with Enron Corp. and Azurix
**10.10 -- Employment Agreement of Rodney L. Gray, effective
February 16, 1999, with Azurix
**10.11 -- Employment Agreement of Amanda K. Martin, effective
January 1, 1998, with Enron Capital & Trade Resources
Corp., First Amendment, dated October 29, 1998, with
Enron Capital & Trade Resources Corp. and Azurix and
Second Amendment, dated March 15, 1999, with Azurix
**10.12 -- Employment Agreement of Alex Kulpecz, effective September
15, 1998, and First Amendment, dated March 11, 1999, with
Azurix
**10.13 -- Employment Agreement of Colin F. Skellett, dated February
24, 1995, and First Amendment, dated December 9, 1998,
with Wessex Water Plc
**21 -- Subsidiaries of Azurix
**23.1 -- Consent of Arthur Andersen LLP (independent public
accountants)
**23.2 -- Consent of Arthur Andersen (independent accountants)
**23.3 -- Consent of PricewaterhouseCoopers (independent
accountants)
*23.4 -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit
5.1)
**24 -- Power of Attorney
27 -- Financial Data Schedule
</TABLE>

- ---------------

* To be filed by amendment.

** Filed herewith.

All other exhibits have been previously filed.

<PAGE> 1
EXHIBIT 10.4

AZURIX CORP. 1999 STOCK PLAN

This Stock Plan (the "Plan") is hereby established by Azurix Corp., a
Delaware corporation (the "Company") and adopted by its Board of Directors as of
the 2nd day of February, 1999 (the "Effective Date").

ARTICLE I
PURPOSES OF THE PLAN

1.1 Purposes. The purposes of the Plan are (a) to enhance the
Company's ability to attract and retain the services of qualified employees,
consultants and other service providers upon whose judgment, initiative and
efforts the successful conduct and development of the Company's business largely
depends, and (b) to provide additional incentives to such persons or entities to
devote their utmost effort and skill to the advancement and betterment of the
Company, by providing them an opportunity to participate in the ownership of the
Company and thereby have an interest in the success and increased value of the
Company.

ARTICLE 2
DEFINITIONS

For purposes of this Plan, the following terms shall have the meanings
indicated:

2.1 Administrator. "Administrator" means the Board or, if the Board
delegates responsibility for any matter to the Committee, the term Administrator
shall mean the Committee.

2.2 Affiliate. "Affiliate" shall mean (i) any entity that directly or
through one or more intermediaries is controlled by the Company, (ii) any entity
in which the Company has a significant equity interest as determined by the
Committee, and (iii) as used in Article 8 and in the term "Associate", as the
term "affiliate" is defined in Rule 12b-2 under the Securities Exchange Act of
1934, as amended, or any successor rule or regulation.

2.3 Affiliated Company. "Affiliated Company" means any "parent
corporation" or "subsidiary corporation" of the Company or Enron Corp., whether
now existing or hereafter created or acquired, as those terms are defined in
Sections 424(e) and 424(f) of the Code, respectively.

2.4 Associate. "Associate" is used to indicate a relationship with a
specified person and shall mean (i) any corporation, partnership or other
organization to which such specified person is an officer or partner or is,
directly or indirectly, the Beneficial Owner of ten percent (10%) or more of any
class of equity securities, (ii) any trust or other estate in which such
specified person has a substantial beneficial interest or as to which such
specified person serves as trustee or in a similar fiduciary capacity, (iii) any
relative or spouse of such specified person, or any relative of such spouse, who
has the same home as such specified person or who is a Director or officer of
the Company or any of its parents or Affiliates, and (iv) any person who is a
director or officer of such specified person or any of its parents or Affiliates
(other than the Company or any wholly-owned subsidiary of the Company).

<PAGE> 2

2.5 Beneficial Owner. "Beneficial Owner" shall be defined by
reference to Rule 13d-3 under the Securities Exchange Act of 1934, as amended,
or any successor rule or regulation; provided, however, and without limitation,
any individual, corporation, partnership, group, association or other person or
entity which has the right to acquire any capital stock of the Company at any
time in the future, whether such right is contingent or absolute, pursuant to
any agreement, arrangement or understanding or upon exercise of conversion
rights, warrants or options, or otherwise, shall be the Beneficial Owner of such
capital stock.

2.6 Board. "Board" means the Board of Directors of the Company.

2.7 Change in Control. "Change in Control" means any of the events or
circumstances described in Article 8.

2.8 Code. "Code" means the Internal Revenue Code of 1986, as amended
from time to time.

2.9 Committee. "Committee" means a committee of two or more members
of the Board appointed to administer the Plan, as set forth in Section 7.1
hereof.

2.10 Common Stock. "Common Stock" means the Common Stock of the
Company, subject to adjustment pursuant to Section 4.2 hereof.

2.11 Disability. "Disability" means permanent and total disability as
defined in the long term disability benefit plan covering employees of the
Company, or if a Participant is not covered by such a plan, as determined by the
Administrator. The Administrator's determination of a Disability or the absence
thereof shall be binding on all interested parties.

2.12 Effective Date. "Effective Date" means the date on which the Plan
is adopted by the Board, as set forth on the first page hereof.

2.13 Exercise Price. "Exercise Price" means the purchase price per
share of Common Stock payable upon exercise of an Option.

2.14 Fair Market Value. "Fair Market Value" on any given date means
the value or one share of Common Stock, determined as follows:

(a) If the Common Stock is then listed or admitted to trading
on a NASDAQ market or a stock exchange which reports closing sale
prices, the Fair Market Value shall be the closing on the date of
valuation on such NASDAQ market system or principal stock exchange on
which the Common Stock is then listed or admitted to trading, or, if no
closing sale price is quoted on then the Fair Market Value shall be the
closing sale price of the Common Stock on such market system or such
exchange on the next preceding day for which a closing sale price is
reported.

<PAGE> 3

(b) If the Common Stock is not then listed or admitted to
trading on a NASDAQ market system or a stock exchange which reports
closing sale prices, the Fair Market Value shall be the average of the
closing bid and asked prices of the Common Stock in the
over-the-counter market on the date of valuation.

(c) If neither (a) nor (b) is applicable as of the date of
valuation, then the Fair Market Value shall be determined by the
Administrator in good faith using any reasonable method of evaluation,
which determination shall be conclusive and binding on all interested
parties. If an equity capital contribution is made to the Company,
stockholders and Plan Participants will experience a dilution in their
shares of Common Stock, Options, or Restricted Stock by the amount of
such contribution. An example of such adjustment is given in Section
4.2.

2.15 Incentive Option. "Incentive Option" means any Option designated
and qualified as an "incentive stock option" as defined in Section 422 of the
Code.

2.16 Incentive Option Agreement. "Incentive Option Agreement" means an
Option Agreement with respect to an Incentive Option.

2.17 NASD Dealer. "NASD Dealer" means a broker-dealer that is a member
of the National Association of Securities Dealers, Inc.

2.18 Nonqualified Option. "Nonqualified Option" means any Option that
is not an Incentive Option. To the extent that any Option designated as an
Incentive Option fails in whole or in part to qualify as an Incentive Option,
including, without limitation, for failure to meet the limitations applicable to
a 10% Shareholder or because it exceeds the annual limit provided for in Section
5.6 below, it shall to that extent constitute a Nonqualified Option.

2.19 Nonqualified Option Agreement. "Nonqualified Option Agreement"
means an Option Agreement with respect to a Nonqualified Option.

2.20 Option. "Option" means any option to purchase Common Stock
granted pursuant to the Plan.

2.21 Option Agreement. "Option Agreement" means the written agreement
entered into between the Company and the Optionee with respect to an Option
granted under the Plan.

2.22 Optionee. "Optionee" means a Participant who holds an Option.

2.23 Participant. "Participant" means an individual or entity that has
received a grant of an Option or a grant of Restricted Stock under the Plan, and
where permitted under the Plan, includes such person's successors and assigns.

2.24 Restricted Stock. "Restricted Stock" means shares of Common Stock
issued pursuant to Article 6 hereof, subject to any restrictions and conditions
as are established pursuant to such Article 6.

<PAGE> 4

2.25 Service Provider. "Service Provider" means a consultant or other
person or entity that provides services to the Company or an Affiliated Company
and who the Administrator authorizes to become a Participant in the Plan.

2.26 Restricted Stock Agreement. "Restricted Stock Agreement" means
the written agreement entered into between the Company and a Participant with
respect to a grant of Restricted Stock offered under the Plan.

2.27 10% Shareholder. "10% Shareholder" means a person who, as of a
relevant date, owns or is deemed to own (by reason of the attribution rules
applicable under Section 424(d) of the Code) stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or of an
Affiliated Company.

ARTICLE 3
ELIGIBILITY

3.1 Incentive Options. Officers and other employees of the Company or
of an Affiliated Company (including members of the Board if they are employees
of the Company or of an Affiliated Company) are eligible to receive Incentive
Options under the Plan.

3.2 Nonqualified Options and Restricted Stock. Officers and other
employees of the Company or of an Affiliated Company, members of the Board
(whether or not employed by the Company or an Affiliated Company), and Service
Providers are eligible to receive grants of Nonqualified Options or grants of
Restricted Stock under the Plan.

ARTICLE 4
PLAN SHARES

4.1 Shares Subject to the Plan. A total of fifteen percent (15%) of
the Company's authorized shares of Common Stock may be issued under the Plan,
provided however, at any particular time not more than 15% of the Company's
outstanding shares may be issued under the Plan, of which seven and one half
percent (7.5%) may be granted in the form of Restricted Stock and options for up
to 15 million shares may be granted in the form of Incentive Options, subject to
adjustment as to the number and kind of shares pursuant to Section 4.2 hereof.

For purposes of this limitation, in the event that (a) all or any
portion of any Option or Restricted Stock granted or offered under the Plan can
no longer under any circumstances be exercised, or (b) any shares of Common
Stock are reacquired by the Company pursuant to an Incentive Option Agreement,
Nonqualified Option Agreement or Restricted Stock Agreement, the shares of
Common Stock allocable to the unexercised portion of such Option or such grant
of Restricted Stock, shall again be available for grant or issuance under the
Plan.

4.2 Changes in Capital Structure. In the event that the outstanding
shares of Common Stock are hereafter increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of the
Company by reason of a recapitalization, stock split,

<PAGE> 5

combination of shares, reclassification, stock dividend, or other change in the
capital structure of the Company, then appropriate adjustments shall be made by
the Administrator to the aggregate number and kind of shares subject to this
Plan, and the number and kind of shares and the price per share subject to
outstanding Option Agreements, Restricted Stock Agreements in order to preserve,
as nearly as practical, but not to increase, the benefits to Participants.
Further, if an equity capital contribution is made to the Company, stockholders
and Plan Participants will experience a dilution in their shares of Common
Stock, Options, rights to acquire Restricted Stock by the amount of such
contribution. For example, if there are 30 million shares of Common Stock
outstanding, and the Fair Market Value is $1/share, and an equity contribution
of 30 million dollars is made, the total number of shares of Common Stock
outstanding would increase to 60 million shares and the per share Fair Market
Value would remain $1.

ARTICLE 5
OPTIONS

5.1 Option Agreement. Each Option granted pursuant to this Plan shall
be evidenced by an Option Agreement which shall specify the number of shares
subject thereto, vesting provisions relating to such Option, the Exercise Price
per share, and whether the Option is an Incentive Option or Nonqualified Option.
As soon as is practical following the grant of an Option, an Option Agreement
shall be duly executed and delivered by or on behalf of the Company to the
Optionee to whom such Option was granted. Each Option Agreement shall be in such
form and contain such additional terms and conditions, not inconsistent with the
provisions of this Plan, as the Administrator shall, from time to time, deem
desirable. Each Option Agreement may be different from each other Option
Agreement.

5.2 Exercise Price. The Exercise Price per share of Common Stock
covered by each Option shall be determined by the Administrator, subject to the
following: (a) the Exercise Price of an Incentive Option shall not be less than
100% of Fair Market Value on the date the Incentive Option is granted, (b) the
Exercise Price of a Nonqualified Option shall not be less than 100% of Fair
Market Value on the date the Nonqualified Option is granted, and (c) if the
person to whom an Option is granted is a 10% Shareholder on the date of grant,
the Exercise Price of an Incentive Option shall not be less than 110% of Fair
Market Value on the date the Option is granted.

5.3 Payment of Exercise Price. Payment of the Exercise Price shall be
made upon exercise of an Option and may be made, in the discretion or the
Administrator, subject to any legal restrictions, by: (a) cash; (b) check; (c)
the surrender of shares of Common Stock owned by the Optionee that have been
held by the Optionee for at least six (6) months, which surrendered shares shall
be valued at Fair Market Value as of the date of such exercise; (d) the
Optionee's promissory note in a form and on terms acceptable to the
Administrator; (e) the cancellation of indebtedness of the Company to the
Optionee; (f) the waiver of compensation due or accrued to the Optionee for
services rendered; (g) provided that a public market for the Common Stock
exists, a "same day sale" commitment from the Optionee and an NASD Dealer
whereby the Optionee irrevocably elects to exercise the Option and to sell a
portion of the shares so purchased to pay for the Exercise Price and whereby the
NASD Dealer irrevocably commits upon receipt of such shares to forward the
Exercise Price directly to the Company; (h) provided that a public market for
the Common Stock exists, a "margin" commitment from the Optionee and an NASD

<PAGE> 6

Dealer whereby the Optionee irrevocably elects to exercise the Option and to
pledge the shares so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the Exercise Price,
and whereby the NASD Dealer irrevocably commits upon receipt of such shares to
forward the Exercise Price directly to the Company; or (i) any combination of
the foregoing methods of payment or any other consideration or method of payment
as shall be permitted by applicable corporate law and acceptable to the
Administrator.

5.4 Term and Termination of Options. The term and provisions for
termination of each Option shall be as fixed by the Administrator, but no Option
may be exercisable more than ten (10) years after the date it is granted.

5.5 Vesting and Exercise of Options. Each Option shall vest and
become exercisable in one or more installments at such time or times, and
subject to such conditions for accelerated vesting, including without limitation
the achievement of specified performance goals or objectives, as shall be
determined by the Administrator.

5.6 Annual Limit on Incentive Options. To the extent required for
"incentive stock option" treatment under Section 422 of the Code, the aggregate
Fair Market Value (determined as of the time of grant) of the Common Stock shall
not, with respect to which Incentive Options granted under this Plan and any
other plan of the Company or any Affiliated Company become exercisable for the
first time by an Optionee during any calendar year, exceed $100,000.

5.7 Nontransferability of Options. No Option shall be assignable or
transferable except by will or the laws of descent and distribution, and during
the life of the Optionee shall be exercisable only by such Optionee; provided,
however, that, in the discretion of the Administrator, an Option may be assigned
or transferred in any manner which any such option is permitted to be assigned
or transferred under the Code.

5.8 Rights as Shareholder. An Optionee or permitted transferee of an
Option shall have no rights or privileges as a shareholder with respect to any
shares covered by an Option until such Option has been duly exercised and
certificates representing shares purchased upon such exercise have been issued
to such person.

5.9 Restrictions on Underlying Shares of Common Stock. Shares of
Common Stock issued pursuant to the exercise of an Option may not be sold,
assigned, transferred, pledged or otherwise encumbered or disposed of except as
specifically provided in the Option Agreement.

<PAGE> 7

ARTICLE 6
RESTRICTED STOCK

6.1 Grants of Restricted Stock. A grant of Restricted Stock pursuant
to a Restricted Stock Agreement entitles the recipient to acquire shares of
Common Stock subject to such terms, restrictions and conditions as the
Administrator may determine at the time of grant. Such conditions may include,
but are not limited to, continued employment and/or the achievement of specified
performance goals or objectives, if any.

6.2 Restricted Stock Agreement. Each Restricted Stock Agreement shall
be in such form, and shall set forth the terms, conditions and restrictions of
the Restricted Stock, not inconsistent with the provisions of this Plan, as the
Administrator shall, from time to time, deem desirable. Each Restricted Stock
Agreement may be different from each other Restricted Stock Agreement.

6.3 Rights as a Shareholder. Upon becoming vested in Restricted
Stock, a Participant shall have the rights of a shareholder with respect to the
Restricted Stock granted pursuant to the Restricted Stock Agreement, including
voting and dividend rights, subject to the terms, restrictions and conditions as
are set forth herein and in the Restricted Stock Agreement. Unless the
Administrator shall determine otherwise, certificates evidencing shares of
Restricted Stock shall remain in the possession of the Company until such shares
have vested and are no longer subject to any restrictions on transfer in
accordance with the terms of the Restricted Stock Agreement.

6.4 Restrictions. Shares of Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered or disposed of except as
specifically provided in the Restricted Stock Agreement.

6.5 Vesting of Restricted Stock. The Restricted Stock Agreement shall
specify the date or dates, the performance goals or objectives that must be
achieved, if any, and any other conditions on which the Restricted Stock may
vest.

6.6 Dividends. All dividends and distributions, or cash equivalent
thereof (whether cash, stock or otherwise), on unvested Restricted Stock shall
be withheld from the respective Participant and credited by the Company for the
Participant's account. At such time as a Participant becomes vested in a portion
of the grant of Restricted Stock, all accumulated credits for dividends and
distributions, or cash equivalent thereof attributable to such vested Restricted
Stock shall be released to the Participant. Interest shall not be paid on any
dividends or distributions or cash equivalent thereof, credited by the Company
for the account of a Participant. The Company shall have the option of paying
such credits for accumulated dividends or distributions or cash equivalent
thereof, in shares of Common Stock of the Company rather than in cash. If
payment is made in shares, the conversion to shares shall be at the Fair Market
Value. Dividends and distributions, or cash equivalent thereof credited on
non-vested Restricted Stock shall be forfeited in the same manner and at the
same time as the respective shares of Restricted Stock to which they are
attributable are forfeited.

<PAGE> 8

6.7 Nonassignability of Rights. No Participant's right to acquire
shares of Restricted Stock shall be assignable or transferable except by will or
the laws of descent and distribution or as otherwise provided by the
Administrator.

ARTICLE 7
ADMINISTRATION OF THE PLAN

7.1 Administrator. Authority to control and manage the operation and
administration of the Plan shall be vested in the Board, which may delegate such
responsibilities in whole or in part to a committee consisting of two (2) or
more members of the Board (the "Committee" or "Administrator"). Members of the
Committee may be appointed from time to time by, and shall serve at the pleasure
of, the Board.

7.2 Powers of the Administrator. In addition to any other powers or
authority conferred upon the Administrator elsewhere in the Plan or by law, the
Administrator shall have full power and authority: (a) to determine the persons
to whom, and the time or times at which, Incentive Options or Nonqualified
Options and awards of Restricted Stock shall be granted, the number of shares to
be represented by each Option and grant of Restricted Stock and the
consideration, if any, to be received by the Company upon the exercise thereof;
(b) to construe and interpret provisions of the Plan and other documents and
agreements pertaining to the Plan; (c) to create, amend or rescind rules and
regulations relating to the Plan; (d) to determine the terms, conditions and
restrictions contained in, and the form of, Option Agreements and Restricted
Stock Agreements; (e) to determine the identity or capacity of any persons who
may be entitled to exercise a Participant's rights under any Option or
Restricted Stock Agreement granted under the Plan; (f) to correct any defect or
supply any omission or reconcile any inconsistency in the Plan or in any Option
Agreement or Restricted Stock Agreement; (g) to accelerate the vesting of any
Option or grant of Restricted Stock; (h) to extend the exercise date of any
Option and vesting date of any grant of Restricted Stock; (i) to amend
outstanding Option Agreements and Restricted Stock Agreements to provide for,
among other things, any change or modification which the Administrator could
have provided for upon the grant of an Option or Restricted Stock or in
furtherance of the powers provided for herein; and (j) to make all other
determinations necessary or advisable for the administration of the Plan, but
only to the extent not contrary to the express provisions of the Plan. Any
action, decision, interpretation or determination made in good faith by the
Administrator in the exercise of its authority conferred upon it under the Plan
shall be final and binding on the Company and all Participants.

7.3 Limitation on Liability. No employee of the Company or member of
the Board or Committee shall be subject to any liability with respect to duties
under the Plan unless the person acts fraudulently or in bad faith. To the
extent permitted by law, the Company shall indemnify each member of the Board or
Committee, and any employee of the Company with duties under the Plan, who was
or is a party, or is threatened to be made a party, to any threatened, pending
or completed proceeding, whether civil, criminal, administrative or
investigative, by reason of such person's conduct in the performance of duties
under the Plan.

<PAGE> 9

ARTICLE 8
CHANGE IN CONTROL

8.1 Change in Control of Enron Corp. If at any time after the date
the Plan is adopted when:

(a) if a public offering of Common Stock has not yet occurred, fifty
percent (50%) or more of the Directors of the Company have been
appointed, directly or indirectly, by Enron Corp., or

(b) if a public offering of Common Stock has occurred, Enron Corp. directly
or indirectly owns thirty percent (30%) or more of the capital stock of
the Company,

a transaction occurs which is not approved, recommended or supported by a
majority of the board of directors of Enron Corp. in actions taken prior to, and
with respect to, such transaction in which:

(i) Enron Corp. merges or consolidates with any other entity (other than
one of Enron Corp.'s wholly owned subsidiaries) and is not the
surviving entity (or survives only as the subsidiary of another person
or entity),

(ii) Enron Corp. sells all or substantially all of its assets to any other
person or entity,

(iii) Enron Corp. is dissolved,

(iv) any third person or entity (other than the trustee or committee of any
qualified employee benefit plan of Enron Corp.), together with its
Affiliates and Associates, shall be, directly or indirectly, the
Beneficial Owner of at least thirty percent (30%) of the outstanding
capital stock of Enron Corp., or

(v) the individuals who constitute the members of Enron Corp.'s board of
directors on the date hereof (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided that any
person becoming a director subsequent to the date hereof whose election
or nomination for election by Enron Corp.'s stockholders was approved
by a vote of at least eighty percent (80%) of the directors comprising
the Incumbent Board (either by a specific vote or by approval of the
proxy statement of Enron Corp. in which such person is named as a
nominee for director, without objection to such nomination) shall be,
for purposes of this clause (v), considered as though such person were
a member of the Incumbent Board,

then within (a) ten days of the approval by the stockholders of Enron Corp. of
such merger, consolidation, sale of assets or dissolution as described in clause
(i), (ii) or (iii) of this Section 8.1, or (b) thirty (30) days of the
occurrence of such change of Beneficial Ownership or Directors as described in
clause (iv) or (v) of this Section 8.1, with respect to outstanding grants of
Restricted Stock made under Article 6, all such grants of Restricted Stock,
irrespective of whether they are then vested, shall be surrendered to the
Company by each grantee thereof and such grants shall thereupon be canceled by
the Company, and the grantee shall receive a

<PAGE> 10

cash payment by the Company in an amount equal to the number of Shares subject
to the grant of Restricted Stock held by such grantee multiplied by the Fair
Market Value of a Share on the date determined by the Administrator (as
constituted prior to any change described in clause (iv) or (v)) to be the date
of cancellation and surrender of such Options if any such change of Beneficial
Ownership or Directors occurs other than pursuant to a tender or exchange offer,
whichever is appropriate, and with respect to outstanding grants of Options made
under Article 5, all such outstanding Options irrespective of whether they are
then exercisable, shall be surrendered (at such time as may be necessary to
comply with Rule 16b-3 under the Securities Exchange Act of 1934, as amended, if
applicable) to the Company by each grantee thereof and such Options shall
thereupon be cancelled by the Company, and the grantee shall receive a cash
payment by the Company in an amount equal to the number of Shares subject to the
Options held by such grantee multiplied by the difference between (x) and (y)
where (y) equals the purchase price per Share covered by the Option, and (x)
equals the Fair Market Value of a Share on the date determined by the
Administrator (as constituted prior to any change described in clause (iv) or
(v)) to be the date of cancellation and surrender of such Options if any such
change of Beneficial Ownership or directors occurs other than pursuant to a
tender or exchange offer, whichever is appropriate.

8.2 Change in Control of the Company. If a transaction occurs after
the date the Plan is adopted in which:

(a) any person or entity (other than Enron Corp., persons and entities
owning through Enron Corp., or the trustee or committee of any
qualified employee benefit plan of the Company or Enron Corp., or
Marlin Water Trust or Atlantic Water Trust), together with its
subsidiaries and Associates, shall be, directly or indirectly, the
Beneficial Owner of (i) more than fifty percent (50%) of the
outstanding voting stock of the Company at a time before a public
offering of Common Stock has occurred, or (ii) at least thirty percent
(30%) of the outstanding voting stock of the Company at a time after a
public offering of Common Stock has occurred, unless that person or
entity, together with its subsidiaries and Associates, first became a
Beneficial Owner of thirty percent (30%) or more by acquiring shares of
Common Stock directly from the Company,

(b) the Company sells all or substantially all of its assets to any other
person or entity,

(d) after a public offering of Common Stock has occurred, the Common Stock
ceases to be listed or admitted to trading on a NASDAQ market system or
a stock exchange, or

(e) after a public offering of Common Stock has occurred, as a result of a
transaction that has not been approved, recommended or supported by a
majority of the board of directors of the Company in actions taken
prior to, and with respect to, such transaction:

(i) the Company merges or consolidates with any other entity
(other than one of the Company's wholly owned subsidiaries)
and is not the surviving entity (or survives only as the
subsidiary of another person or entity), or

<PAGE> 11

(ii) the individuals who constitute the members of Company's Board
on the date hereof (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided
that any person becoming a Director subsequent to the date of
the public offering whose election or nomination for election
by the Company's stockholders was approved by a vote of at
least eighty percent (80%) of the Directors comprising the
Incumbent Board (either by a specific vote or by approval of
the proxy statement of the Company in which such person is
named as a nominee for Director, without objection to such
nomination) shall be, for purposes of this clause (ii),
considered as though such person were a member of the
Incumbent Board,

then within (a) ten days of the approval by the stockholders of the Company of
such merger, consolidation, sale of assets or dissolution as described in clause
(b), (c) or (e)(i) of this Section 8.2, (b) thirty (30) days of the occurrence
of such change of Beneficial Ownership or Directors as described in clause (a)
or (e)(ii) of this Section 8.2 or the cessation of trading or listing as
described in clause (d) of this Section 8.2, then with respect to outstanding
grants of Restricted Stock made under Article 6, all such grants of Restricted
Stock, irrespective of whether they are then vested, shall be surrendered to the
Company by each grantee thereof and such grants shall thereupon be canceled by
the Company, and the grantee shall receive a cash payment by the Company in an
amount equal to the number of Shares subject to the grant of Restricted Stock
held by such grantee multiplied by the Fair Market Value of a Share on the date
determined by the Administrator (as constituted prior to any change described in
clause (a) or (d)(ii)) to be the date of cancellation and surrender of such
Options if any such change of Beneficial Ownership or Directors occurs other
than pursuant to a tender or exchange offer, whichever is appropriate, and with
respect to outstanding grants of Options made under Article 5, all such
outstanding Options, irrespective of whether they are then exercisable, shall be
surrendered (at such time as may be necessary to comply with Rule 16b-3 under
the Securities Exchange Act of 1934, as amended) to the Company by each grantee
thereof and such Options shall thereupon be canceled by the Company, and the
grantee shall receive a cash payment by the Company in an amount equal to the
number of Shares subject to the Options held by such grantee multiplied by the
difference between (x) and (y) where (y) equals the purchase price per Share
covered by the Option, and (x) equals (1) the per share price offered to
stockholders of the Company in any such merger, consolidation, sale of assets or
dissolution transaction, (2) the per share price offered to stockholders of the
Company in any tender offer or exchange offer whereby any such change of
Beneficial Ownership or Directors takes place, or (3) the Fair Market Value of a
Share on the date determined by the Administrator (as constituted prior to any
change described in clause (a) or (d)(ii)) to be the date of cancellation and
surrender of such Options if any such change of Beneficial Ownership or
Directors occurs other than pursuant to a tender or exchange offer, whichever is
appropriate. In the event that the consideration offered to stockholders of the
Company in any transaction described in this Section 8.2 consists of anything
other than cash, the Administrator (as constituted prior to such transaction)
shall determine the fair cash equivalent of the portion of the consideration
offered which is other than cash.

<PAGE> 12

ARTICLE 9
AMENDMENT AND TERMINATION OF THE PLAN

9.1 Amendments. The Board may from time to time alter, amend, suspend
or terminate the Plan in such respects as the Board may deem advisable. No such
alteration, amendment, suspension or termination shall be made which shall
substantially affect or impair the rights of any Participant under an
outstanding Option Agreement or Restricted Stock Agreement without such
Participant's consent. The Board may alter or amend the Plan to comply with
requirements under the Code relating to Incentive Options or other types of
options which give Optionees more favorable tax treatment than that applicable
to Options granted under this Plan as of the date or its adoption. Upon any such
alteration or amendment, any outstanding Option granted hereunder may, if the
Administrator so determines and if permitted by applicable law, be subject to
the more favorable tax treatment afforded to an Optionee pursuant to such terms
and conditions.

9.2 Plan Termination. Unless the Plan shall theretofore have been
terminated, the Plan shall terminate on the fifth (5th) anniversary of the
Effective Date and no Options or grants of Restricted Stock may be granted under
the Plan thereafter, but Option Agreements and Restricted Stock Agreements then
outstanding shall continue in effect in accordance with their respective terms
and provisions.

9.3 Employees in Foreign Countries. The Board shall have the
authority to adopt such modifications, procedures, and subplans as may be
necessary or desirable to comply with provisions of the laws of foreign
countries in which the Company or its Affiliated Companies may operate to assure
the viability of the benefits from grants made to eligible employees employed in
such countries and to meet the objectives of the Plan.

ARTICLE 10
TAX WITHHOLDING

10.1 Withholding. The Company shall have the power to withhold, or
require a Participant to remit to the Company, an amount sufficient to satisfy
any applicable Federal, state, and local tax withholding requirements with
respect to any Options exercised or Restricted Stock issued under the Plan. To
the extent permissible under applicable tax, securities and other laws, the
Administrator may, in its sole discretion and upon such terms and conditions as
it may deem appropriate, permit a Participant to satisfy his or her obligation
to pay any such tax, in whole or in part, up to an amount determined on the
basis of the highest marginal tax rate applicable to such Participant, by (a)
directing the Company to apply shares of Common Stock to which the Participant
is entitled as a result of the exercise of an Option or as a result of the
purchase of or lapse of restrictions on Restricted Stock or (b) delivering to
the Company shares of Common Stock owned by the Participant. The shares of
Common Stock so applied or delivered in satisfaction of the Participant's tax
withholding obligation shall be valued at their Fair Market Value as of the date
of measurement of the amount of income subject to withholding.

<PAGE> 13

ARTICLE 11
MISCELLANEOUS

11.1 Benefits Not Alienable. Other than as provided above, benefits
under the Plan may not be assigned or alienated, whether voluntarily or
involuntarily. Any unauthorized attempt at assignment, transfer, pledge or other
disposition shall be without effect.

11.2 No Enlargement or Employee Rights. This Plan is strictly a
voluntary undertaking on of the Company and shall not be deemed to constitute a
contract between the Company and any Participant to be consideration for, or an
inducement to, or a condition of, the employment of any Participant. Nothing
contained in the Plan shall be deemed to give the right to any Participant to be
retained as an employee of the Company or any Affiliated Company or to interfere
with the right of the Company or any Affiliated Company to discharge any
Participant at any time.

11.3 Application of Funds. Any proceeds received by the Company from
the sale of Common Stock pursuant to Option Agreements, except as otherwise
provided herein, will be used for general corporate purposes.

11.4 Annual Reports. During the term of this Plan, the Company will
furnish to each Participant copies of annual financial reports that the Company
distributes generally to its shareholders.

Adopted pursuant to resolution of the Board of Directors of the Company this 2nd
day of February, 1999.

AZURIX CORP.

By: /s/ REBECCA P. MARK
------------------------------
Title: Chairman of the Board and
Chief Executive Officer

<PAGE> 1
EXHIBIT 10.9

EXECUTIVE EMPLOYMENT AGREEMENT

This Employment Agreement ("Agreement"), including the attached Exhibit
"A," is entered into between ENRON CORP., a Delaware corporation, having offices
at 1400 Smith Street, Houston, Texas 77002 ("Employer"), and REBECCA P. MARK, an
individual currently residing at 6102 Crab Orchard Road, Houston, Texas 77057
("Employee"), to be effective as of May 4, 1998 (the "Effective Date").

WITNESSETH:

WHEREAS, Employee is currently employer under that certain Employment
Agreement between Enron Development Corp. and Rebecca P. Mark, effective January
1, 1996.

WHEREAS, Employee is willing to continue her employment with Employer
under the terms and conditions set forth in this Employment Agreement which
shall supersede all previous agreements; and

NOW, THEREFORE, for and in consideration of the mutual promises,
covenants, and obligations contained herein, Employer and Employee agree as
follows:

ARTICLE 1: EMPLOYMENT AND DUTIES:

1.1 Employer agrees to employ Employee, and Employee agrees to be
employed by Employer, beginning as of the Effective Date and continuing until
the date set forth on Exhibit "A" (the "Term"), subject to the terms and
conditions of this Agreement.

1.2 Employee initially shall be employed in the position set forth on
Exhibit A. Employer may subsequently assign Employee to a different position or
modify Employee's duties and responsibilities; provided however, in the event
(a) Employer substantially reduces the duties or responsibilities of Employee,
or (b) Ken Lay is no longer Chairman of Enron Corp., Employee may elect to
terminate this Agreement under Section 3.2(ii) and said termination shall
constitute an Involuntary Termination for purposes of Section 3.5. Moreover,
Employer may assign this Agreement and Employee's employment to Enron or any
affiliates of Enron. Employee agrees to serve in the assigned position and to
perform diligently and to the best of Employee's abilities the duties and
services appertaining to such position as determined by Employer, as well as
such additional or different duties and services appropriate to such position
which Employee from time to time may be reasonably directed to perform by
Employer. Employee shall at all times comply with and be subject to such
policies and procedures as Employer may establish from time to time.
Notwithstanding any other provision of this Agreement, during the Term, Employee
shall be a member of the Enron Corp. Office of the Chairman.

1.3 Employee shall, during the period of Employee's employment by
Employer, devote Employee's full business time, energy, and best efforts to the
business and affairs of Employer and its affiliates, including the formation of
a potential new water company. Employee may not engage, directly or indirectly,
in any other business, investment, or activity

1
<PAGE> 2

that interferes with Employee's performance of Employee's duties hereunder, is
contrary to the interests of Employer or Enron, or requires any significant
portion of Employee's business time.

1.4 In connection with Employee's employment by Employer, Employer
shall endeavor to provide Employee access to such confidential information
pertaining to the business and services of Employer as is appropriate for
Employee's employment responsibilities. Employer also shall endeavor to provide
to Employee the opportunity to develop business relationships with those of
Employer's clients and potential clients that are appropriate for Employee's
employment responsibilities.

1.5 Employee acknowledges and agrees that, at all times during the
employment relationship Employee owes fiduciary duties to Employer, including
but not limited to the fiduciary duties of the highest loyalty, fidelity and
allegiance to act at all times in the best interests of the Employer, to make
full disclosure to Employer of all information that pertains to Employer's
business and interests, to do no act which would injure Employer's business, its
interests, or its reputation, and to refrain from using for Employee's own
benefit or for the benefit of others any information or opportunities pertaining
to Employer's business or interests that are entrusted to Employee or that she
learned while employed by Employer. Employee acknowledges and agrees that upon
termination of the employment relationship, Employee shall continue to refrain
from using for her own benefit or the benefit of others any information or
opportunities pertaining to Employer's business or interests that were entrusted
to Employee during the employment relationship or that she learned while
employed by Employer. Employee agrees that while employed by Employer and
thereafter she shall not knowingly take any action which interferes with the
internal relationships between Employer and its employees or representatives or
interferes with the external relationships between Employer and third parties.

1.6 It is agreed that any direct or indirect interest in, connection
with, or benefit from any outside activities, particularly commercial
activities, which interest might in any way adversely affect Employer or any of
its affiliates, involves a possible conflict of interest. In keeping with
Employee's fiduciary duties to Employer, Employee agrees that during the
employment relationship Employee shall not knowingly become involved in a
conflict of interest with Employer or its affiliates, or upon discovery thereof,
allow such a conflict to continue. Moreover, Employee agrees that Employee shall
disclose to Employer's President any facts which might involve such a conflict
of interest that has not been approved by Employer's President. Employer and
Employee recognize that it is impossible to provide an exhaustive list of
actions or interests which constitute a "conflict of interest." Moreover,
Employer and Employee recognize there are many borderline situations. In some
instances, full disclosure of facts by the Employee to Employer's President may
be all that is necessary to enable Employer or its affiliates to protect its
interests. In others, if no improper motivation appears to exist and the
interests of Employer or its affiliates have not suffered, prompt elimination of
the outside interest will suffice. In still others, it may be necessary for
Employer to terminate the employment relationship. Employer and Employee agree
that Employer's determination as to whether a conflict of interest exists shall
be conclusive. Employer reserves the right to take such action as, in its
judgment, will end the conflict.

1.7 Employee understands and acknowledges that the terms and conditions
of this Agreement constitute confidential information. Employee shall keep
confidential the terms of

2
<PAGE> 3

this Agreement and shall not disclose this confidential information to anyone
other than Employee's attorneys, tax advisors, or as required by law. Employee
acknowledges and understands that disclosure of the terms of this Agreement
constitutes a material breach of this Agreement and could subject Employee to
disciplinary action, including without limitation, termination of employment.

ARTICLE 2: COMPENSATION AND BENEFITS:

2.2 While employed by Employer (both during the Term and thereafter),
Employee shall be allowed to participate, on the same basis generally as other
employees of Employer, in all general employee benefit plans and programs,
including improvements or modifications of the same, which on the effective date
or thereafter are made available by Employer to all or substantially all of
Employer's employees. Such benefits, plans, and programs may include, without
limitation, medical, health, and dental care, life insurance, disability
protection, and pension plans. Nothing in this Agreement is to be construed or
interpreted to provide greater rights, participation, coverage, or benefits
under such benefit plans or programs than provided to similarly situated
employees pursuant to the terms and conditions of such benefit plans and
programs.

2.3 Employer shall not by reason of this Article 2 be obligated to
institute, maintain, or refrain from changing, amending, or discontinuing, any
such incentive compensation or employee benefit program or plan, so long as such
actions are similarly applicable to covered employees generally. Moreover,
unless specifically provided for in a written plan document adopted by the Board
of Directors of either Employer or Enron, none of the benefits or arrangements
described in this Article 2 shall be secured or funded in any way, and each
shall instead constitute an unfunded and unsecured promise to pay money in the
future exclusively from the general assets of Employer.

2.4 Subject to the approval of the Compensation Committee of the Enron
Corp. Board of Directors at the May 4, 1998 meeting of the Compensation
Committee, Employee shall receive an option to purchase 100,000 shares of Enron
Corp. Common Stock. The grant shall be effective on the date approved by the
Compensation Committee and shall vest 33.3% on each of January 1, 1999, January
1, 2000 and January 1, 2001, and shall be evidenced by a grant agreement.
Subject to the approval of the Compensation Committee of the Enron Corp. Board
of Directors at the May 4, 1998 meeting of the Compensation Committee, Employee
shall receive an option to purchase 350,000 shares of Enron Corp. Common Stock.
The grant shall be effective on the date approved by the Compensation Committee
and shall vest 33.3% on each of May 4, 1999, May 4, 2000 and May 4, 2001, and
shall be evidenced by a grant agreement.

3
<PAGE> 4
2.5 The Employer shall pay the Employee a Deferred Project Plan ("DP
Plan") bonus for SARAS in the amount of $1,027,112.00 and for Puerto Rico in the
amount of $2,316,909.00. Employee shall vest immediately in the total sum of
these bonuses and 50% shall be paid to Employee upon the execution of this
Agreement and the remaining 50% shall be paid at the start of commercial
operations subject to adjustment as provided in the DP Plan.

2.6 As of the Effective Date, Employee is fifty percent (50%) vested in
a Stock Option Grant Agreement dated February 12, 1996, granting Employee an
option to purchase 125,000 shares of the Employer's common stock. Employer shall
cause the vesting schedule of said Agreement to be amended at the first meeting
of the Employer's Compensation Committee after the Effective Date to provide
that twenty five percent (25%) of said option shall become exercisable on
January 1, 1999, and twenty five percent (25%) of said option shall become
exercisable on January 1, 2000, subject to the continuing terms and provisions
thereof; provided, however, said Agreement and the grant made thereby shall
become vested by the passage of time only, without condition, regardless whether
Employee's employment with Employer terminates for any reason and whether or not
Employee continues to be employed by Employer or an Affiliate of Employer.
Further, in the event of Employee's termination of employment with the Employer
for any reason prior to January 1, 2000, the unvested options shall become fully
vested. Employee shall have the lesser of three years or the remaining term of
exercise under said Grant Agreement to exercise said option in the event of
Employee's termination of employment with the Employer for any reason during the
Term of this Agreement.

2.7 As of the Effective Date, Employee is forty percent (40%) vested in
a Stock Option Grant Agreement dated February 10, 1997, granting Employee an
option to purchase 432,322 shares of the Employer's common stock. Employer shall
cause the vesting schedule of said Agreement to be amended at the first meeting
of the Employer's Compensation Committee after the Effective Date to provide
that thirty percent (30%) of said option shall become exercisable on January 1,
1999, and thirty percent (30%) of said option shall become exercisable on
January 1, 2000, subject to the continuing terms and provisions thereof;
provided, however, said Agreement and the grant made thereby shall become vested
by the passage of time only, without condition, regardless whether Employee's
employment with Employer terminates for any reason and whether or not Employee
continues to be employed by Employer or an Affiliate of Employer. Further, in
the event of Employee's termination of employment with the Employer for any
reason prior to January 1, 2000, the unvested options shall become fully vested.
Employee shall have the lesser of three years or the remaining term of exercise
under said Grant Agreement to exercise said option in the event of Employee's
termination of employment with the Employer for any reason during the Term of
this Agreement.

2.8 At the first meeting of the Employer's Compensation Committee after
the Effective Date, Employer shall cause the vesting schedule of Employee's
Restricted Stock Award Agreement dated February 12, 1996, awarding Employee
100,000 shares of the Employer's common stock to be amended to immediately vest
in and release to Employee, sixty-six and 7/10ths percent (66.7%) in said Award
and to provide that the remaining unvested shares of Restricted Stock shall be
released and vested in Employee in two equal amounts on January 31, 1999, and
January 31, 2000, conditioned on Enron International, Inc. meeting its net
income and funds flow targets as approved by the Enron Corp. Board of Directors
for calendar years 1998 and 1999, respectively, as determined by the
Compensation Committee in its sole discretion.

4
<PAGE> 5

2.9 As of the Effective Date, Employee is forty percent (40%) vested in
a Restricted Stock Award Agreement dated February 10, 1997, awarding Employee
173,737 shares of the Employer's common stock. Employer shall cause the vesting
schedule of said Agreement to be amended at the first meeting of the Employer's
Compensation Committee after the Effective Date to provide that thirty percent
(30%) of said Award shall become vested in and released to Employee on January
31, 1999, and thirty percent (30%) of said Award shall become vested in and
released to Employee on January 31, 2000, subject to the continuing terms and
provisions thereof; provided, however, said Agreement and the Award made thereby
shall become vested in and released to Employee by the passage of time only,
without condition, regardless whether Employee's employment with Employer
terminates for any reason and weather or not Employee continues to be employed
by Employer or an Affiliate of Employer.

2.10 All Enron International Options granted to Employee by Enron
International Inc. prior to the Effective Date are hereby waived and forfeited
by Employee, and are rescinded.

2.11 The outstanding loan principal and accrued interest owed by
Employee to Employer, as evidenced by that Note certain dated May, 1997, and
executed by Employee, is forgiven to Employee by Employer and Employee is
forever released from the obligations of said Note and the underlying agreements
pertaining thereto.

2.12 Employer may withhold from any compensation, benefits, or amounts
payable under this Agreement all federal, state, city, or other taxes as may be
required pursuant to any law or governmental regulation or ruling.

ARTICLE 3: TERMINATION PRIOR TO EXPIRATION OF TERM AND EFFECTS OF SUCH
TERMINATION:

3.1. Notwithstanding any other provisions of this Agreement, Employer
shall have the right to terminate Employee's employment under this Agreement at
any time prior to the expiration of the Term for any of the following reasons:

(i) For "cause" upon the determination by the Employer's Board of
Directors that "cause" exists for the termination of the
employment relationship. As used in this Section 3.1(i), the term
"cause" shall mean [a] Employee's gross negligence or willful
misconduct in the performance of the duties and services required
of Employee pursuant to this Agreement; [b] Employee has been
convicted of a felony; [c] Employee has willfully refused without
proper legal reason to perform the duties and responsibilities
required of Employee under this Agreement which remains
uncorrected for thirty (30) days following written notice to
Employee by Employer of such breach; [d] Employee's involvement in
a conflict of interest as referenced in Section 1.6 for which
Employer makes a determination to terminate the employment of
Employee which remains uncorrected for thirty (30) days following
written notice to Employee by Employer of such breach; [e]
Employee has willfully engaged in conduct that Employee knows or
should know is materially injurious to Employer, Enron, or any of
their respective subsidiaries; [f] Employee's material breach of
any material provision of this Agreement or

5
<PAGE> 6

corporate code or policy which remains uncorrected for thirty
(30) days following written notice to Employee by Employer of
such breach; or [g] Employee violates the Foreign Corrupt
Practices Act or other applicable United States law as proscribed
by Section 5.1. It is expressly acknowledged and agreed that the
decision as to whether "cause" exists for termination of the
employment relationship by Employer is delegated to the
Employer's Board of Directors for determination. If Employee
disagrees with the decision reached by Employer's Board of
Directors, the dispute will be limited to whether Employer's
Board of Directors reached its decision in good faith;

(ii) for any other reason whatsoever, with or without cause, in the
sole discretion of the Board of Directors of Employer;

(iii) upon Employee's death; or

(iv) upon Employee's becoming disabled so as to entitle Employee to
benefits under Enron's long-term disability plan or, if Employee
is not eligible to participate in such plan, then Employee is
permanently and totally unable to perform Employee's duties for
Employer as a result of any medically determinable physical or
mental impairment as supported by a written medical opinion to the
foregoing effect by a physician selected by Employer.

The termination of Employee's employment by Employer prior to the expiration of
the Term shall constitute a "Termination for Cause" if made pursuant to Section
3.1(i); the effect of such termination is specified in Section 3.4. The
termination of Employee's employment by Employer prior to the expiration of the
Term shall constitute an "Involuntary Termination" if made pursuant to Section
3.1(ii); the effect of such termination is specified in Section 3.5. The effect
of the employment relationship being terminated pursuant to Section 3.1(iii) as
a result of Employee's death is specified in Section 3.6. The effect of the
employment relationship being terminated pursuant to Section 3.1(iv) as a result
of the Employee becoming incapacitated is specified in Section 3.7.

3.2 Notwithstanding any other provisions of this Agreement except
Section 8.6, Employee shall have the right to terminate the employment
relationship under this Agreement at any time prior to the expiration of the
Term of employment for any of the following reasons:

(i) a material breach by Employer of any material provision of this
Agreement which remains uncorrected for 30 days following written
notice of such breach by Employee to Employer; or

(ii) for any other reason whatsoever, in the sole discretion of
Employee.

The termination of Employee's employment by Employee prior to the expiration of
the Term shall constitute an "Involuntary Termination" if made pursuant to
Section 3.2(i); the effect of such termination is specified in Section 3.5. The
termination of Employee's employment by Employee prior to the expiration of the
Term shall constitute a "Voluntary Termination" if made pursuant to Section
3.2(ii); the effect of such termination is specified in Section 3.3.

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<PAGE> 7

3.3 Upon a "Voluntary Termination" of the employment relationship by
Employee prior to expiration of the Term, all future compensation to which
Employee is entitled and all future benefits for which Employee is eligible
shall cease and terminate as of the date of termination. Employee shall be
entitled to pro rata salary through the date of such termination, but Employee
shall not be entitled to any individual bonuses or individual incentive
compensation not yet paid at the date of such termination.

3.4 If Employee's employment hereunder shall be terminated by Employer
for Cause prior to expiration of the Term, all future compensation to which
Employee is entitled and all future benefits for which Employee is eligible
shall cease and terminate as of the date of termination. Employee shall be
entitled to pro rata salary through the date of such termination, but Employee
shall not be entitled to any individual bonuses or individual incentive
compensation not yet paid at the date of such termination.

3.5 Upon an Involuntary Termination of the employment relationship by
either Employer or Employee prior to the expiration of the Term, Employee shall
be entitled, in consideration of Employee's continuing obligations hereunder
after such termination (including, without limitation, Employee's
non-competition obligations), to receive one hundred twenty-five percent (125%)
of the then current Monthly Base Salary as if Employee's employment (which shall
cease on the date of such Involuntary Termination) had continued for the full
Term of this Agreement Employee shall not be under any duty or obligation to
seek or accept other employment following Involuntary Termination and the
amounts due Employee hereunder shall not be reduced or suspended if Employee
accepts subsequent employment. Employee's rights under this Section 3.5 are
Employee's sole and exclusive rights against Employer, Enron, or their
affiliates, and Employer's sole and exclusive liability to Employee under this
Agreement, in contract, tort, or otherwise, for any Involuntary Termination of
the employment relationship. Employee covenants not to sue or lodge any claim,
demand or cause of action against Employer for any sums for Involuntary
Termination other than those sums specified in this Section 3.5. If Employee
breaches this covenant, Employer shall be entitled to recover from Employee all
sums expended by Employer (including costs and attorneys fees) in connection
with such suit, claim, demand or cause of action.

3.6 Upon termination of the employment relationship as a result of
Employee's death, Employee's heirs, administrators, or legatees shall be
entitled to Employee's pro rata salary through the date of such termination, but
Employee's heirs, administrators, or legatees shall not be entitled to any
individual bonuses or individual incentive compensation not yet paid to Employee
at the date of such termination.

3.7 Upon termination of the employment relationship as a result of
Employee's incapacity, Employee shall be entitled to his or her pro rata salary
through the date of such termination, but Employee shall not be entitled to any
individual bonuses or individual incentive compensation not yet paid to Employee
at the date of such termination.

3.8 Notwithstanding any provision herein to the contrary, upon a
termination of Employee's employment under any of the circumstances described in
Sections 3.5, 3.6 or 3.7 above, Employee shall be entitled to receive a pro-rata
annual bonus payment through the date of

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<PAGE> 8

such termination of employment and Employee shall become fully vested in
specific grants and awards made or awarded to Employee under long term incentive
plans maintained by Employer and its affiliates.

3.9 In all cases, the compensation and benefits payable to Employee
under this Agreement upon termination of the employment relationship shall be
offset against any amounts to which Employee may otherwise be entitled under any
and all severance plans, and policies of Employer, Enron, or its affiliates.

3.10 Termination of the employment relationship does not terminate
those obligations imposed by this Agreement which are continuing obligations,
including, without limitation, Employee's obligations under Articles 6 and 7.

3.11 This Agreement governs the rights and obligations of Employer and
Employee with respect to Employee's salary, bonuses, and other perquisites of
employment. Except as provided above in Section 2.5 and in Section 3.8,
Employee's rights and obligations with respect to stock options and restricted
stock are governed by Enron's Stock Option Plan and respective grant agreements
and with respect to incentive compensation payments are governed by the Award
Agreement and the Plan.

ARTICLE 4: CONTINUATION OF EMPLOYMENT BEYOND TERM; TERMINATION AND EFFECTS OF
TERMINATION:

4.1 Should Employee remain employed by Employer beyond the expiration
of the Term specified on Exhibit "A," such employment shall convert to a
month-to-month relationship terminable at any time by either Employer or
Employee for any reason whatsoever, with or without cause. Upon such termination
of the employment relationship by either Employer or Employee for any reason
whatsoever, all future compensation to which Employee is entitled and all future
benefits for which Employee is eligible shall cease and terminate. Employee
shall be entitled to pro rata salary through the date of such termination, but
Employee shall not be entitled to any individual bonuses or individual incentive
compensation not yet paid at the date of such termination.

8
<PAGE> 9

ARTICLE 5: UNITED STATES FOREIGN CORRUPT PRACTICES ACT AND OTHER LAWS:

5.1. Employee shall at all times comply with United States laws
applicable to Employee's actions on behalf of Employer, including specifically,
without limitation, the United States Foreign Corrupt Practices Act, generally
codified in 15 USC 78 (FCPA), as the FCPA may hereafter be amended, and/or its
successor statutes. If Employee pleads guilty to or nolo contendere or admits
civil or criminal liability under the FCPA or other applicable United States
law, or if a court finds that Employee has personal civil or criminal liability
under the FCPA or other applicable United States law, or if a court finds that
Employee committed an action resulting in any Enron entity having civil or
criminal liability or responsibility under the FCPA or other applicable United
States law with knowledge of the activities giving rise to such liability or
knowledge of facts from which Employee should have reasonably inferred the
activities giving rise to liability had occurred or were likely to occur, such
action or finding shall constitute "cause" for termination under this Agreement
unless Employer's management committee (or, if there is no management committee,
the highest applicable level of Employer's management) determines that the
actions found to be in violation of the FCPA or other applicable United States
law were taken in good faith and in compliance with all applicable policies of
Employer and Enron.

ARTICLE 6: OWNERSHIP AND PROTECTION OF INFORMATION; COPYRIGHTS:

6.1 All information, ideas, concepts, improvements, discoveries, and
inventions, whether patentable or not, which are conceived, made, developed or
acquired by Employee, individually or in conjunction with others, during
Employee's employment by Employer (whether during business hours or otherwise
and whether on Employer's premises or otherwise) which relate to Employer's
business, products or services (including, without limitation, all such
information relating to corporate opportunities, research, financial and sales
data, pricing and trading terms, evaluations, opinions, interpretations,
acquisition prospects, the identity of customers or their requirements, the
identity of key contacts within the customer's organizations or within the
organization of acquisition prospects, or marketing and merchandising
techniques, prospective names, and marks) shall be disclosed to Employer and are
and shall be the sole and exclusive property of Employer. Moreover, all
drawings, memoranda, notes, records, files, correspondence, drawings, manuals,
models, specifications, computer programs, maps and all other writings or
materials of any type embodying any of such information, ideas, concepts,
improvements, discoveries, and inventions are and shall be the sole and
exclusive property of Employer.

9
<PAGE> 10

Employer, Enron, and their affiliates in maintaining their competitive position.
Employee hereby agrees that Employee will not, at any time during or after his
or her employment by Employer, make any unauthorized disclosure of any
confidential business information or trade secrets of Employer, Enron, or their
affiliates, or make any use thereof, except in the carrying out of his or her
employment responsibilities hereunder. Enron and its affiliates shall be third
party beneficiaries of Employee's obligations under this Section. As a result of
Employee's employment by Employer, Employee may also from time to time have
access to, or knowledge of, confidential business information or trade secrets
of third parties, such as customers, suppliers, partners, joint venturers, and
the like, of Employer, Enron, and their affiliates. Employee also agrees to
preserve and protect the confidentiality of such third party confidential
information and trade secrets to the same extent, and on the same basis, as
Employer's confidential business information and trade secrets. Employee
acknowledges that money damages would not be sufficient remedy for any breach of
this Article 6 by Employee, and Employer shall be entitled to enforce the
provisions of this Article 6 by terminating any payments then owing to Employee
under this Agreement and/or to specific performance and injunctive relief as
remedies for such breach or any threatened breach. Such remedies shall not be
deemed the exclusive remedies for a breach of this Article 6, but shall be in
addition to all remedies available at law or in equity to Employer, including
the recovery of damages from Employee and his or her agents involved in such
breach.

6.3 All written materials, records, and other documents made by, or
coming into the possession of, Employee during the period of Employee's
employment by Employer which contain or disclose confidential business
information or trade secrets of Employer, Enron, or their affiliates shall be
and remain the property of Employer, Enron, or their affiliates, as the case may
be. Upon termination of Employee's employment by Employer, for any reason,
Employee promptly shall deliver the same, and all copies thereof, to Employer.

6.4 If, during Employee's employment by Employer, Employee creates any
original work of authorship fixed in any tangible medium of expression which is
the subject matter of copyright (such as videotapes, written presentations on
acquisitions, computer programs, drawings, maps, architectural renditions,
models, manuals, brochures, or the like) relating to Employer's business,
products, or services, whether such work is created solely by Employee or
jointly with others (whether during business hours or otherwise and whether on
Employer's premises or otherwise), Employee shall disclose such work to
Employer. Employer shall be deemed the author of such work if the work is
prepared by Employee in the scope of his or her employment; or, if the work is
not prepared by Employee within the scope of his or her employment but is
specially ordered by Employer as a contribution to a collective work, as a part
of a motion picture or other audiovisual work, as a translation, as a
supplementary work, as a compilation, or as an instructional text, then the work
shall be considered to be work made for hire and Employer shall be the author of
the work. If such work is neither prepared by the Employee within the scope of
his or her employment nor a work specially ordered and is deemed to be a work
made for hire, then Employee hereby agrees to assign, and by these presents does
assign, to Employer all of Employee's worldwide right, title, and interest in
and to such work and all rights of copyright therein.

6.5 Both during the period of Employee's employment by Employer and
thereafter, Employee shall assist Employer and its nominee, at any time, in the
protection of Employer's

10
<PAGE> 11

worldwide right, title, and interest in and to information, ideas, concepts,
improvements, discoveries, and inventions, and its copyrighted works, including
without limitation, the execution of all formal assignment documents requested
by Employer or its nominee and the execution of all lawful oaths and
applications for applications for patents and registration of copyright in the
United States and foreign countries.

ARTICLE 7: POST-EMPLOYMENT NON-COMPETITION OBLIGATIONS:

7.1 As part of the consideration for the compensation and benefits to
be paid to Employee hereunder, in keeping with Employee's duties as a fiduciary
and in order to protect Employer's interests in the confidential information of
Employer and the business relationships developed by Employee with the clients
and potential clients of Employer, and as an additional incentive for Employer
to enter into this Agreement, Employer and Employee agree to the non-competition
provisions of this Article 7. Employee agrees that during the period of
Employee's non-competition obligations hereunder, Employee will not, directly or
indirectly for Employee or for others, in any geographic area or market where
Employer or Enron or any of their affiliated companies are conducting any
business as of the date of termination of the employment relationship or have
during the previous twelve months conducted any business:

(i) engage in any business competitive with the business conducted by
Employer;

(ii) render advice or services to, or otherwise assist, any other
person, association, or entity who is engaged, directly or indirectly, in any
business competitive with the business conducted by Employer;

(iii) induce any employee of Employer or Enron or any of their
affiliates to terminate his or her employment with Employer, Enron, or their
affiliates, or hire or assist in the hiring of any such employee by person,
association, or entity not affiliated with Enron.

These non-competition obligations shall extend until December 31, 2001.

7.2 Employee understands that the foregoing restrictions may limit his
or her ability to engage in certain businesses anywhere in the world during the
period provided for above, but acknowledges that Employee will receive
sufficiently high remuneration and other benefits (e.g., the right to receive
compensation under Section 3.5 for the remainder of the Term upon Involuntary
Termination) under this Agreement to justify such restriction. Employee
acknowledges that money damages would not be sufficient remedy for any breach of
this Article 7 by Employee, and Employer shall be entitled to enforce the
provisions of this Article 7 by terminating any payments then owing to Employee
under this Agreement and/or to specific performance and injunctive relief as
remedies for such breach or any threatened breach. Such remedies shall not be
deemed the exclusive remedies for a breach of this Article 7, but shall be in
addition to all remedies available at law or in equity to Employer, including,
without limitation, the recovery of damages from Employee and his or her agents
involved in such breach.

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<PAGE> 12

having jurisdiction to be unreasonable, or overly broad as to geographic area or
time, or otherwise unenforceable, the parties intend for the restrictions
therein set forth to be modified by such courts so as to be reasonable and
enforceable and, as so modified by the court, to be fully enforced.

ARTICLE 8: MISCELLANEOUS:

8.1 For purposes of this Agreement the terms "affiliates" or
"affiliated" means an entity who directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with
Enron or Employer.

8.2 Employee shall refrain, both during the employment relationship and
after the employment relationship terminates, from publishing any oral or
written statements about Employer, Enron, any of their respective subsidiaries
or affiliates, or any of such entities' officers, employees, agents or
representatives that are slanderous, libelous, or defamatory; or that disclose
private or confidential information about Employer, Enron, any of their
respective subsidiaries or affiliates, or any of such entities' business
affairs, officers, employees, agents, or representatives; or that constitute an
intrusion into the seclusion or private lives of Employer, Enron, any of their
respective subsidiaries or affiliates, or such entities' officers, employees,
agents, or representatives; or that give rise to unreasonable publicity about
the private lives of Employer, Enron, any of their respective subsidiaries or
affiliates, or any of such entities' officers, employees, agents, or
representatives; or that place Employer, Enron, any of their respective
subsidiaries or affiliates, or any of such entities' or its officers, employees,
agents, or representatives in a false light before the public; or that
constitute a misappropriation of the name or likeness of Employer, Enron, any of
their respective subsidiaries or affiliates, or any of such entities' or its
officers, employees, agents, or representatives. A violation or threatened
violation of this prohibition may be enjoined by the courts. The rights afforded
the Enron entities and affiliates under this provision are in addition to any
and all rights and remedies otherwise afforded by law.

8.3 For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when personally delivered or when mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:

If to Employer:

Enron Corp.
1400 Smith Street
Houston, Texas 77002
Attention: Corporate Secretary

If to Employee, to the address shown on the first page hereof.

Either Employer or Employee may furnish a change of address to the other in
writing in accordance herewith, except that notices of changes of address shall
be effective only upon receipt.

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<PAGE> 13
8.4 This Agreement shall be governed in all respects by the laws of the
State of Texas, excluding any conflict-of-law rule or principle that might refer
the construction of the Agreement to the laws of another State or country.

8.5 No failure by either party hereto at any time to give notice of any
breach by the other party of, or to require compliance with, any condition or
provision of this Agreement shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.

8.6 If a dispute arises out of or related to this Agreement, other than
a dispute regarding Employee's obligations under Article 6, or Article 7, and if
the dispute cannot be settled through direct discussions, then Employer and
Employee agree to first endeavor to settle the dispute in an amicable manner by
mediation, before having recourse to any other proceeding or forum.

8.7 Each of Employer and Employee is a citizen of the State of Texas.
Employer's principal place of business is in Houston, Harris County, Texas.
Employee resides in Harris County, Texas. This Agreement was negotiated and
signed in Houston, Texas. This Agreement shall be performed in Houston, Texas.
Any litigation that may be brought by either Employer or Employee involving the
enforcement of this Agreement or the rights, duties, or obligations of this
Agreement, shall be brought exclusively in the State or federal courts sitting
in Houston, Harris County, Texas. In the event that service of process cannot be
effected upon a party, each party hereby irrevocably appoints the Secretary of
State for the State of Texas as its or her agent for service of process to
receive the summons and other pleadings in connection with any such litigation.

8.8 It is a desire and intent of the parties that the terms,
provisions, covenants, and remedies contained in this Agreement shall be
enforceable to the fullest extent permitted by law. If any such term, provision,
covenant, or remedy of this Agreement or the application thereof to any person,
association, or entity or circumstances shall, to any extent, be construed to be
invalid or unenforceable in whole or in part, then such term, provision,
covenant, or remedy shall be construed in a manner so as to permit its
enforceability under the applicable law to the fullest extent permitted by law.
In any case, the remaining provisions of this Agreement or the application
thereof to any person, association, or entity or circumstances other than those
to which they have been held invalid or unenforceable, shall remain in full
force and effect.

8.9 This Agreement shall be binding upon and inure to the benefit of
Employer and any other person, association, or entity which may hereafter
acquire or succeed to all or substantially all of the business or assets of
Employer by any means whether direct or indirect, by purchase, merger,
consolidation, or otherwise. Employee's rights and obligations under Agreement
hereof are personal and such rights, benefits, and obligations of Employee shall
not be voluntarily or involuntarily assigned, alienated, or transferred, whether
by operation of law or otherwise, without the prior written consent of Employer.

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<PAGE> 14
8.10 There exist other agreements between Employer and Employee
relating to the employment relationship between them, e.g., the agreement with
respect to company policies contained in Employer's Conduct of Business Affairs
booklet and agreements with respect to benefit plans. This Agreement replaces
and merges previous agreements and discussions pertaining to the following
subject matters covered herein: the nature of Employee's employment relationship
with Employer and the term and termination of such relationship. This Agreement
constitutes the entire agreement of the parties with regard to such subject
matters, and contains all of the covenants, promises, representations,
warranties, and agreements between the parties with respect such subject
matters. Each party to this Agreement acknowledges that no representation,
inducement, promise, or agreement, oral or written, has been made by either
party with respect to such subject matters, which is not embodied herein, and
that no agreement, statement, or promise relating to the employment of Employee
by Employer that is not contained in this Agreement shall be valid or binding.
Any modification of this Agreement will be effective only if it is in writing
and signed by each party whose rights hereunder are affected thereby, provided
that any such modification must be authorized or approved by the Board of
Directors of Employer.

IN WITNESS WHEREOF, Employer and Employee have duly executed this
Agreement in multiple originals to be effective on the date first stated above.

ENRON CORP. REBECCA P. MARK

By: /s/ Kenneth L. Lay /s/ Rebecca P. Mark
----------------------------- ---------------------------
Name:
This 6th day of May, 1998
Title: Chairman and CEO
-----------------------------
This 7th day of May, 1998

14
<PAGE> 15

EXHIBIT "A" TO
EXECUTIVE EMPLOYMENT AGREEMENT
BETWEEN ENRON CORP. AND REBECCA P. MARK

Employee Name: Rebecca P. Mark

Term: Effective May 5, 1998 through December 31, 2001

Position: Vice Chairman, Enron Corp., and Chairman of Enron
International Inc.

Location: Houston, Texas

Reporting Relationship: Reports to Office of the Chairman

Monthly Base Salary: Fifty Nine Thousand One Hundred Sixty Six and 67/100
Dollars ($59,166.67)

Bonus: Employee shall be eligible to participate in the
Enron Corp. Annual Incentive Plan ("Plan"). All
bonuses shall be paid in accordance with the terms
and provisions of the Plan. Employee's 1998 bonus
amount under this Plan shall be one percent (1%) of
Enron International Inc.'s earnings defined as either
after-tax net income or earnings per share ("EPS")
multiplied by the appropriate number of EI shares
(both methodologies approximately equivalent in
value), subject to adjustment in the sole discretion
of Enron Corp.'s Chairman and CEO, taking into
consideration net income, EPS, total obligations and
cash flow from operations targets, as such targets
are set each year by the Board of Directors of
Employer, as well as other performance criteria,
consistent with the treatment of other similarly
situated executives of Employer. Employer and
Employee agree to negotiate Employee's bonus
opportunity for calendar years 1999, 2000, and 2001,
no later than January 31st of each applicable
calendar year.

Long Term Incentive Plan: Starting in 1999, Employee shall be eligible to
participate in either 1) the Enron Corp. Long Term
Incentive Plan, or 2) an equity participation plan
related to Enron's interest in a potential new water
company. At the sole discretion of the Chairman of
the Board of Employer, Employee may be eligible to
participate in both.

ENRON CORP. REBECCA P. MARK

By: /s/ Kenneth L.Lay /s/ Rebecca P. Mark
------------------------ ---------------------------
Name:
This 6th day of May, 1998
Title: Chairman & CEO
---------------------
This 7th day of May, 1998

<PAGE> 16

FIRST AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT

This Agreement, entered into and made effective as of February 1, 1999,
by and between ENRON CORP. an Oregon corporation ("Company") having its
headquarters at 1400 Smith Street, Houston, Texas 77002, AZURIX CORP., a
Delaware corporation having its headquarters at 333 Clay Street, Houston, Texas
77002, and REBECCA P. MARK ("Employee"), an individual residing in Houston,
Texas, is an amendment to that certain Executive Employment Agreement between
the Company and Employee entered into the 6th day of May, 1998, and made
effective as of May 4, 1998 (the "Employment Agreement").

WHEREAS, the parties desire to amend the Employment Agreement to
provide for assignment of the Employment Agreement by Company to, and assumption
of the Employment Agreement by, Enron Corp. and Azurix Corp., respectively, and
to make other amendments to the Employment Agreement as provided herein;

NOW, THEREFORE, in consideration thereof and of the mutual covenants
contained herein, the parties agree as follows:

1. Effective February 1, 1999, the Employment Agreement is
assigned by Company to, and assumed by, Enron Corp. and Azurix Corp.,
respectively. Any reference to the "Company" and/or "Employer" in the
Employment Agreement shall mean Enron Corp. and Azurix Corp.,
respectively. Employee consents to such assignment and assumption, and
releases Company from every obligation under the Employment Agreement.
Enron Corp. and Azurix Corp., respectively, each assume the obligations
of Enron Corp. and Azurix Corp., under the Employment Agreement.

2. Article 3, Section 3.5 is hereby deleted in its entirety
and the following language inserted in its entirety:

"3.5 Upon an Involuntary Termination of the employment
relationship by either Employer or Employee prior to the expiration of
the Term, Employee shall be entitled, in consideration of Employee's
continuing obligations hereunder after such termination (including,
without limitation, Employee's non-competition obligations), to
receive the compensation specified in Section 2.1, as well as unpaid
Bonuses described on Exhibit "A", as if Employee's employment (which
shall cease on the date of such Involuntary Termination) had continued
for the full Term of this Agreement. Upon an Involuntary Termination,
Employee shall also be entitled to all vested benefits and rights
under other Enron benefits, incentive, and/or compensation plans to
which Employee may be entitled through her termination and pursuant to
plan documents and all other benefits that Employee may be entitled to
under any other compensation plans. In the event of Involuntary
Termination, the compensation specified in Section 2.1 that will be
paid to Employee will be paid

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<PAGE> 17

on a semi-monthly basis; the unpaid Bonuses described in Exhibit "A"
will be paid annually and the amounts under the compensation plans
will be paid in accordance with the terms and provisions of the
respective compensation plans. Employee shall not be under any duty or
obligation to seek or accept other employment following Involuntary
Termination and the amounts due Employee hereunder shall not be
reduced or suspended if Employee accepts subsequent employment.
Employee's rights under this Section 3.5 are Employee's sole and
exclusive rights against Employer, Enron, or their affiliates, and
Employer's sole and exclusive liability to Employee under this
Agreement, in contract, tort, or otherwise, for any Involuntary
Termination of the employment relationship. Employee covenants not to
sue or lodge any claim, demand or cause of action against Employer for
any sums for Involuntary Termination other than those sums specified
in this Section 3.5. If Employee breaches this covenant, Employer
shall be entitled to recover from Employee all sums expended by
Employer (including costs and attorneys fees) in connection with such
suit, claim, demand or cause of action."

3. Article 3, Section 3.8 is hereby deleted in its entirety
and the following language inserted in its entirety:

"3.8 Notwithstanding any provision herein to the
contrary, upon a termination of Employee's employment under any of the
circumstances described in Sections 3.6 or 3.7 above, Employee shall
be entitled to receive a pro-rata annual bonus payment through the
date of such termination of employment. Further, upon termination of
Employee's employment under any of the circumstances described in
Sections 3.5, 3.6, or 3.7, Employee shall become fully vested in
specific grants and awards made or awarded to Employee under long term
incentive plans maintained solely by Enron Corp. and its affiliates;
provided however, any grants and awards made or awarded under the
Azurix Corp. 1999 Stock Plan shall be excluded and governed by the
terms and provisions of the respective grants and awards under the
Azurix Corp. 1999 Stock Plan."

4. Exhibit "A" to the Employment Agreement is hereby deleted
in its entirety and the attached Exhibit "A" is inserted in its
entirety.

This Amendment is a First Amendment to the Employment Agreement, and
the parties agree that all other terms, conditions and stipulations contained in
the Employment Agreement, and any amendments thereto, shall remain in full force
and effect and without any change or modification, except as provided herein.

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<PAGE> 18

In Witness Whereof, the parties have duly executed this Agreement as of
the date first above written.

ENRON CORP.

By: /s/ KENNETH L. LAY
----------------------------------
Name: Kenneth L. Lay

Title: Chairman & CEO

This 10th day of March, 1999

AZURIX CORP.

By: /s/ PHILIP J. BAZELIDES
----------------------------------
Name: Philip J. Bazelides

Title: Managing Director
Human Resources
and Administration

This 1st day of March, 1999

REBECCA P. MARK

/s/ REBECCA P. MARK
-------------------------------------
This 1st day of March, 1999

3
<PAGE> 19

EXHIBIT "A" TO
EXECUTIVE EMPLOYMENT AGREEMENT
BETWEEN ENRON CORP., AZURIX CORP., AND REBECCA P. MARK

Employee Name: Rebecca P. Mark

Term: Effective February 1, 1999 through December 31, 2001

Position: Vice Chairman, Enron Corp., and Chairman and Chief
Executive Officer of Azurix Corp.

Location: Houston, Texas

Reporting Relationship: Reports to Office of the Chairman, Enron Corp.

Monthly Base Salary: Fifty-Nine Thousand One Hundred Sixty Six Dollars and
Sixty Seven Cents ($59,166.67)

Bonus: Employee shall be eligible to participate in the Enron
Corp. Annual Incentive Plan ("Plan") or any replacement
plan of Azurix Corp. All bonuses shall be paid in
accordance with the terms and provisions of the Plan, a
portion or all of which may be paid in cash, and a
portion or all of which may be paid in stock or stock
options. All bonuses paid shall be based upon the
performance of Azurix Corp. and Employee as determined
by the Board of Directors of Azurix Corp.

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<PAGE> 20

Long Term Incentive
Plan: Employee shall be eligible to participate in either 1)
the Enron Corp. Long Term Incentive Plan or 2) an
equity participation plan related to Enron's interest
in a new water company. At the sole discretion of the
Chairman of the Board of Employer, Employee may be
eligible to participate in both plans.

ENRON CORP.

By: /s/ KENNETH L. LAY
----------------------------------
Name: Kenneth L. Lay

Title: Chairman & CEO

This 10th day of March, 1999

AZURIX CORP.

By: /s/ PHILIP J. BAZELIDES
----------------------------------
Name: Philip J. Bazelides
--------------------------------
Title: Managing Director
Human Resources
and Administration

This 1st day of March, 1999

REBECCA P. MARK

/s/ REBECCA P. MARK
-------------------------------------
This 1st day of March, 1999

<PAGE> 1
EXHIBIT 10.10

EXECUTIVE EMPLOYMENT AGREEMENT

This Employment Agreement ("Agreement"), including the attached Exhibit
"A," is entered into between AZURIX CORP., a Delaware corporation ("Employer")
and subsidiary of ENRON CORP., an Oregon corporation, having offices at 1400
Smith Street, Houston, Texas 77002 ("Enron"), and RODNEY L. GRAY, an individual
currently residing at 4146 Marquette, Houston, Texas 77005 ("Employee"), to be
effective as of February 16, 1999 (the "Effective Date").

WITNESSETH:

WHEREAS, Employer is desirous of employing Employee pursuant to the terms
and conditions and for the consideration set forth in this Agreement, and
Employee is desirous of entering the employ of Employer pursuant to such terms
and conditions and for such consideration.

NOW, THEREFORE, for and in consideration of the mutual promises, covenants,
and obligations contained herein, Employer and Employee agree as follows:

ARTICLE 1: EMPLOYMENT AND DUTIES:

1.1 Employer agrees to employ Employee, and Employee agrees to be employed
by Employer, beginning as of the Effective Date and continuing until the date
set forth on Exhibit "A" (the "Term"), subject to the terms and conditions of
this Agreement.

1.2 Employee initially shall be employed in the position set forth on
Exhibit A. Employer may subsequently assign Employee to a different position or
modify Employee's duties and responsibilities, provided that no such assignment
or modification shall result in a substantial reduction of Employee's duties and
responsibilities. Moreover, Employer may assign this Agreement and Employee's
employment to any affiliates of Employer. Employee agrees to serve in the
assigned position and to perform diligently and to the best of Employee's
abilities the duties and services appertaining to such position as determined by
Employer, as well as such additional or different duties and services
appropriate to such position which Employee from time to time may be reasonably
directed to perform by Employer. Employee shall at all times comply with and be
subject to such policies and procedures as Employer may establish from time to
time.

1.4 In connection with Employee's employment by Employer, Employer shall
endeavor to provide Employee access to such confidential information pertaining
to the business and services of Employer as is appropriate for Employee's
employment responsibilities. Employer also shall endeavor to provide to Employee
the opportunity to develop business relationships with those of

1
<PAGE> 2

Employer's clients and potential clients that are appropriate for Employee's
employment responsibilities.

1.5 Employee acknowledges and agrees that, at all times during the
employment relationship Employee owes fiduciary duties to Employer, including
but not limited to the fiduciary duties of the highest loyalty, fidelity and
allegiance to act at all times in the best interests of the Employer, to make
full disclosure to Employer of all information that pertains to Employer's
business and interests, to do no act which would injure Employer's business, its
interests, or its reputation, and to refrain from using for Employee's own
benefit or for the benefit of others any information or opportunities pertaining
to Employer's business or interests that are entrusted to Employee or that he
learned while employed by Employer. Employee acknowledges and agrees that upon
termination of the employment relationship, Employee shall continue to refrain
from using for his own benefit or the benefit of others any information or
opportunities pertaining to Employer's business or interests that were entrusted
to Employee during the employment relationship or that he learned while employed
by Employer. Employee agrees that while employed by Employer and thereafter he
shall not knowingly take any action which interferes with the internal
relationships between Employer and its employees or representatives or
interferes with the external relationships between Employer and third parties.

1.6 It is agreed that any direct or indirect interest in, connection with,
or benefit from any outside activities, particularly commercial activities,
which interest might in any way adversely affect Employer or any of its
affiliates, involves a possible conflict of interest. In keeping with Employee's
fiduciary duties to Employer, Employee agrees that during the employment
relationship Employee shall not knowingly become involved in a conflict of
interest with Employer or its affiliates, or upon discovery thereof, allow such
a conflict to continue. Moreover, Employee agrees that Employee shall disclose
to Employer's President any facts which might involve such a conflict of
interest that has not been approved by Employer's President. Employer and
Employee recognize that it is impossible to provide an exhaustive list of
actions or interests which constitute a "conflict of interest." Moreover,
Employer and Employee recognize there are many borderline situations. In some
instances, full disclosure of facts by the Employee to Employer's President may
be all that is necessary to enable Employer or its affiliates to protect its
interests. In others, if no improper motivation appears to exist and the
interests of Employer or its affiliates have not suffered, prompt elimination of
the outside interest will suffice. In still others, it may be necessary for
Employer to terminate the employment relationship. Employer and Employee agree
that Employer's determination as to whether a conflict of interest exists shall
be conclusive. Employer reserves the right to take such action as, in its
judgment, will end the conflict.

1.7 Employee understands and acknowledges that the terms and conditions of
this Agreement constitute confidential information. Employee shall keep
confidential the terms of this Agreement and shall not disclose this
confidential information to anyone other than Employee's attorneys, tax
advisors, or as required by law. Employee acknowledges and understands that
disclosure of the terms of this Agreement constitutes a material breach of this
Agreement and could subject Employee to disciplinary action, including without
limitation, termination of employment.

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<PAGE> 3

ARTICLE 2: COMPENSATION AND BENEFITS:

2.4 Employer may withhold from any compensation, benefits, or amounts
payable under this Agreement all federal, state, city, or other taxes as may be
required pursuant to any law or governmental regulation or ruling.

ARTICLE 3: TERMINATION PRIOR TO EXPIRATION OF TERM AND EFFECTS OF SUCH
TERMINATION:

3.1. Notwithstanding any other provisions of this Agreement, Employer shall
have the right to terminate Employee's employment under this Agreement at any
time prior to the expiration of the Term for any of the following reasons:

(i) For "cause" upon the determination by the Employer's Board of
Directors or Enron's management committee (or, if there is no Enron
management committee, the highest applicable level of Enron
management) that "cause" exist's for the termination of the employment
relationship. As used in this Section 3. 1 (i), the term "cause" shall
mean [a] Employee's gross negligence or willful misconduct in the
performance of the duties and services required of Employee pursuant
to this Agreement; [b] Employee has been convicted of a felony; [c]
Employee has willfully refused without proper legal reason to perform
the duties and responsibilities required of Employee under this
Agreement which remains uncorrected for thirty (30) days following
written notice to Employee by Employer of such breach; [d] Employee's
involvement in a

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<PAGE> 4

conflict of interest as referenced in Section 1.6 for which Employer
makes a determination to terminate the employment of Employee which
remains uncorrected for thirty (30) days following written notice to
Employee by Employer of such breach; [e] Employee has willfully
engaged in conduct that Employee knows or should know is materially
injurious to Employer, Enron, or any of their respective subsidiaries;
[f] Employee's material breach of any material provision of this
Agreement or corporate code or policy which remains uncorrected for
thirty (30) days following written notice to Employee by Employer of
such breach; or [g] Employee violates the Foreign Corrupt Practices
Act or other applicable United States law as proscribed by Section
5.1. It is expressly acknowledged and agreed that the decision as to
whether "cause" exists for termination of the employment relationship
by Employer is delegated to the Employer's management committee (or,
if there is no management committee, the highest applicable level of
Employer's management) for determination. If Employee disagrees with
the decision reached by Employee's management committee (or, if there
is no management committee, the highest applicable level of Employer's
management), the dispute will be limited to whether Employer's
management committee (or, if there is no Enron management committee,
the highest applicable level of Employer's management) reached its
decision in good faith;

(ii) for any other reason whatsoever, with or without cause, in the sole
discretion of the management committee (or, if there is no management
committee, the highest applicable level of management) of Employer;

(iii) upon Employee's death; or

(iv) upon Employee's becoming disabled so as to entitle Employee to
benefits under Enron's long-term disability plan or, if Employee is
not eligible to participate in such plan, then Employee is permanently
and totally unable to perform Employee's duties for Employer as a
result of any medically determinable physical or mental impairment as
supported by a written medical opinion to the foregoing effect by a
physician selected by Employer.

The termination of Employee's employment by Employer prior to the expiration of
the Term shall constitute a "Termination for Cause" if made pursuant to Section
3.1(i); the effect of such termination is specified in Section 3.4. The
termination of Employee's employment by Employer prior to the expiration of the
Term shall constitute an "Involuntary Termination" if made pursuant to Section
3.1(ii); the effect of such termination is specified in Section 3.5. The effect
of the employment relationship being terminated pursuant to Section 3.1(iii)
as a result of Employee's death is specified in Section 3.6. The effect of the
employment relationship being terminated pursuant to Section 3.1(iv) as a result
of the Employee becoming incapacitated is specified in Section 3.7.

3.2 Notwithstanding any other provisions of this Agreement except Section
8.6, Employee shall have the right to terminate the employment relationship
under this Agreement at any time prior to the expiration of the Term of
employment for any of the following reasons:

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<PAGE> 5

(i) a material breach by Employer of any material provision of this
Agreement which remains uncorrected for 30 days following written
notice of such breach by Employee to Employer; or

(ii) for any other reason whatsoever, in the sole discretion of Employee.

3.4 If Employee's employment hereunder shall be terminated by Employer for
Cause prior to expiration of the Term, all future compensation to which Employee
is entitled and all future benefits for which Employee is eligible shall cease
and terminate as of the date of termination. Employee shall be entitled to pro
rata salary through the date of such termination, but Employee shall not be
entitled to any individual bonuses or individual incentive compensation not yet
paid at the date of such termination.

3.5 Upon an Involuntary Termination of the employment relationship by
either Employer or Employee prior to the expiration of the Term, Employee shall
be entitled, in consideration of Employee's continuing obligations hereunder
after such termination (including, without limitation, Employee's
non-competition obligations), to receive the compensation specified in Section
2.1, as well as unpaid Bonuses described on Exhibit "A", as if Employee's
employment (which shall cease on the date of such Involuntary Termination) had
continued for the full Term of this Agreement. Upon an Involuntary Termination,
Employee shall also be entitled to all vested benefits and rights under other
Enron benefits, incentive, and/or compensation plans to which Employee may be
entitled through his termination and pursuant to plan documents and all other
benefits that Employee may be entitled to under any other compensation plans. In
the event of Involuntary Termination, the compensation specified in Section 2.1
that will be paid to Employee will be paid on a semi-monthly basis; the unpaid
Bonuses described in Exhibit "A" will be paid annually and the amounts under the
compensation plans will be paid in accordance with the terms and provisions of
the respective compensation plans. Employee shall not be under any duty or
obligation to seek or accept other employment following Involuntary Termination
and the amounts due Employee hereunder shall not be reduced or suspended if
Employee accepts subsequent employment. Employee's rights under this Section 3.5
are Employee's sole and exclusive rights against Employer, Enron, or their
affiliates, and Employer's sole and exclusive liability to Employee under this
Agreement, in contract, tort, or otherwise, for any Involuntary Termination of
the employment relationship. Employee covenants not to sue or lodge any claim,
demand or cause of

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action against Employer for any sums for Involuntary Termination other than
those sums specified in this Section 3.5. If Employee breaches this covenant,
Employer shall be entitled to recover from Employee all sums expended by
Employer (including costs and attorneys fees) in connection with such suit,
claim, demand or cause of action.

3.7 Upon termination of the employment relationship as a result of
Employee's incapacity, Employee shall be entitled to his or her pro rata salary
through the date of such termination, but Employee shall not be entitled to any
individual bonuses or individual incentive compensation not yet paid to Employee
at the date of such termination.

3.8 In all cases, the compensation and benefits payable to Employee under
this Agreement upon termination of the employment relationship shall be offset
against any amounts to which Employee may otherwise be entitled under any and
all severance plans, and policies of Employer, Enron, or its affiliates.

3.9 Termination of the employment relationship does not terminate those
obligations imposed by this Agreement which are continuing obligations,
including, without limitation, Employee's obligations under Articles 6 and 7.

ARTICLE 4: CONTINUATION OF EMPLOYMENT BEYOND TERM; TERMINATION AND EFFECTS OF
TERMINATION:

4.1 Should Employee remain employed by Employer beyond the expiration of
the Term specified on Exhibit "A," such employment shall convert to a
month-to-month relationship terminable at any time by either Employer or
Employee for any reason whatsoever, with or without cause. Upon such termination
of the employment relationship by either Employer or Employee for any reason
whatsoever, all future compensation to which Employee is entitled and all
future benefits for which Employee is eligible shall cease and terminate.
Employee shall be entitled to pro rata salary through the date of such
termination, but Employee shall not be entitled to any individual bonuses or
individual incentive compensation not yet paid at the date of such termination.

ARTICLE 5: UNITED STATES FOREIGN CORRUPT PRACTICES ACT AND OTHER LAWS:

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<PAGE> 7

States law, or if a court finds that Employee committed an action resulting in
any Enron entity having civil or criminal liability or responsibility under the
FCPA or other applicable United States law with knowledge of the activities
giving rise to such liability or knowledge of facts from which Employee should
have reasonably inferred the activities giving rise to liability had occurred or
were likely to occur, such action or finding shall constitute "cause" for
termination under this Agreement unless Employer's management committee (or, if
there is no management committee, the highest applicable level of Employer's
management) determines that the actions found to be in violation of the FCPA or
other applicable United States law were taken in good faith and in compliance
with all applicable policies of Employer and Enron.

ARTICLE 6: OWNERSHIP AND PROTECTION OF INFORMATION; COPYRIGHTS:

6.2 Employee acknowledges that the business of Employer, Enron, and their
affiliates is highly competitive and that their strategies, methods, books,
records, and documents, their technical information concerning their products,
equipment, services, and processes, procurement procedures and pricing
techniques, the names of and other information (such as credit and financial
data) concerning their customers and business affiliates, all comprise
confidential business information and trade secrets which are valuable, special,
and unique assets which Employer, Enron, or their affiliates use in their
business to obtain a competitive advantage over their competitors. Employee
further acknowledges that protection of such confidential business information
and trade secrets against unauthorized disclosure and use is of critical
importance to Employer, Enron, and their affiliates in maintaining their
competitive position. Employee hereby agrees that Employee will not, at any time
during or after his or her employment by Employer, make any unauthorized
disclosure of any confidential business information or trade secrets of
Employer, Enron, or their affiliates, or make any use thereof, except in the
carrying out of his or her employment responsibilities hereunder. Enron and its
affiliates shall be third party beneficiaries of Employee's obligations under
this Section. As a result of Employee's employment by Employer, Employee may
also from time to time have access to, or knowledge of, confidential business
information or trade secrets of third parties, such as customers, suppliers,
partners, joint venturers, and the like, of Employer, Enron, and their
affiliates. Employee also agrees to preserve and protect the confidentiality of
such third party confidential information and trade secrets to the same extent,
and on the same basis, as Employer's

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<PAGE> 8

confidential business information and trade secrets. Employee acknowledges that
money damages would not be sufficient remedy for any breach of this Article 6 by
Employee, and Employer shall be entitled to enforce the provisions of this
Article 6 by terminating any payments then owing to Employee under this
Agreement and/or to specific performance and injunctive relief as remedies for
such breach or any threatened breach. Such remedies shall not be deemed the
exclusive remedies for a breach of this Article 6, but shall be in addition to
all remedies available at law or in equity to Employer, including the recovery
of damages from Employee and his or her agents involved in such breach.

6.3 All written materials, records, and other documents made by, or coming
into the possession of, Employee during the period of Employee's employment by
Employer which contain or disclose confidential business information or trade
secrets of Employer, Enron, or their affiliates shall be and remain the property
of Employer, Enron, or their affiliates, as the case may be. Upon termination of
Employee's employment by Employer, for any reason, Employee promptly shall
deliver the same, and all copies thereof, to Employer.

6.4 If, during Employee's employment by Employer, Employee creates any
original work of authorship fixed in any tangible medium of expression which is
the subject matter of copyright (such as videotapes, written presentations on
acquisitions, computer programs, drawings, maps, architectural renditions,
models, manuals, brochures, or the like) relating to Employer's business
products, or services, whether such work is created solely by Employee or
jointly with others (whether during business hours or otherwise and whether on
Employer's premises or otherwise), Employee shall disclose such work to
Employer. Employer shall be deemed the author of such work if the work is
prepared by Employee in the scope of his or her employment; or, if the work is
not prepared by Employee within the scope of his or her employment but is
specially ordered by Employer as a contribution to a collective work, as a part
of a motion picture or other audiovisual work, as a translation, as a
supplementary work, as a compilation, or as an instructional text, then the work
shall be considered to be work made for hire and Employer shall be the author of
the work. If such work is neither prepared by the Employee within the scope of
his or her employment nor a work specially ordered and is deemed to be a work
made for hire, then Employee hereby agrees to assign, and by these presents does
assign, to Employer all of Employee's worldwide right, title, and interest in
and to such work and all rights of copyright therein.

6.5 Both during the period of Employee's employment by Employer and
thereafter, Employee shall assist Employer and its nominee, at any time, in the
protection of Employer's worldwide right, title, and interest in and to
information, ideas, concepts, improvements, discoveries, and inventions, and its
copyrighted works, including without limitation, the execution of all formal
assignment documents requested by Employer or its nominee and the execution of
all lawful oaths and applications for applications for patents and registration
of copyright in the United States and foreign countries.

ARTICLE 7: POST-EMPLOYMENT NON-COMPETITION OBLIGATIONS:

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developed by Employee with the clients and potential clients of Employer, and as
an additional incentive for Employer to enter into this Agreement, Employer and
Employee agree to the noncompetition provisions of this Article 7. Employee
agrees that during the period of Employee's noncompetition obligations
hereunder, Employee will not, directly or indirectly for Employee or for others,
in any geographic area or market where Employer or Enron or any of their
affiliated companies related to the water business, are conducting any business
as of the date of termination of the employment relationship or have during the
previous twelve months conducted any business:

(i) engage in any business competitive with the water business conducted by
Employer;

(ii) render advice or services to, or otherwise assist, any other person,
association, or entity who is engaged, directly or indirectly, in any business
competitive with the water business conducted by Employer;

(iii) induce any employee of Employer or Enron or any of their affiliates
to terminate his or her employment with Employer, Enron, or their affiliates, or
hire or assist in the hiring of any such employee by person, association, or
entity not affiliated with Enron.

These non-competition obligations shall extend until expiration of the Term of
this Agreement.

7.2 Employee understands that the foregoing restrictions may limit his or
her ability to engage in certain businesses anywhere in the world during the
period provided for above, but acknowledges that Employee will receive
sufficiently high remuneration and other benefits (e.g., the right to receive
compensation under Section 3.5 for the remainder of the Term upon Involuntary
Termination) under this Agreement to justify such restriction. Employee
acknowledges that money damages would not be sufficient remedy for any breach of
this Article 7 by Employee, and Employer shall be entitled to enforce the
provisions of this Article 7 by terminating any payments then owing to Employee
under this Agreement and/or to specific performance and injunctive relief as
remedies for such breach or any threatened breach. Such remedies shall not be
deemed the exclusive remedies for a breach of this Article 7, but shall be in
addition to all remedies available at law or in equity to Employer, including,
without limitation, the recovery of damages from Employee and his or her agents
involved in such breach.

7.3 It is expressly understood and agreed that Employer and Employee
consider the restrictions contained in this Article 7 to be reasonable and
necessary to protect the proprietary information of Employer. Nevertheless, if
any of the aforesaid restrictions are found by a court having jurisdiction to be
unreasonable, or overly broad as to geographic area or time, or otherwise
unenforceable, the parties intend for the restrictions therein set forth to be
modified by such courts so as to be reasonable and enforceable and, as so
modified by the court, to be fully enforced.

ARTICLE 8. MISCELLANEOUS:

8.1 For purposes of this Agreement the terms "affiliates" or "affiliated"
means an entity who directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common is under common control with
Enron or Employer.

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8.3 For purposes of this Agreement, notices and all other communications
provided for herein shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by United States registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:

If to Employer:

Azurix Corp.
1400 Smith Street
Houston, Texas 77002
Attention: Corporate Secretary

If to Employee, to the address shown on the first page hereof.

Either Employer or Employee may furnish a change of address to the other in
writing in accordance herewith, except that notices of changes of address shall
be effective only upon receipt.

8.4 This Agreement shall be governed in all respects by the laws of the
State of Texas, excluding any conflict-of-law rule or principle that might refer
the construction of the Agreement to the laws of another State or country.

8.6 If a dispute arises out of or related to this Agreement, other than a
dispute regarding Employee's obligations under Article 6, or Article 7, and if
the dispute cannot be settled through

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direct discussions, then Employer and Employee agree to first endeavor to settle
the dispute in an amicable manner by mediation, before having recourse to any
other proceeding or forum.

8.7 Each of Employer and Employee is a citizen of the State of Texas.
Employer's principal place of business is in Houston, Harris County, Texas.
Employee resides in Harris County, Texas. This Agreement was negotiated and
signed in Houston, Texas. This Agreement shall be performed in Houston, Texas.
Any litigation that may be brought by either Employer or Employee involving the
enforcement of this Agreement or the rights, duties, or obligations of this
Agreement, shall be brought exclusively in the State or federal courts sitting
in Houston, Harris County, Texas. In the event that service of process cannot be
effected upon a party, each party hereby irrevocably appoints the Secretary of
State for the State of Texas as its or his agent for service of process to
receive the summons and other pleadings in connection with any such litigation.

8.8 It is a desire and intent of the parties that the terms, provisions,
covenants, and remedies contained in this Agreement shall be enforceable to the
fullest extent permitted by law. If any such term, provision, covenant, or
remedy of this Agreement or the application thereof to any person, association,
or entity or circumstances shall, to any extent, be construed to be invalid or
unenforceable in whole or in part, then such term, provision, covenant, or
remedy shall be construed in a manner so as to permit its enforceability under
the applicable law to the fullest extent permitted by law. In any case, the
remaining provisions of this Agreement or the application thereof to any person,
association, or entity or circumstances other than those to which they have been
held invalid or unenforceable, shall remain in full force and effect.

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8.10 There exist other agreements between Employer and Employee relating to
the employment relationship between them, e.g., the agreement with respect to
company policies contained in Employer's Conduct of Business Affairs booklet and
agreements with respect to benefit plans. This Agreement replaces and merges
previous agreements and discussions pertaining to the following subject matters
covered herein: the nature of Employee's employment relationship with Employer
and the term and termination of such relationship. This Agreement constitutes
the entire agreement of the parties with regard to such subject matters, and
contains all of the covenants, promises, representations, warranties, and
agreements between the parties with respect such subject matters. Each party to
this Agreement acknowledges that no representation, inducement, promise, or
agreement, oral or written, has been made by either party with respect to such
subject matters, which is not embodied herein, and that no agreement, statement,
or promise relating to the employment of Employee by Employer that is not
contained in this Agreement shall be valid or binding. Any modification of this
Agreement will be effective only if it is in writing and signed by each party
whose rights hereunder are affected thereby, provided that any such modification
must be authorized or approved by the Board of Directors of Employer.

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IN WITNESS WHEREOF, Employer and Employee have duly executed this Agreement
in multiple originals to be effective on the date first stated above.

AZURIX CORP.

By: /s/ REBECCA P. MARK
----------------------------
Name: Rebecca P. Mark
Title: Chairman
This 10th day of March, 1999

RODNEY L. GRAY

/s/ RODNEY L. GRAY
------------------------------
This 10th day of March, 1999

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EXHIBIT "A" TO
EXECUTIVE EMPLOYMENT AGREEMENT
BETWEEN AZURIX CORP. AND RODNEY L. GRAY

Employee Name: Rodney L. Gray

Term; February 16, 1999 through February 15, 2004

Position: Vice Chairman

Location: Houston, Texas

Reporting Relationship: Reports to Rebecca Mark, Chairman

Monthly Base Salary: Thirty-Five Thousand Eight Hundred Thirty-Three
and Thirty-Three Dollars ($35,833.33) per month

Bonus: Employee shall be eligible to participate in the
Enron Corp. Annual Incentive Plan ("Plan") or
any replacement plan of Employer. All bonuses
shall be paid in accordance with the terms and
provisions of the Plan, a portion of which may
be paid in cash and a portion of which may be
paid in stock options and/or restricted stock.
Employee's annual bonus target is 100% of
Employee's annual base salary, subject to both
Employer's performance and Employee's
performance.

Long-Term Incentive: Employee shall be eligible to participate in the
Azurix Corp. Stock Plan. Upon finalization of
the Plan, Employee shall receive a one million
share stock option grant with the stock option
strike price equal to the fair market value of
the Company. Employee shall vest 20% on each
grant date anniversary (5-year vesting).

AZURIX CORP.

By: /s/ REBECCA P. MARK
---------------------------
Name: Rebecca P. Mark
-------------------------
Title: Chairman
------------------------
This 10th day of March, 1999

RODNEY L. GRAY

/s/ RODNEY L. GRAY
------------------------------
This 10th day of March, 1999

<PAGE> 1
EXHIBIT 10.11

EXECUTIVE EMPLOYMENT AGREEMENT

This Employment Agreement ("Agreement"), including the attached Exhibit
"A," is entered into between ENRON CAPITAL & TRADE RESOURCES CORP., a Delaware
corporation and subsidiary of Enron Corp. ("Enron"), having offices at 1400
Smith Street, Houston, Texas 77002 ("Employer"), and AMANDA K. MARTIN, an
individual currently residing in Houston, Texas ("Employee"), to be effective as
of January 1, 1998 (the "Effective Date").

WITNESSETH:

WHEREAS, Employer is desirous of employing Employee pursuant to the
terms and conditions and for the consideration set forth in this Agreement, and
Employee is desirous of entering the employ of Employer pursuant to such terms
and conditions and for such consideration.

NOW, THEREFORE, for and in consideration of the mutual promises,
covenants, and obligations contained herein, Employer and Employee agree as
follows:

ARTICLE 1: EMPLOYMENT AND DUTIES:

1.2 Employee initially shall be employed in the position set forth on
Exhibit A. Employer may subsequently assign Employee to a different position
with duties, responsibilities, and reporting relationships that are reasonably
equivalent to the position described on Exhibit "A." Moreover, Employer may
assign this Agreement and Employee's employment to Enron or any affiliates of
Enron; provided, however, that Employer will not transfer Employee to a position
outside of Houston, Texas without Employee's consent. Employee agrees to serve
in the assigned position and to perform diligently and to the best of Employee's
abilities the duties and services appertaining to such position as determined by
Employer, as well as such additional or different duties and services
appropriate to such position which Employee from time to time may be reasonably
directed to perform by Employer. Employee shall at all times comply with and be
subject to such policies and procedures as Employer may establish from time to
time.

1.3 Employee shall, during the period of Employee's employment by
Employer, devote Employee's full business time, energy, and best efforts to the
business and affairs of Employer. Employee may not engage, directly or
indirectly, in any other business, investment, or activity that interferes with
Employee's performance of Employee's duties hereunder, is contrary to the
interests of Employer or Enron, or requires any significant portion of
Employee's business time. Nothing in this paragraph 1.3 should prohibit Employee
from serving in positions or on Boards that benefit Employer within the energy
industry. Nor is Employee prohibited from providing service and/or serving as a
Board member for non-profit and/or charitable organizations.

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<PAGE> 2

1.4 In connection with Employee's employment by Employer, Employer
shall provide Employee access to such confidential information pertaining to the
business and services of Employer as is appropriate for Employee's employment
responsibilities. Employer also shall provide to Employee the opportunity to
develop business relationships with those of Employer's clients and potential
clients that are appropriate for Employee's employment responsibilities.

1.7 Employee may be asked from time to time by Employer or Enron to
serve as a director, officer, or employee of an affiliate or joint venture of
Enron. Employer and Employee acknowledge that from time to time the best
interests of such affiliate or joint venture may

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<PAGE> 3

arguably diverge from the best interests of Employer and Enron and thus agree
that, notwithstanding any provision of this Agreement to the contrary,
Employee's proper discharge of her duties as a director, officer, or employee,
as applicable, of such affiliate or joint venture shall not, in and of itself,
constitute a breach of any provision of this Agreement or a cause for
termination under Section 3.1(a).

1.8 Employee acknowledges that the terms and conditions of this
Agreement constitute confidential information. Employee shall not disclose this
confidential information to anyone other than Employee's attorneys, tax
advisors, or as required by law. Employee acknowledges and understands that
disclosure of the terms of this Agreement constitutes a material breach of this
Agreement and could subject Employee to disciplinary action, including without
limitation, termination of employment.

ARTICLE 2: COMPENSATION AND BENEFITS:

2.1 Employee's monthly base salary during the Term shall be not less
than the amount set forth under the heading "Monthly Base Salary" on Exhibit A,
subject to increase at the sole discretion of the Employer, which shall be paid
in semimonthly installments in accordance with Employer's standard payroll
practice. On an annual basis, Employer will review Employee's monthly base
salary for purposes of determining the amount of any increase and eligibility
for bonuses or participation in any compensation plan. The annual review and
subsequent compensation and bonus decision will be based on Employee's
performance and comparisons to salaries and bonuses of other similarly-situated
employees of Employer performing in a reasonably equivalent capacity. Any
calculation to be made under this Agreement with respect to Employee's Monthly
Base Salary shall be made using the then current Monthly Base Salary in effect
at the time of the event for which such calculation is made.

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<PAGE> 4

instead constitute an unfunded and unsecured promise to pay money in the future
exclusively from the general assets of Employer.

ARTICLE 3: TERMINATION PRIOR TO EXPIRATION OF TERM AND EFFECTS OF SUCH
TERMINATION:

a. For "cause" upon the good faith determination by the
Employer's management committee (or, if there is no management
committee, the highest applicable level of management) of Employer that
"cause" exists for the termination of the employment relationship. As
used in this Section 3.1.a, the term "cause" shall mean (i) Employee's
gross negligence or willful misconduct in the performance of the duties
and services required of Employee pursuant to this Agreement; (ii)
Employee's final conviction of a felony; (iii) Employee's involvement
in a conflict of interest as referenced in Sections 1.5-1.6 for which
Employer makes a determination to terminate the employment of Employee
which remains uncorrected for thirty (30) days following written notice
to Employee by Employer; or (iv) Employee's material breach of any
material provision of this Agreement which remains uncorrected for
thirty (30) days following written notice to Employee by Employer of
such breach. It is expressly acknowledged and agreed that the decision
as to whether "cause" exists for termination of the employment
relationship by Employer is delegated to the management committee (or,
if there is no management committee, the highest applicable level of
management) of Employer for determination;

b. for any other reason whatsoever, including termination
without cause, in the sole discretion of the management committee (or,
if there is no management committee, the highest applicable level of
management) of Employer;

c. upon Employee's death; or

d. upon Employee's becoming disabled so as to entitle Employee
to benefits under Enron's long-term disability plan or, if Employee is
not eligible to participate in such plan, then Employee is permanently
and totally unable to perform Employee's duties for Employer as a
result of any medically determinable physical or mental impairment as
supported by a written medical opinion to the foregoing effect by a
physician selected by Employer.

The termination of Employee's employment by Employer prior to the expiration of
the Term shall constitute a "Termination for Cause" if made pursuant to Section
3.1.a; the effect of such

-4-
<PAGE> 5

termination is specified in Section 3.4. The termination of Employee's
employment by Employer prior to the expiration of the Term shall constitute an
"Involuntary Termination" if made pursuant to Section 3.1.b; the effect of such
termination is specified in Section 3.5. The effect of the employment
relationship being terminated pursuant to Section 3.1.c as a result of
Employee's death is specified in Section 3.6. The effect of the employment
relationship being terminated pursuant to Section 3.1.d as a result of the
Employee becoming incapacitated is specified in Section 3.7.

3.2 Notwithstanding any other provisions of this Agreement except
Section 7.6, Employee shall have the right to terminate the employment
relationship under this Agreement at any time prior to the expiration of the
Term of employment for any of the following reasons:

a. a material breach by Employer of any material provision of
this Agreement which remains uncorrected for 30 days following written
notice of such breach by Employee to Employer; or

b. for any other reason whatsoever, in the sole discretion of
Employee.

The termination of Employee's employment by Employee prior to the expiration of
the Term shall constitute an "Involuntary Termination" if made pursuant to
Section 3.2.a; the effect of such termination is specified in Section 3.5. The
termination of Employee's employment by Employee prior to the expiration of the
Term shall constitute a "Voluntary Termination" if made pursuant to Section
3.2.b; the effect of such termination is specified in Section 3.3.

3.3 Upon a "Voluntary Termination" of the employment relationship by
Employee prior to expiration of the Term, all future compensation described on
Exhibit "A" to which Employee is entitled and all future benefits for which
Employee is eligible, with the exception of vested benefits and/or rights under
other Enron benefit, incentive, and/or compensation plans, as well as any and
all statutory rights and benefits, shall cease and terminate as of the date of
termination. Employee shall be entitled to pro rata salary through the date of
such termination, but Employee shall not be entitled to any individual bonuses
or individual incentive compensation not yet paid at the date of such
termination.

3.4 If Employee's employment hereunder shall be terminated by Employer
for Cause prior to expiration of the Term, all future compensation described on
Exhibit "A" to which Employee is entitled and all future benefits for which
Employee is eligible, with the exception of vested benefits and/or rights under
other Enron benefit incentive, and/or compensation plans, as well as any and all
statutory rights and benefits, shall cease and terminate as of the date of
termination. Employee shall be entitled to pro rata salary through the date of
such termination, but Employee shall not be entitled to any individual bonuses
or individual incentive compensation not yet paid at the date of such
termination.

3.5 Upon an Involuntary Termination of the employment relationship by
either Employer or Employee prior to expiration of the Term, Employee shall be
entitled, in consideration of Employee's continuing obligations hereunder after
such termination (including, without limitation, Employee's non-competition
obligations), to receive the compensation

-5-
<PAGE> 6

specified in Section 2.1, as well as the unpaid Retention Bonuses described on
Exhibit "A," as if Employee's employment (which shall cease on the date of such
Involuntary Termination) had continued for the full Term of this Agreement. Upon
an Involuntary Termination, Employee also will be entitled to all vested
benefits and rights under other Enron benefits, incentive, and/or compensation
plans to which Employee may be entitled through her termination and pursuant to
plan documents. In the event of Involuntary Termination, the compensation
specified in Section 2.1 that will be paid to Employee will be paid on a
semi-monthly basis; the unpaid Retention Bonuses described in Exhibit A will be
paid on the dates noted on Exhibit A. Employee shall not be under any duty or
obligation to seek or accept other employment following Involuntary Termination
and the amounts due Employee hereunder shall not be reduced or suspended if
Employee accepts subsequent employment. Employee's rights under this Section 3.5
are Employee's sole and exclusive rights against Employer, Enron, or their
affiliates, and Employer's sole and exclusive liability to Employee under this
Agreement, in contract, tort, or otherwise, for any Involuntary Termination of
the employment relationship. Employee covenants not to sue or lodge any claim,
demand or cause of action against Employer for any sums for Involuntary
Termination other than those sums specified in this Section 3.5. If Employee
breaches this covenant, Employer shall be entitled to recover from Employee all
sums expended by Employer (including costs and attorneys fees) in connection
with such suit, claim, demand or cause of action.

3.6 Upon termination of the employment relationship as a result of
Employee's death, Employee's heirs, administrators, or legatees shall be
entitled to Employee's pro rata salary through the date of such termination and
all vested benefits and rights under other Enron benefits, incentive, and/or
compensation plan, as well as the unpaid Retention Bonuses described on Exhibit
"A," but Employee's heirs, administrators, or legatees shall not be entitled to
any individual bonuses or individual incentive compensation not yet paid to
Employee at the date of such termination.

3.7 Upon termination of the employment relationship as a result of
Employee's incapacity, Employee shall be entitled to his or her pro rata salary
through the date of such termination and all vested benefits and rights under
other Enron benefits, incentive, and/or compensation plan, as well as the unpaid
Retention Bonuses described on Exhibit "A," but Employee shall not be entitled
to any individual bonuses or individual incentive compensation not yet paid to
Employee at the date of such termination.

3.8 In all cases, the compensation and benefits payable to Employee
under this Agreement upon termination of the employment relationship shall be
offset against any amounts to which Employee may otherwise be entitled under any
and all benefit plans and policies of Employer, Enron, or its affiliates.
Employee is eligible for benefits under Employer's severance plans, if
applicable.

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<PAGE> 7

ARTICLE 4: CONTINUATION OF EMPLOYMENT BEYOND TERM;
TERMINATION AND EFFECTS OF TERMINATION:

ARTICLE 5: OWNERSHIP AND PROTECTION OF INFORMATION; COPYRIGHTS:

5.1 All information, ideas, concepts, improvements, discoveries, and
inventions, whether patentable or not, which are conceived, made, developed or
acquired by Employee, individually or in conjunction with others, during
Employee's employment by Employer (whether during business hours or otherwise
and whether on Employer's premises or otherwise) which relate to Employer's
business, products or services (including, without limitation, all such
information relating to corporate opportunities, research, financial and sales
data, pricing and trading terms, evaluations, opinions, interpretations,
acquisition prospects, the identity of customers or their requirements, the
identity of key contacts within the customer's organizations or within the
organization of acquisition prospects, or marketing and merchandising
techniques, prospective names, and marks) shall be disclosed to Employer and are
and shall be the sole and exclusive property of Employer. Moreover, all
drawings, memoranda, notes, records, files, correspondence, drawings, manuals,
models, specifications, computer programs, maps and all other writings or
materials of any type embodying any of such information, ideas, concepts,
improvements, discoveries, and inventions are and shall be the sole and
exclusive property of Employer.

5.2 Employee acknowledges that the business of Employer, Enron, and
their affiliates is highly competitive and that their strategies, methods,
books, records, and documents, their technical information concerning their
products, equipment, services, and processes, procurement procedures and pricing
techniques, the names of and other information (such as credit and financial
data) concerning their customers, investors and business affiliates, all
comprise confidential business information and trade secrets which are valuable,
special, and unique assets which Employer, Enron, or their affiliates use in
their business to obtain a competitive advantage over their competitors.
Employee further acknowledges that protection of such confidential business
information and trade secrets against unauthorized disclosure and use is of
critical importance to Employer, Enron, and their affiliates in maintaining
their competitive position. Employee hereby agrees that Employee will not, at
any time during or after his or her employment by Employer, make any
unauthorized disclosure of any confidential business information or trade
secrets of Employer, Enron, or their affiliates, or make any use thereof,

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<PAGE> 8

except in the carrying out of his or her employment responsibilities hereunder.
Enron and its affiliates shall be third party beneficiaries of Employee's
obligations under this Section. As a result of Employee's employment by
Employer, Employee may also from time to time have access to, or knowledge of,
confidential business information or trade secrets of third parties, such as
actual and potential customers, suppliers, partners, joint venturers, investors,
financing sources and the like, of Employer, Enron, and their affiliates.
Employee also agrees to preserve and protect the confidentiality of such third
party confidential information and trade secrets to the same extent, and on the
same basis, as Employer's confidential business information and trade secrets.
Employee acknowledges that money damages would not be sufficient remedy for any
breach of this Article 5 by Employee, and Employer shall be entitled to enforce
the provisions of this Article 5 by terminating any payments then owing to
Employee under this Agreement and/or to specific performance and injunctive
relief as remedies for such breach or any threatened breach. Such remedies shall
not be deemed the exclusive remedies for a breach of this Article 5, but shall
be in addition to all remedies available at law or in equity to Employer,
including the recovery of damages from Employee and his or her agents involved
in such breach.

5.3 All written materials, records, and other documents made by, or
coming into the possession of, Employee during the period of Employee's
employment by Employer which contain or disclose confidential business
information or trade secrets of Employer, Enron, or their affiliates shall be
and remain the property of Employer, Enron, or their affiliates, as the case may
be. Upon termination of Employee's employment by Employer, for any reason,
Employee promptly shall deliver the same, and all copies thereof, to Employer.

5.4 If, during Employee's employment by Employer, Employee creates any
original work of authorship fixed in any tangible medium of expression which is
the subject matter of copyright (such as videotapes, written presentations on
acquisitions, computer programs, drawings, maps, architectural renditions,
models, manuals, brochures, or the like) relating to Employer's business,
products, or services, whether such work is created solely by Employee or
jointly with others (whether during business hours or otherwise and whether on
Employer's premises or otherwise), Employee shall disclose such work to
Employer. Employer shall be deemed the author of such work if the work is
prepared by Employee in the scope of his or her employment; or, if the work is
not prepared by Employee within the scope of his or her employment but is
specially ordered by Employer as a contribution to a collective work, as a part
of a motion picture or other audio-visual work, as a translation, as a
supplementary work, as a compilation, or as an instructional text, then the work
shall be considered to be work made for hire and Employer shall be the author of
the work. If such work is neither prepared by the Employee within the scope of
his or her employment nor a work specially ordered and is deemed to be a work
made for hire, then Employee hereby agrees to assign, and by these presents does
assign, to Employer all of Employee's worldwide right, title, and interest in
and to such work and all rights of copyright therein.

5.5 Both during the period of Employee's employment by Employer and
thereafter, Employee shall assist Employer and its nominee, at any time, in the
protection of Employer's worldwide right, title, and interest in and to
information, ideas, concepts, improvements, discoveries, and inventions, and its
copyrighted works, including without limitation, the

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<PAGE> 9

execution of all formal assignment documents requested by Employer or its
nominee and the execution of all lawful oaths and applications for applications
for patents and registration of copyright in the United States and foreign
countries.

ARTICLE 6: POST-EMPLOYMENT NON-COMPETITION OBLIGATIONS:

6.1 Employer shall provide Employee with Confidential Information as
described above. To protect the confidential business information and trade
secrets described in Section 5 above, and as an additional incentive for
Employer to enter into this Agreement, Employer and Employee agree to the
non-competition provisions of this Article. Employee agrees that during the
period of Employee's non-competition obligations thereunder, Employee will not,
directly or indirectly, for Employee or for others, in any State of the United
States in which Employer is qualified to do business or in any foreign country
in which Employer has an office as of the date of termination of the employment
relationship:

a. engage in any business engaged by Employer, Enron, or their
affiliates during the Term including, but not limited to, buying,
selling, trading, structuring or execution of transactions in paper,
pulp, packaging, metals, interest rates, currencies, securities, or
other commodities (including, without limitation, energy commodities),
or any futures, derivatives, or equities related to any of the
foregoing, whether at wholesale or retail, or the development of
systems, information technology, accounting or risk management with
respect to any of the foregoing;

b. render advice or services to, or otherwise assist, any
other person, association, or entity who is engaged, directly or
indirectly, in any business engaged by Employer, Enron, or their
affiliates during the Term, including, but not limited to, buying,
selling, trading, structuring or execution of transactions in paper,
pulp, packaging, metals, interest rates, currencies, securities, or
other commodities (including, without limitation, energy commodities)
or any futures, derivatives, or equities related to any of the
foregoing, whether at wholesale or retail, or the development of
systems, information technology, accounting or risk management with
respect to any of the foregoing; or

c. engage in any other business in which Employer, Enron, or
their affiliates have engaged during the Term, including, but not
limited to, acquiring or disposing of assets or equity investments or
providing or raising capital, through loans, equity, joint ventures,
partnerships, working interests, production payments or similar
arrangements that have been or will be pursued by Employer.

d. render advice or services to, or otherwise assist, any
other person, association or entity, in any other business in which
Employer, Enron, or their affiliates have engaged during the Term,
including, but not limited to, the business of procuring or delivering
paper, pulp, packaging, metals, interest rates, currencies, securities,
or other commodities (including, without limitation, energy
commodities) or providing or raising

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<PAGE> 10

capital, through loans, equity, joint ventures, partnerships, working
interests, production payments or similar arrangements;

The non-competition obligations in Section 6.1a., b., c., and d., shall extend
throughout the Term of this Agreement and for a period of six (6) months after
the expiration of the Term of this Agreement; provided, however, that in the
event that Employee is involuntarily terminated pursuant to Section 3.1b. or
3.2a, Employee's obligations under this Section 6.1 shall continue for six (6)
months after the date of such Involuntarily Termination. If, after that
six-month period has elapsed, Employee commences employment that violates
Section 6.1a., b., c., or d., then Employer's obligation to pay Employee under
Section 3.5 shall cease as of the first day of such employment by Employee.

6.2 Employee agrees that she will not call on, service, and/or solicit
competing business on behalf of another entity from customers of Employer,
Enron, or their affiliates for the Term of this Agreement and for a period of
twelve (12) months thereafter.

6.3 During the Term of this Agreement, and for a period of twelve (12)
months thereafter, Employee will not, either directly or indirectly, call on,
solicit or induce any other employee of Employer, Enron, or their affiliates to
terminate their employment and will not assist in the hiring of any such
employee by any other person or entity not affiliated with Employer, Enron, or
their affiliates.

6.4 Employee understands that the foregoing restrictions may limit his
or her ability to engage in certain businesses in the United States and/or any
country in which Employer is doing business during the period provided for
above, but acknowledges that Employer has a need to protect the confidential
business information and trade secrets of Employer. Employee also acknowledges
that she will receive sufficiently high remuneration and other benefits (e.g.,
the right to receive compensation under Section 3.5 for the remainder of the
Term upon Involuntary Termination) under this Agreement to justify such
restriction. Employee acknowledges that money damages would not be sufficient
remedy for any breach of this Article 6 by Employee, and that Employer shall be
entitled to enforce the provisions of this Article 6 by terminating any payments
then owing to Employee under this Agreement and/or to specific performance and
injunctive relief as remedies for such breach or any threatened breach. Such
remedies shall not be deemed the exclusive remedies for a breach of this Article
6, but shall be in addition to all remedies available at law or in equity to
Employer, including, without limitation, the recovery of damages from Employee
and his or her agents involved in such breach.

6.5 It is expressly understood and agreed that Employer and Employee
consider the restrictions contained in this Article 6 to be reasonable and
necessary to protect the proprietary information of Employer. Nevertheless, if
any of the aforesaid restrictions are found by a court having jurisdiction to be
unreasonable, or overly broad as to geographic area or time, or otherwise
unenforceable, the parties intend for the restrictions therein set forth to be
modified by such courts so as to be reasonable and enforceable and, as so
modified by the court, to be fully enforced.

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<PAGE> 11

6.6 Nothing in Article 6 shall be construed to prohibit Employee from
engaging in the private practice of law during the term of the restrictive
covenants described herein, provided, however, that Employee will not accept a
position as an in-house lawyer with a competitor of ECT, Enron, or its
affiliates, and that Employee will not use the practice of law as a subterfuge
to circumvent the requirements of Article 6.

6.7 Nothing in Article 6 shall be construed to prohibit Employee from
engaging in personal, noncompetitive transactions such as the purchase and/or
sale of her home or the management of her personal investments so long as the
transactions are not used as a subterfuge to circumvent the requirements of
Article 6.

ARTICLE 7: MISCELLANEOUS:

7.1 For purposes of this Agreement the terms "affiliates" or
"affiliated" means an entity who directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with
Enron or Employer.

7.2 Employee shall refrain, both during the employment relationship and
after the employment relationship terminates, from publishing any oral or
written statements about Employer, Enron, any of their respective subsidiaries
or affiliates, or any of such entities' officers, employees, agents or
representatives that are slanderous, libelous, or defamatory; or that disclose
private or confidential information about Employer, Enron, any of their
respective subsidiaries or affiliates, or any of such entities' business
affairs, officers, employees, agents, or representatives; or that constitute an
intrusion into the seclusion or private lives of Employer, Enron, any of their
respective subsidiaries or affiliates, or such entities' officers, employees,
agents, or representatives; or that give rise to unreasonable publicity about
the private lives of Employer, Enron, any of their respective subsidiaries or
affiliates, or any of such entities' officers, employees, agents, or
representatives; or that place Employer, Enron, any of their respective
subsidiaries or affiliates, or any of such entities' or its officers, employees,
agents, or representatives in a false light before the public; or that
constitute a misappropriation of the name or likeness of Employer, Enron, any of
their respective subsidiaries or affiliates, or any of such entities' or its
officers, employees, agents, or representatives. A violation or threatened
violation of this prohibition may be enjoined by the courts. The rights afforded
the Enron entities and affiliates under this provision are in addition to any
and all rights and remedies otherwise afforded by law.

7.3 For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when personally delivered or when mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows: (a) if to Employer, to: Enron Capital & Trade Resources
Corp.,1400 Smith Street, Houston, Texas 77002, Attention: Chief Executive
Officer; with a copy to: Enron Corp., 1400 Smith Street, Houston, Texas 77002,
Attention: Corporate Secretary; or (b) if to Employee, to the address Employee
most recently provided to the Employer. Either Employer or Employee may furnish
a change of address to the other in writing in accordance herewith, except that
notices of changes of address shall be effective only upon receipt.

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<PAGE> 12

7.4 This Agreement shall be governed in all respects by the laws of the
State of Texas, excluding any conflict-of-law rule or principle that might refer
the construction of the Agreement to the laws of another State or country.

7.5 No failure by either party hereto at any time to give notice of any
breach by the other party of, or to require compliance with, any condition or
provision of this Agreement shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.

7.6 If a dispute arises out of or related to this Agreement, other than
a dispute regarding Employee's obligations under Sections 5 or 6, and if the
dispute cannot be settled through direct discussions, then Employer and Employee
agree to first endeavor to settle the dispute in an amicable manner by
mediation, before having recourse to any other proceeding or forum.

7.7 Each of Employer and Employee is a citizen of the State of Texas.
Employer's principal place of business is in Houston, Harris County, Texas.
Employee resides in Harris County, Texas. This Agreement was negotiated and
signed in Houston, Texas. This Agreement shall be performed in Houston, Texas.
Any litigation that may be brought by either Employer or Employee involving the
enforcement of this Agreement or the rights, duties, or obligations of this
Agreement, shall be brought exclusively in the State or federal courts sitting
in Houston, Harris County, Texas. In the event that service of process cannot be
effected upon a party, each party hereby irrevocably appoints the Secretary of
State for the State of Texas as its or his agent for service of process to
receive the summons and other pleadings in connection with any such litigation.

7.8 It is a desire and intent of the parties that the terms,
provisions, covenants, and remedies contained in this Agreement shall be
enforceable to the fullest extent permitted by law. If any such term, provision,
covenant, or remedy of this Agreement or the application thereof to any person,
association, or entity or circumstances shall, to any extent, be construed to be
invalid or unenforceable in whole or in part, then such term, provision,
covenant, or remedy shall be construed in a manner so as to permit its
enforceability under the applicable law to the fullest extent permitted by law.
In any case, the remaining provisions of this Agreement or the application
thereof to any person, association, or entity or circumstances other than those
to which they have been held invalid or unenforceable, shall remain in full
force and effect.

7.9 This Agreement shall be binding upon and inure to the benefit of
Employer and any other person, association, or entity which may hereafter
acquire or succeed to all or substantially all of the business or assets of
Employer by any means whether direct or indirect, by purchase, merger,
consolidation, or otherwise. Employee's rights and obligations under Agreement
hereof are personal and such rights, benefits, and obligations of Employee shall
not be voluntarily or involuntarily assigned, alienated, or transferred, whether
by operation of law or otherwise, without the prior written consent of Employer.

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<PAGE> 13

7.10 There exist other agreements between Employer and Employee
relating to the employment relationship between them, e.g., the agreement with
respect to company policies contained in Employer's Conduct of Business Affairs
booklet and agreements with respect to benefit plans. This Agreement replaces
and merges previous agreements and discussions pertaining to the following
subject matters covered herein: the nature of Employee's employment relationship
with Employer and the term and termination of such relationship. This Agreement
does not replace benefit plans, incentive plans, long-term compensation plans,
or similar plans or programs, which are described and defined in related plan
documents. This Agreement constitutes the entire agreement of the parties with
regard to such subject matters, and contains all of the covenants, promises,
representations, warranties, and agreements between the parties with respect
such subject matters. Each party to this Agreement acknowledges that no
representation, inducement, promise, or agreement, oral or written, has been
made by either party with respect to such subject matters, which is not embodied
herein, and that no agreement, statement, or promise relating to the employment
of Employee by Employer that is not contained in this Agreement shall be valid
or binding. Any modification of this Agreement will be effective only if it is
in writing and signed by each party whose rights hereunder are affected thereby,
provided that any such modification must be authorized or approved by the Board
of Directors of Employer.

IN WITNESS WHEREOF, Employer and Employee have duly executed this
Agreement in multiple originals to be effective on the date first stated above.

ENRON CAPITAL & TRADE RESOURCES CORP.

By: /s/ KENNETH D. RICE
----------------------------------
Kenneth D. Rice
Chairman and Chief Executive Officer
This 9th day of June, 1998

By: /s/JEFFREY K. SKILLING
----------------------------------
Jeffrey K. Skilling
President and Chief Operating Officer
This 9th day of June, 1998

AMANDA K. MARTIN

/s/ AMANDA K. MARTIN
---------------------------------------
This 1st day of June, 1998

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<PAGE> 14

EXHIBIT "A" TO
EXECUTIVE EMPLOYMENT AGREEMENT
BETWEEN ENRON CAPITAL & TRADE RESOURCES CORP.
AND AMANDA K. MARTIN

Employee Name: Amanda K. Martin

Term: January 1, 1998 through December 31, 2000

Position: President - Energy & Finance Services

Location: Houston

Monthly Base Salary: Employee's monthly base salary shall be
Twenty Seven Thousand Eighty-Three and
34/100 Dollars ($27,083.34) per month.

Bonus: Employee shall be eligible to participate in
the Enron Corp. Annual Incentive Plan
("Plan") or any appropriate replacement
bonus plan of ECT. All bonuses shall be paid
in accordance with the terms and provisions
of the Plan, a portion of which may be paid
in cash and a portion of which may be paid
in stock options and/or restricted stock.

Signing Bonus: Employer shall pay Employee the sum of
$375,000.00 within the first regularly
scheduled payday following ten (10) business
days of the signing of this Agreement by
both parties.

Retention Bonus: On the first regularly scheduled payday
following January 1, 1999, Employer shall
pay Employee the sum of $200,000.00.

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<PAGE> 15

On the first regularly scheduled payday
following January 1, 2001, Employer shall
pay Employee the sum of $200,000.00.

ENRON CAPITAL & TRADE RESOURCES CORP.

By: /s/ KENNETH D. RICE
----------------------------------
Kenneth D. Rice
Chairman and Chief Executive Officer
This 9th day of June, 1998

By: /s/JEFFREY K. SKILLING
----------------------------------
Jeffrey K. Skilling
President and Chief Operating Officer
This 9th day of June, 1998

AMANDA K. MARTIN

/s/ AMANDA K. MARTIN
---------------------------------------
This 1st day of June, 1998

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<PAGE> 16

FIRST AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT

This Agreement, entered into on this 29th of October, 1998, and made
effective as of September 1, 1998, by and between ENRON CAPITAL & TRADE
RESOURCES CORP. an Oregon corporation ("Company") having its headquarters at
1400 Smith Street, Houston, Texas 77002, AZURIX CORP., a Delaware corporation
having its headquarters at 333 Clay Street, Houston, Texas 77002, and AMANDA K.
MARTIN ("Employee"), an individual residing in Houston, Texas, is an amendment
to that certain Executive Employment Agreement between the Company and Employee
entered into the 1st day of January 1, 1998, and made effective as of January 1,
1998 (the "Employment Agreement").

WHEREAS, the parties desire to amend the Employment Agreement to
provide for assignment of the Employment Agreement by Company to, and assumption
of the Employment Agreement by, Azurix Corp., and to make other amendments to
the Employment Agreement as provided herein;

NOW, THEREFORE, in consideration thereof and of the mutual covenants
contained herein, the parties agree as follows:

1. Effective September 1, 1998, the Employment Agreement is
assigned by Company to, and assumed by, Azurix Corp. Any reference to
the "Company" and/or "Employer" in the Employment Agreement shall mean
Azurix Corp. Employee consents to such assignment and assumption, and
releases Company from every obligation under the Employment Agreement.
Azurix Corp. assumes every obligation of Company under the Employment
Agreement.

2. Exhibit "A" to the Employment Agreement is hereby deleted
in its entirety and the attached Exhibit "A" is inserted in its
entirety.

3. Article 3, Section 3.5 is hereby deleted in its entirety
and the following language shall be inserted in its place:

"3.5 Upon an Involuntary Termination of the employment relationship by
either Employer or Employee prior to the expiration of the Term,
Employee shall be entitled, in consideration of Employee's continuing
obligations hereunder after such termination (including, without
limitation, Employee's non-competition obligations), to receive the
compensation specified in Section 2.1, as well as unpaid Bonuses
described on Exhibit "A", as if Employee's employment (which shall
cease on the date of such Involuntary Termination) had continued for
the full Term of this Agreement Upon an Involuntary Termination,
Employee shall also be entitled to all vested benefits and rights under
other Enron benefits, incentive, and/or compensation plans to which
Employee may be entitled through her termination and pursuant to plan
documents and all other benefits that Employee may be entitled to under
any other compensation plans. In the event of Involuntary Termination,
the compensation specified in Section 2.1 that will be paid to Employee
will be paid on a semi-monthly basis; the unpaid Bonuses described in
Exhibit

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<PAGE> 17

"A" will be paid annually and the amounts under the compensation plans
will be paid in accordance with the terms and provisions of the
respective compensation plans. Employee shall not be under any duty or
obligation to seek or accept other employment following Involuntary
Termination and the amounts due Employee hereunder shall not be reduced
or suspended if Employee accepts subsequent employment. Employee's
rights under this Section 3.5 are Employee's sole and exclusive rights
against Employer, Enron, or their affiliates, and Employer's sole and
exclusive liability to Employee under this Agreement, in contract,
tort, or otherwise, for any Involuntary Termination of the employment
relationship. Employee covenants not to sue or lodge any claim, demand
or cause of action against Employer for any sums for Involuntary
Termination other than those sums specified in this Section 3.5. If
Employee breaches this covenant, Employer shall be entitled to recover
from Employee all sums expended by Employer (including costs and
attorneys fees) in connection with such suit, claim, demand or cause of
action."

4. Article 3, Sections 3.6, 3.7, and 3.8 of the Employment
Agreement are deleted in its entirety and the following inserted in its
entirety:

"3.6 Upon termination of the employment relationship as a
result of Employee's death, Employee's heirs, administrators, or
legatees shall be entitled to Employee's pro rata salary through the
date of such termination, and all vested benefits and rights under
other Enron or Company benefits, incentive, and/or compensation plans,
as well as the unpaid pro rata Bonuses described on Exhibit "A" up to
the date of death.

3.7 Upon termination of the employment relationship as a
result of Employee's incapacity, Employee shall be entitled to his or
her pro rata salary through the date of such termination, and all
vested benefits and rights under other Enron or Company benefits,
incentive, and/or compensation plans, as well as the unpaid pro rata
Bonuses described on Exhibit "A" up to the date of incapacity.

3.8 In all cases, the compensation and benefits payable to
Employee under this Agreement upon termination of the employment
relationship shall be in addition to any amounts to which Employee may
otherwise be entitled under any and all benefit plans and programs of
Employer, Enron, or its affiliates; provided however, Employee shall
not be entitled to any benefits under Employer or Enron's severance
plans.

5. Article 6, Sections 6.1 and 6.2 of the Employment Agreement
are hereby deleted in its entirety and the following is inserted in its
entirety:

"6.1 Employer shall provide Employee with Confidential Information as
described above. To protect the confidential business information and
trade secrets described in Section 5 above, and as an additional
incentive for Employer to enter into this Agreement, Employer and
Employee agree to the non-competition provisions of this Article.
Employee agrees that during the period of Employee's non-competition
obligations thereunder, Employee will not, directly

-2-
<PAGE> 18

or indirectly for Employee or for others, in any State of the United
States in which Employer is qualified to do business or in any foreign
country in which Employer has an office as of the date of termination
of the employment relationship engage in any business engaged by
Employer, Enron, or their affiliates during the Term related to the
water business. The non-competition obligations in Section 6.1 shall
extend throughout the Term of this Agreement and for a period of six
(6) months after the expiration of this Agreement; provided, however,
that in the event Employee is involuntarily terminated pursuant to
Section 3.1b. or 3.2a, Employee's obligations under this Section 6.1
shall continue for six (6) months after the date of such Involuntary
Termination. If, after that six-month period has elapsed, Employee
commences employment that violates Section 6.1, then Employer's
obligation to pay Employee under Section 3.5 shall cease as of the
first day of such employment by Employee.

6.2 Employee agrees that she will not call on, service, and/or
solicit competing business on behalf of another entity from customers
of Employer, Enron, or their affiliates in the water business for the
Term of this Agreement and for a period of twelve (12) months
thereafter."

In Witness Whereof, the parties have duly executed this Agreement as of
the date first above written.

ENRON CAPITAL & TRADE RESOURCES CORP.

By: /s/ PEGGY B. MENCHACA
---------------------------------
Name: Peggy B. Menchaca
Title: Vice President and Secretary
This _____ day of ______________, 19__

-3-
<PAGE> 19

AZURIX CORP.

By: /s/ REBECCA P. MARK
-------------------------------
Name: Rebecca P. Mark
Title: Chairman
This 29th day of October, 1998

AMANDA K. MARTIN

/s/ AMANDA K. MARTIN
----------------------------------
This 29th day of October, 1998

-4-
<PAGE> 20

EXHIBIT "A" TO
EXECUTIVE EMPLOYMENT AGREEMENT
BETWEEN ENRON CAPITAL & RESOURCES CORP., AZURIX CORP.,
AND AMANDA K. MARTIN

Employee Name: Amanda K. Martin

Term: September 1, 1998 through August 31, 2003

Position: Executive Director and President of the Americas and
member of the Executive Committee primarily
accountable for all profit and loss aspects of the
development, implementation and operations of the
business in the Americas including, without
limitation, management of acquisitions, finance,
development and strategy.

Location: Houston, Texas

Reporting Relationship: Reports to Rebecca P. Mark, Chairman

Monthly Base Salary: Thirty Three Thousand Three Hundred Thirty-Three
Dollars and 33/100 Cents ($33,333.33) per month.

Bonus: Employee shall be eligible to participate in the
Enron Corp. Annual Incentive Plan ("Plan") or any
replacement plan of Employer. All bonuses shall be
paid in accordance with the terms and provisions of
the Plan, a portion of which may be paid in cash,
and a portion of which may be paid in stock options
and/or restricted stock. Employee's bonus for 1998
shall be $725,000.00. All bonuses paid thereafter
shall be based on performance but with reasonable
expectation of receiving between 100% and 200% of
annual base salary. Employee shall be eligible for a
pro rata bonus upon completion of the Term of this
Agreement.

Signing Bonus Employer shall pay Employee the sum of $350,000.00
as described below:

1. $150,000.00 shall be paid to Employee
within the first regularly scheduled payday
following ten (10) business days of the
signing of this Agreement; and

2. $200,000.00 shall be paid on
January 15, 1999.

-5-
<PAGE> 21

Long Term Incentives: Employee shall be eligible to participate in the
Azurix Corp. stock plan. Upon finalization of the
plan, Employee shall receive a grant based on the
initial valuation of the Company with a theoretical
5 year total value of 9 million dollars. The
theoretical value methodology shall be the same
methodology used for other executives of the
Employer participating in the plan. Employee shall
be vested 25% upon receipt of grant, effective
January 1, 1999 and 18.75% for each grant date
anniversary in accordance with the terms and
provisions of the plan. Employer in its sole
discretion may make additional grants during this 5
year period.

ENRON CAPITAL & TRADE RESOURCES CORP.

By: /s/ PEGGY B. MENCHACA
---------------------------------------
Name: Peggy B. Menchaca
Title: Vice President and Secretary
This _____ day of ______________, 19__

AZURIX CORP.

By: /s/ REBECCA P. MARK
---------------------------------------
Name: Rebecca P. Mark
Title: Chairman
This 29th day of October, 1998

AMANDA K. MARTIN

/s/ AMANDA K. MARTIN
-------------------------------------------
This 29th day of October, 1998

-6-
<PAGE> 22

SECOND AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT

This Agreement, entered into on this 15th of March, 1999, and made
effective as of February 1, 1999, by and between AZURIX CORP., a Delaware
corporation having its headquarters at 333 Clay Street, Houston, Texas 77002
("Employer") and AMANDA K. MARTIN ("Employee"), an individual residing in
Houston, Texas, is a second amendment to that certain Executive Employment
Agreement between the Employer and Employee entered into the 1st day of January
1, 1998, and made effective as of January 1, 1998 (the "Employment Agreement").

WHEREAS, the parties desire to amend the Employment Agreement as
provided herein;

NOW, THEREFORE, in consideration thereof and of the mutual covenants
contained herein, the parties agree as follows:

1. The description of Long Term Incentives described on
Exhibit "A" to the First Amendment to the Employment
Agreement is hereby deleted in its entirety and the
following language inserted in its entirety:

"Long Term Incentives: Employee shall be eligible to
participate in the Azurix
Corp. Stock Plan. Upon
finalization of the Plan,
Employee shall receive a one
million share stock option
grant with the stock option
strike price equal to the
fair market value of the
Company. Employee shall vest
25% on each grant date
anniversary (4-yr vesting).
Employer in its sole
discretion may make
additional grants during this
5-year period."

This Amendment is a Second Amendment to the Employment Agreement, and
the parties agree that all other terms, conditions and stipulations contained in
the Employment Agreement, and any amendments thereto, shall remain in full force
and effect and without any change or modification, except as provided herein.

-1-
<PAGE> 23

In Witness Whereof, the parties have duly executed this Agreement as of
the date first above written.

AZURIX CORP.

By: /s/ REBECCA P. MARK
---------------------------------
Name: Rebecca P. Mark
Title: Chairman
This 1st day of March, 1998

AMANDA K. MARTIN

/s/ AMANDA K. MARTIN
------------------------------------
This 1st day of March, 1998

-2-

<PAGE> 1
EXHIBIT 10.12

EXECUTIVE EMPLOYMENT AGREEMENT

This Employment Agreement ("Agreement"), including the attached Exhibit
"A," is entered into between Azurix Corp., a Delaware corporation, ("Employer")
and subsidiary of ENRON CORP., an Oregon corporation, having offices at 1400
Smith Street, Houston, Texas 77002 ("Enron"), and ALEX KULPECZ, an individual
currently residing at 2 Midgarth Close Oxshott, Surrey UNITED KINGDOM KT22 0JY
("Employee"), to be effective as of September 15, 1998 (the "Effective Date").

WITNESSETH:

WHEREAS, Employer is desirous of employing Employee pursuant to the
terms and conditions and for the consideration set forth in this Agreement, and
Employee is desirous of entering the employ of Employer pursuant to such terms
and conditions and for such consideration.

NOW, THEREFORE, for and in consideration of the mutual promises,
covenants, and obligations contained herein, Employer and Employee agree as
follows:

ARTICLE 1: EMPLOYMENT AND DUTIES:

1.2 Employee initially shall be employed in the position set forth on
Exhibit A. Employer may subsequently assign Employee to a different position or
modify Employee's duties and responsibilities. Moreover, Employer may assign
this Agreement and Employee's employment to Enron or any affiliates of Enron.
Employee agrees to serve in the assigned position and to perform diligently and
to the best of Employee's abilities the duties and services appertaining to such
position as determined by Employer, as well as such additional or different
duties and services appropriate to such position which Employee from time to
time may be reasonably directed to perform by Employer. Employee shall at all
times comply with and be subject to such policies and procedures as Employer may
establish from time to time.

<PAGE> 2

Employer also shall endeavor to provide to Employee the opportunity to develop
business relationships with those of Employer's clients and potential clients
that are appropriate for Employee's employment responsibilities.

1.5 Employee acknowledges and agrees that, at all times during the
employment relationship Employee owes fiduciary duties to Employer, including
but not limited to the fiduciary duties of the highest loyalty, fidelity and
allegiance to act at all times in the best interests of the Employer, to make
full disclosure to Employer of all information that pertains to Employer's
business and interests, to do no act which would injure Employer's business, its
interests, or its reputation, and to refrain from using for Employee's own
benefit or for the benefit of others any information or opportunities pertaining
to Employer's business or interests that are entrusted to Employee or that he
learned while employed by Employer. Employee acknowledges and agrees that upon
termination of the employment relationship, Employee shall continue to refrain
from using for his own benefit or the benefit of others any information or
opportunities pertaining to Employer's business or interests that were entrusted
to Employee during the employment relationship or that he learned while employed
by Employer. Employee agrees that while employed by Employer and thereafter he
shall not knowingly take any action which interferes with the internal
relationships between Employer and its employees or representatives or
interferes with the external relationships between Employer and third parties.

1.7 Employee understands and acknowledges that the terms and
conditions of this Agreement constitute confidential information. Employee shall
keep confidential the terms of this Agreement and shall not disclose this
confidential information to anyone other than Employee's attorneys, tax
advisors, or as required by law. Employee acknowledges and understands that
disclosure of the terms of this Agreement constitutes a material breach of this
Agreement and could subject Employee to disciplinary action, including without
limitation, termination of employment.

<PAGE> 3

ARTICLE 2: COMPENSATION AND BENEFITS:

2.5 In addition to all other compensation payable under this
Agreement to Employee, Employer shall also cause Employee to receive:

(i) an option to purchase 100,000 shares of Enron Corp. Common
Stock. The grant shall be effective and the grant price shall
be equal to the closing price of Enron Corp. Common Stock on
the date on which Employee commences employment under this
Agreement; the grant shall have an exercise term of ten years
from date of grant and shall be evidenced by an award
agreement in the form attached as Exhibit "B"; such option to
vest at the rate of 33 1/3% annually beginning on the first

<PAGE> 4

anniversary of the date of grant; if Employee and Employer
mutually agree, this option may be converted in whole or in
part into an option to purchase a comparable value of stock in
Employer;

(ii) a lump sum signing bonus of $250,000.00, fully earned by
Employee upon payment thereof, payable in full on a fully
tax-protected basis for both U.S. and U.K. purposes on or
before the expiration of 30 days following the date on which
Employee commences employment under this Agreement;

(iii) an option to purchase 30,000 shares of Enron Corp. Common
Stock. The grant shall be effective and the grant price shall
be equal to the closing price of Enron Corp. Common Stock on
the date on which Employee commences employment under this
Agreement; such option to be 100% vested upon date of grant;

(iv) a performance bonus under the Enron Corp. Annual Incentive
Bonus Plan (or, a replacement Employer performance bonus
plan), with a target bonus for 1999 and future years equal to
100% of Monthly Base Salary multiplied times 12 ("Annual Base
Salary"). For 1998, Employee's target bonus shall be 50% of
his Annual Base Salary if employment begins in September 1998,
based upon Enron Corp.'s achievement of net income relative to
its target and Employee's achievement of his Performance
Objectives; for 1999 and future years, participation shall be
based on Employer's achievement of net income and/or other
financial measures relative to pre-established targets and
Employee's achievement of his Performance Objectives;
provided, however, Employer's Chairman and Employee shall
negotiate specific Employer and Employee performance targets
and specific relationships of Employee's bonuses to the
Employer's and Employee's actual performance with respect to
such targets; and

(v) the other items of compensation listed on Exhibit "A".

ARTICLE 3: TERMINATION PRIOR TO EXPIRATION OF TERM AND EFFECTS OF SUCH
TERMINATION:

(i) For "cause" upon the determination by the Employer's
management committee (or, if there is no management committee,
the highest applicable level of management) that "cause"
exists for the termination of the employment relationship. As
used in this Section 3.1(i), the term "cause" shall mean [a]
Employee's gross negligence or willful misconduct in the
performance of the duties and services required of Employee
pursuant to this Agreement; [b] Employee has been convicted of
a felony; [c] Employee has willfully refused without proper
legal reason to perform the duties and responsibilities
required of

<PAGE> 5

Employee under this Agreement which remains uncorrected for
thirty (30) days following written notice to Employee by
Employer of such breach; [d] Employee's involvement in a
conflict of interest as referenced in Section 1.6 for which
Employer makes a determination to terminate the employment of
Employee which remains uncorrected for thirty (30) days
following written notice to Employee by Employer of such
breach; [e] Employee has willfully engaged in conduct that
Employee knows or should know is materially injurious to
Employer, Enron, or any of their respective subsidiaries; [f]
Employee's material breach of any material provision of this
Agreement or corporate code or policy which remains
uncorrected for thirty (30) days following written notice to
Employee by Employer of such breach; or [g] Employee violates
the Foreign Corrupt Practices Act or other applicable United
States law as proscribed by Section 5.1. It is expressly
acknowledged and agreed that the decision as to whether
"cause" exists for termination of the employment relationship
by Employer is delegated to the Employer's management
committee (or, if there is no management committee, the
highest applicable level of Employer's management) for
determination. If Employee disagrees with the decision reached
by Employer's management committee (or, if there is no
management committee, the highest applicable level of
Employer's management), the dispute will be limited to whether
Employer's management committee (or, if there is no Enron
management committee, the highest applicable level of
Employer's management) reached its decision in good faith;

(ii) [a] for any other reason whatsoever, with or without cause, in
the sole discretion of the management committee (or, if there
is no management committee, the highest applicable level of
management) of Employer; or [b] Employee's failure to meet his
material specific Performance Objectives as established from
time to time by Employer, as reasonably determined by the
Chairman of Employer;

(iii) upon Employee's death; or

(iv) upon Employee's becoming disabled so as to entitle Employee to
benefits under Enron's long-term disability plan or, if
Employee is not eligible to participate in such plan, then
Employee is permanently and totally unable to perform
Employee's duties for Employer as a result of any medically
determinable physical or mental impairment as supported by a
written medical opinion to the foregoing effect by a physician
selected by Employer.

<PAGE> 6

(i) a material breach by Employer of any material provision of
this Agreement which remains uncorrected for 30 days following
written notice of such breach by Employee to Employer;

(ii) within sixty (60) days of and in connection with or based upon
any of the following:

[a] a transfer of assignment from Employee's present
position to a position which involves an overall
reduction in the nature or scope of Employee's duties
and responsibilities which is not performance
related;

[b] a relocation of Employee from the city in which
Employee was serving at the time of such change to a
place which is more than 50 miles away from such
location;

[c] sale or other disposition of Employer by Enron Corp.
or the sale or other disposition of a material amount
of Employer's assets, such that Employer is no longer
affiliated with Enron Corp., except when Employer
becomes a separate publicly traded company;

[d] the decision by Enron Corp. to discontinue the
development and/or expansion of the Employer's
business or the failure, irrespective of any such
decision, of Employer to continue the development and
or expansion; or

(iii) for any other reason whatsoever, in the sole discretion of
Employee.

The termination of Employee's employment by Employee prior to the expiration of
the Term shall constitute an "Involuntary Termination" if made pursuant to
Section 3.2(i) or 3.2(ii); the effect of such termination is specified in
Section 3.5. The termination of Employee's employment by Employee prior to the
expiration of the Term shall constitute a "Voluntary Termination" if made
pursuant to Section 3.2(iii); the effect of such termination is specified in
Section 3.3.

<PAGE> 7

3.4 If Employee's employment hereunder shall be terminated by
Employer for Cause prior to expiration of the Term, all future compensation to
which Employee is entitled and all future benefits for which Employee is
eligible shall cease and terminate as of the date of termination. Employee shall
be entitled to pro rata salary through the date of such termination, but
Employee shall not be entitled to any individual bonuses or individual incentive
compensation not yet paid at the date of such termination.

3.5 Upon an Involuntary Termination of the employment relationship by
either Employer or Employee under Section 3.2(i) or (ii) prior to the expiration
of the Term, Employee shall be entitled, in consideration of Employee's
continuing obligations hereunder after such termination (including, without
limitation, Employee's non-competition obligations, except as expressly provided
to the contrary), to the compensation specified in Section 2.1, as if Employee's
employment (which shall cease on the date of such Involuntary Termination) had
continued for the full Term of this Agreement; housing allowance and educational
assistance for Employee's children at assignment to continue through higher
education as specified in the September 9, 1998 Employment Offer Letter and
Exhibit 1 attached thereto through the end of the Term; and 100% of the bonus
provided in Section 2.5(iv) prorated through the end of the calendar year in
which such termination occurs. In addition, Employee shall receive One Million
Dollars minus the value of equity described at Section 2.5(i) which includes
potential future grants of stock or stock options by Employer or Enron Corp.,
such value to be determined in accordance with the applicable stock equity
plan(s) document(s) and shall include a reduction for broker fees to sell the
shares; provided however, if the Involuntary Termination is due to Employee's
failure to meet his material specific Performance Objectives under Section
3.1(ii)[b] as determined by Employer's Chairman, Employee shall only receive the
remainder of the Monthly Base Pay due under the Term of the Agreement, plus
housing allowance and educational assistance for Employee's children at
assignment shall continue through higher education as specified in the September
9, 1998 Employment Offer Letter and Exhibit 1 thereto through the end of the
Term, and 100% of the bonus provided in Section 2.5(iv) prorated through the end
of the calendar year in which such termination occurs. Employee shall not be
under any duty or obligation to seek or accept other employment following
Involuntary Termination and the amounts due Employee hereunder shall not be
reduced or suspended if Employee accepts subsequent employment. Employee's
rights under this Section 3.5 are Employee's sole and exclusive rights against
Employer, Enron, or their affiliates, and Employer's sole and exclusive
liability to Employee under this Agreement, in contract, tort, or otherwise, for
any Involuntary Termination of the employment relationship. Employee covenants
not to sue or lodge any claim, demand or cause of action against Employer for
any sums for Involuntary Termination other than those sums specified in this
Section 3.5. If Employee breaches this covenant, Employer shall be entitled to
recover from Employee all sums expended by Employer (including costs and
attorneys fees) in connection with such suit, claim, demand or cause of action.

<PAGE> 8

3.7 Upon termination of the employment relationship as a result of
Employee's incapacity, Employee shall be entitled to his or her pro rata salary
through the date of such termination, but Employee shall not be entitled to any
individual bonuses or individual incentive compensation not yet paid to Employee
at the date of such termination.

3.8 In all cases, the compensation and benefits payable to Employee
under this Agreement upon termination of the employment relationship shall be
offset against any amounts to which Employee may otherwise be entitled under any
and all severance plans, and policies of Employer, Enron, or its affiliates.

3.9 Termination of the employment relationship does not terminate
those obligations imposed by this Agreement which are continuing obligations,
including, without limitation, Employee's obligations under Articles 6 and 7.

ARTICLE 4: CONTINUATION OF EMPLOYMENT BEYOND TERM; TERMINATION AND EFFECTS OF
TERMINATION:

ARTICLE 5: UNITED STATES FOREIGN CORRUPT PRACTICES ACT AND OTHER LAWS:

<PAGE> 9

ARTICLE 6: OWNERSHIP AND PROTECTION OF INFORMATION; COPYRIGHTS:

6.2 Employee acknowledges that the business of Employer, Enron, and
their affiliates is highly competitive and that their strategies, methods,
books, records, and documents, their technical information concerning their
products, equipment, services, and processes, procurement procedures and pricing
techniques, the names of and other information (such as credit and financial
data) concerning their customers and business affiliates, all comprise
confidential business information and trade secrets which are valuable, special,
and unique assets which Employer, Enron, or their affiliates use in their
business to obtain a competitive advantage over their competitors. Employee
further acknowledges that protection of such confidential business information
and trade secrets against unauthorized disclosure and use is of critical
importance to Employer, Enron, and their affiliates in maintaining their
competitive position. Employee hereby agrees that Employee will not, at any time
during or after his or her employment by Employer, make any unauthorized
disclosure of any confidential business information or trade secrets of
Employer, Enron, or their affiliates, or make any use thereof, except in the
carrying out of his or her employment responsibilities hereunder. Enron and its
affiliates shall be third party beneficiaries of Employee's obligations under
this Section. As a result of Employee's employment by Employer, Employee may
also from time to time have access to, or knowledge of, confidential business
information or trade secrets of third parties, such as customers, suppliers,
partners, joint venturers, and the like, of Employer, Enron, and their
affiliates. Employee also agrees to preserve and protect the confidentiality of
such third party confidential information and trade secrets to the same extent,
and on the same basis, as Employer's confidential business information and trade
secrets. Employee acknowledges that money damages would not be sufficient remedy
for any breach of this Article 6 by Employee, and Employer shall be entitled to
enforce the provisions of this Article 6 by terminating any payments then owing
to Employee under this Agreement and/or to specific performance and injunctive
relief as remedies for such

<PAGE> 10

breach or any threatened breach. Such remedies shall not be deemed the exclusive
remedies for a breach of this Article 6, but shall be in addition to all
remedies available at law or in equity to Employer, including the recovery of
damages from Employee and his or her agents involved in such breach.

6.4 If, during Employee's employment by Employer, Employee creates
any original work of authorship fixed in any tangible medium of expression which
is the subject matter of copyright (such as videotapes, written presentations on
acquisitions, computer programs, drawings, maps, architectural renditions,
models, manuals, brochures, or the like) relating to Employer's business,
products, or services, whether such work is created solely by Employee or
jointly with others (whether during business hours or otherwise and whether on
Employer's premises or otherwise), Employee shall disclose such work to
Employer. Employer shall be deemed the author of such work if the work is
prepared by Employee in the scope of his or her employment; or, if the work is
not prepared by Employee within the scope of his or her employment but is
specially ordered by Employer as a contribution to a collective work, as a part
of a motion picture or other audiovisual work, as a translation, as a
supplementary work, as a compilation, or as an instructional text, then the work
shall be considered to be work made for hire and Employer shall be the author of
the work. If such work is neither prepared by the Employee within the scope of
his or her employment nor a work specially ordered and is deemed to be a work
made for hire, then Employee hereby agrees to assign, and by these presents does
assign, to Employer all of Employee's worldwide right, title, and interest in
and to such work and all rights of copyright therein.

ARTICLE 7: POST-EMPLOYMENT NON-COMPETITION OBLIGATIONS:

<PAGE> 11

competition provisions of this Article 7. Employee agrees that during the period
of Employee's non-competition obligations hereunder, Employee will not, directly
or indirectly for Employee or for others, in any geographic area or market where
Employer or Enron or any of their affiliated companies are conducting any
business as of the date of termination of the employment relationship or have
during the previous twelve months conducted any business:

(i) engage in any business competitive with the water business
conducted by Employer;

(ii) render advice or services to, or otherwise assist, any other
person, association, or entity who is engaged, directly or
indirectly, in any business competitive with the water
business conducted by Employer;

(iii) induce any employee of Employer or Enron or any of their
affiliates to terminate his or her employment with Employer,
Enron, or their affiliates, or hire or assist in the hiring of
any such employee by person, association, or entity not
affiliated with Enron.

These non-competition obligations shall extend until the latter of (a)
expiration of the Term or (b) one year after termination of the employment
relationship.

7.2 Employee understands that the foregoing restrictions may limit
his or her ability to engage in certain businesses anywhere in the world during
the period provided for above, but acknowledges that Employee will receive
sufficiently high remuneration and other benefits (e.g., the right to receive
compensation under Section 3.5 for the remainder of the Term upon Involuntary
Termination) under this Agreement to justify such restriction. Employee
acknowledges that money damages would not be sufficient remedy for any breach of
this Article 7 by Employee, and Employer shall be entitled to enforce the
provisions of this Article 7 by terminating any payments then owing to Employee
under this Agreement and/or to specific performance and injunctive relief as
remedies for such breach or any threatened breach. Such remedies shall not be
deemed the exclusive remedies for a breach of this Article 7, but shall be in
addition to all remedies available at law or in equity to Employer, including,
without limitation, the recovery of damages from Employee and his or her agents
involved in such breach.

<PAGE> 12

ARTICLE 8: MISCELLANEOUS:

8.2 Except as otherwise required by law or court order or in response
to any litigation or other dispute resolution initiated against Employee,
Employee shall refrain, both during the employment relationship and after the
employment relationship terminates, from publishing any oral or written
statements about Employer, Enron, any of their respective subsidiaries or
affiliates, or any of such entities' officers, employees, agents or
representatives that are slanderous, libelous, or defamatory; or that disclose
private or confidential information about Employer, Enron, any of their
respective subsidiaries or affiliates, or any of such entities' business
affairs, officers, employees, agents, or representatives; or that constitute an
intrusion into the seclusion or private lives of Employer, Enron, any of their
respective subsidiaries or affiliates, or such entities' officers, employees,
agents, or representatives; or that give rise to unreasonable publicity about
the private lives of Employer, Enron, any of their respective subsidiaries or
affiliates, or any of such entities' officers, employees, agents, or
representatives; or that place Employer, Enron, any of their respective
subsidiaries or affiliates, or any of such entities' or its officers, employees,
agents, or representatives in a false light before the public; or that
constitute a misappropriation of the name or likeness of Employer, Enron, any of
their respective subsidiaries or affiliates, or any of such entities' or its
officers, employees, agents, or representatives. A violation or threatened
violation of this prohibition may be enjoined by the courts. The rights afforded
the Enron entities and affiliates under this provision are in addition to any
and all rights and remedies otherwise afforded by law.

If to Employer:

Azurix Corp.
1400 Smith Street
Houston, Texas 77002
Attention: Corporate Secretary

If to Employee, to the address shown on the first page hereof.

Either Employer or Employee may furnish a change of address to the
other in writing in accordance herewith, except that notices of changes of
address shall be effective only upon receipt.

<PAGE> 13

8.4 This Agreement shall be governed in all respects by the laws of
the State of Texas, excluding any conflict-of-law rule or principle that might
refer the construction of the Agreement to the laws of another State or country.

8.5 No failure by either party hereto at any time to give notice of
any breach by the other party of, or to require compliance with, any condition
or provision of this Agreement shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.

8.6 If a dispute arises out of or related to this Agreement, other
than a dispute regarding Employee's obligations under Article 6, or Article 7,
and if the dispute cannot be settled through direct discussions, then Employer
and Employee agree to first endeavor to settle the dispute in an amicable manner
by mediation, before having recourse to any other proceeding or forum.

8.7 Each of Employer and Employee is a citizen of the State of
Texas. Employer's principal place of business is in Houston, Harris County,
Texas. Employee resides in the United Kingdom. This Agreement was negotiated and
signed in Houston, Texas. This Agreement shall be performed in Houston, Texas.
Any litigation that may be brought by either Employer or Employee involving the
enforcement of this Agreement or the rights, duties, or obligations of this
Agreement, shall be brought exclusively in the State or federal courts sitting
in Houston, Harris County, Texas. In the event that service of process cannot be
effected upon a party, each party hereby irrevocably appoints the Secretary of
State for the State of Texas as its or his agent for service of process to
receive the summons and other pleadings in connection with any such litigation.

8.9 Enron hereby warrants and represents that it shall guarantee all
contractual obligations under this Agreement and this Agreement shall be binding
upon and inure to the benefit of Employer and any other person, association, or
entity which may hereafter acquire or succeed to all or substantially all of the
business or assets of Employer by any means whether direct or indirect, by
purchase, merger, consolidation, or otherwise. Employee's rights and obligations
under Agreement hereof are personal and such rights, benefits, and obligations
of Employee shall not be voluntarily or involuntarily assigned, alienated, or
transferred, whether by operation of law or otherwise, without the prior written
consent of Employer.

<PAGE> 14

8.10 There exist other agreements between Employer and Employee
relating to the employment relationship between them, e.g., the agreement with
respect to company policies contained in Employer's Conduct of Business Affairs
booklet and agreements with respect to benefit plans, including but not limited
to the expatriate assignment letter assigning this Agreement to Enron Expat
Services, Inc. This Agreement replaces and merges previous agreements and
discussions pertaining to the following subject matters covered herein: the
nature of Employee's employment relationship with Employer and the term and
termination of such relationship. This Agreement constitutes the entire
agreement of the parties with regard to such subject matters, and contains all
of the covenants, promises, representations, warranties, and agreements between
the parties with respect such subject matters. Each party to this Agreement
acknowledges that no representation, inducement, promise, or agreement, oral or
written, has been made by either party with respect to such subject matters,
which is not embodied herein, and that no agreement, statement, or promise
relating to the employment of Employee by Employer that is not contained in this
Agreement shall be valid or binding. Any modification of this Agreement will be
effective only if it is in writing and signed by each party whose rights
hereunder are affected thereby, provided that any such modification must be
authorized or approved by the Board of Directors of Employer.

IN WITNESS WHEREOF, Employer and Employee have duly executed this
Agreement in multiple originals to be effective on the date first stated above.

AZURIX CORP.

By: /s/ REBECCA P. MARK
---------------------------
Name: Rebecca P. Mark
Title: Chairman
This 12th day of October, 1998

ALEX KULPECZ

/s/ ALEX KULPECZ
------------------------------
This 7th day of October, 1998

<PAGE> 15

EXHIBIT "A" TO
EXECUTIVE EMPLOYMENT AGREEMENT
BETWEEN AZURIX CORP. AND ALEX KULPECZ

Employee Name: Alex Kulpecz

Term: September 15, 1998 through September 14, 2001

Position: Executive Director/Europe/Middle East/Africa/CIS

Location: London, England

Monthly Base Salary: $41,000.00 U.S. Currency

Bonus: As described at Section 2.5(iv) of this Agreement.

AZURIX CORP.

By: /s/ REBECCA P. MARK
---------------------------
Name: Rebecca P. Mark
Title: Chairman
This 12th day of October, 1998

ALEX KULPECZ

/s/ ALEX KULPECZ
------------------------------
This 7th day of October, 1998

<PAGE> 16
FIRST AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT

This Agreement, entered into on this 11 of March, 1999, and made effective
as of 11 March, 1999, by and between AZURIX CORP., a Delaware corporation having
its headquarters at 333 Clay Street, Houston, Texas 77002, ("Employer") and ALEX
KULPECZ ("Employee"), an individual residing in the UNITED KINGDOM, is an
amendment to that certain Executive Employment Agreement between the Employer
and Employee entered into the 7th day of October, 1998, and made effective as of
September 15, 1998 (the "Employment Agreement").

WHEREAS, the parties desire to amend the Employment Agreement to provide
for further description of target bonuses, and to make other amendments to the
Employment Agreement as provided herein;

NOW, THEREFORE, in consideration thereof and of the mutual covenants
contained herein, the parties agree as follows:

1. Article 2, Section 2.5 (iv) is are hereby deleted and the
following inserted in its place:

o "(iv) a performance bonus under the Enron Corp. Annual Incentive
Bonus Plan (or, a replacement Employer performance bonus plan), with
a target bonus for 1999 and future years equal to 100% of Monthly
Base Salary multiplied times 12 ("Annual Base Salary"). For 1998,
Employee's target bonus shall be 50% of his Annual Base Salary if
employment begins in September 1998, based upon Enron Corp.'s
achievement of net income relative to its target and Employee's
achievement of his Performance Objectives; for 1999 and future
years, participation shall be based on Employer's achievement of
net income and/or other financial measures relative to
pre-established targets and Employee's achievement of his
Performance Objectives; provided, however, Employer's Chairman
and Employee shall negotiate specific Employer and Employee
performance targets and specific relationships of Employee's
bonuses to the Employer's and Employee's actual performance with
respect to such targets; the 1999, 2000, and 2001 bonus payments
will be offset by the increased vested value of 50,000 of the
100,000 Enron Corp. Stock Options described herein above at
Section 2.5(i) and such offset to be determined as follows:

o 1999 bonus target minus the December 31, 1999 value of 16,666
options vested September 15, 1999

o 2000 bonus target minus the December 31, 2000 value of 16,667
options vested September 15, 2000

o 2001 bonus target minus the December 31, 2001 value of 16,667
options vested September 15, 2001

For example, if the 2000 bonus target equaled $500,000.00 and the
December 31, 2000 vested value of the 16,666 options vested September
15, 2000 equaled $249,990.00 ($15.00 increase from exercise prior to
12/31/00 closing price), then the 2000 bonus target would equal
$250,010.00 ($500,000.00 minus(-) $249,990.00); and"

This Amendment is a First Amendment to the Employment Agreement, and the
parties agree that all other terms, conditions and stipulations contained in
the Employment Agreement, and any amendments thereto, shall remain in full
force and effect and without any change or modification, except as provided
herein.

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.

AZURIX CORP.

By: /s/ REBECCA P. MARK
---------------------------
Name: Rebecca P. Mark
Title: Chairman
This 11th day of March, 1999

ALEX KULPECZ

/s/ ALEX KULPECZ
------------------------------
This 11th day of March, 1999

<PAGE> 1
EXHIBIT 10.13

THIS AGREEMENT is made on 24 February 1995 BETWEEN

(1) WESSEX WATER PLC whose registered office is at Wessex House, Passage
Street, Bristol, Avon, B2S OJQ ("the Company"); and

(2) COLIN FRANK SKELLETT of 20 Common Road, Hanham, Bristol, BS15 3LL
("the Employee") of the other part.

WHEREBY IT IS AGREED that the Employee shall serve the Company upon the
following terms and conditions:-

DEFINITIONS

1.1 In this Agreement unless the context otherwise requires the following
expressions shall have the following meanings:

"Associated Company" means any company whose equity share capital
(as defined in Section 744 of the Companies
Act 1985) is owned as to 20 per cent or more
but less than 50 per cent by the Company
(and/or any of its Subsidiaries);

"Group Company" means the Company or any company which is
from time to time a Holding Company or
Subsidiary or Associated Company of the
Company,

"Subsidiary" means any company which for the time being
is a subsidiary company (as defined by
Section 736 of the Companies Act 1985) of
the Company;

"Holding Company" means the holding company of the Company
from time to time (as defined in Section 736
of the Companies Act 1985);

"The Board" means the Board of Directors for the time
being of the Company; and

"The Act" means the Employment Protection
(Consolidation) Act 1978.

1.2 Any reference to a statutory provision shall be deemed to include a
reference to any statutory modification or re-enactment of the same.

1
<PAGE> 2

1.3 Unless the context otherwise requires words in the singular include the
plural and vice versa, and a reference to a person includes a reference
to a body corporate and to an unincorporated body of persons.

APPOINTMENT AND DUTIES

2.1 The Company HEREBY AGREES to employ the Employee and the Employee
HEREBY AGREES to serve as the Chief Executive of the Company and the
relevant Subsidiary Companies.

2.2 The Employee's employment hereunder shall be deemed to have commenced
on 1st January 1995 and shall continue subject to the terms of this
Agreement until determined by either party giving to the other not less
than twelve (12) months' previous written notice PROVIDED THAT this
Agreement shall automatically terminate (if not already terminated)
upon the Employee's 60th birthday.

2.3 During his employment hereunder the Employee shall in addition to those
duties for which he is responsible by virtue of his position as a
director of the Company exercise such other powers and perform such
duties in relation to the business of the Company of any Group Company
as may from time to time be vested in or assigned to him by the Board
and shall in all respects comply with directions given by or under the
authority of the Board. The Board shall have the power to vary or
withdraw any powers and responsibilities as it shall see fit at its
absolute discretion. The Board further reserves the right as its
discretion to appoint one or more additional employees to act jointly
with the Employee.

2.4 The Employee shall perform his duties hereunder in such place or places
in the United Kingdom as the Board may from time to time reasonably
direct and may be required to travel within the United Kingdom and
abroad in the performance of his duties.

2.5 The Employee shall work the hours necessary for the proper performance
of his duties hereunder. The Employee shall use his best endeavours to
promote the interests of the Company.

2.6 Subject to the terms of Clause 8.1, the Employee shall not (except as a
representative of the Company of any Group Company) be directly or
indirectly concerned in the conduct of any business, trade, profession
or other occupation while employed by the Company.

REMUNERATION

3.1 For his services hereunder the Employee shall be paid a salary at the rate
specified in the Schedule hereto (inclusive of any remuneration to which he may
become entitled as a Director of the Company or any Group Company) payable by
equal monthly instalments in arrears. Such salary shall be subject to periodical
review at the Board's discretion. The Employee will also be

2
<PAGE> 3

eligible for bonus payments under any bonus scheme approved from time to time
for this purpose by the Board.

3.2 The Company shall repay to the Employee all reasonable travelling and other
expenses properly incurred by him in the performance of his duties hereunder in
accordance with the Company rules and procedures for the time being in force,
details of which are available from the Secretary of the Company.

3.3 The Company shall during the term of this Agreement provide the Employee
with either a car allowance of (if it so decides) a fully funded car which in
either case shall be provided subject to and in accordance with the terms of the
Company's scheme.

HOLIDAY

4. The Employee shall be entitled to thirty (30) working days' holiday (in
addition to public holidays) in each holiday year at full salary. Holidays not
taken in one holiday year cannot be carried over to a subsequent year without
prior approval. The holiday year runs from 1 April to 31 March.

INCAPACITY FOR WORK AND SICK PAY

5.1 If the Employee is absent as a result of sickness or injury he will
comply with the Company's requirements for the time being in force as
to notification of absence.

5.2 The Employee will be entitled to payment of his salary subject to and
in accordance with their terms of the Company's Sick Pay Scheme during
any periods of absence from work as a result of sickness or injury.

5.3 The Company will pay statutory sick pay, where appropriate, in
accordance with the legislation in force from the time of absence, and
payment of salary in accordance with 5.2 will go towards discharging
its liability to pay statutory sick pay.

MEDICAL EXAMINATION AND REPORT

6. The Employee shall at any time if directed to do so by the Board submit
to a medical examination or examinations by a qualified medical
practitioner or practitioners of the Company's choice and at its
expense on the understanding that thereafter the said medical
practitioner or practitioners will prepare a written report of the
results of any such examination and send the same to the Secretary of
the Company. The Employee will have the right to see the written report
of the results. The Employee hereby authorises (such authority to be
deemed to include the consent of the Employee for the purposes of
section 3 of the Access to Medical Reports Act 1988) his own doctor to
disclose to the Company such relevant medical information as it may
reasonably require subject to the Employee being informed by the
Company of such request prior to it being made.

3
<PAGE> 4

PENSION

7. The provisions relating to the Employee's pension are set out in the
Schedule hereto.

EXCLUSIVE SERVICES AND INTERESTS IN SECURITIES

8.1 During the continuance of his employment under this Agreement the
Employee shall not without the prior written consent of the Company
directly or indirectly invest or participate in the management of or in
any capacity provide services to any business (including acting as a
director) PROVIDED THAT (a) nothing in this clause shall preclude the
Employee (including his spouse and infant children) from holding or
acquiring by way of a bona fide investment only an interest not
exceeding 5 per cent of any class of securities in (i) a company any
part of whose share capital is listed or dealt in on a recognised stock
exchange of (ii) any other company whose business does not compete with
any business carried on by any Group Company and PROVDED THAT (B) the
Employee shall, subject to the prior written consent of the Board (such
consent to be subject to the absolute discretion of the Board), be
permitted to hold up to two external non-executive directorships
provided and for so long as each such directorship would not materially
interfere with his duties to any Group Company.

8.2 While he is a director of the Company of any Group Company, the
Employee will not (and will procure, so far as he is able, that his
wife and infant children will not) deal or become or cease to be
interested in any securities of the Company or any Group Company except
in accordance with the Company's Code of practice for the time being in
relation to such transactions, a copy of which can be obtained from the
Secretary of the Company.

CONFIDENTIALITY

9.1 The Employee shall not during his employment by the Company or
thereafter (save as required for the proper performance of his duties
or unless authorised to do so by the Board or by a Court of competent
jurisdiction) use or disclose to any third party, and shall use his
reasonable endeavours to prevent publication or disclosure of and shall
keep confidential, any confidential information concerning the business
or finances of the Company or any other Group Company or any customer
or other person having dealings with the Company or a Group Company,
which come to his knowledge during the course of his employment with
the Company or any Group Company.

9.2 Following the termination of his employment hereunder (howsoever
occasioned) the Employee shall forthwith return to the Company all
items of property belonging to the Company of any Group Company or its
of their customers or business associates then in his possession or
control.

4
<PAGE> 5
CONVENANTS IN RELATION TO ACTIVITIES DURING AND AFTER THE TERMINATION OF
EMPLOYMENT HEREUNDER

10.1 In this Clause the expressions following bear the meanings ascribed to
them respectively below, namely:

"Restricted Period" means the period of 12 months commencing
with the Termination Date; and

"Termination Date" means the date on which the Employee's
employment under this Agreement shall
terminate howsoever caused.

10.2 Since the Employee is likely to obtain the course of his employment
hereunder knowledge of the trade secrets and also other confidential
information in regard to the business of the Company and its
Subsidiaries the Employee hereby agrees with the Company that he shall
not (unless his employment under this Agreement has been terminated by
the Company in breach of this Agreement):-

(a) during the Restricted Period, either on his own account or for
any other person directly or indirectly be engaged in or
concerned with any business which:-

(i) is carried on in the Wessex territory as determined
by the Instrument of Appointment dated August 1989
(as amended); and

(ii) competes with any business carried on at the date of
that termination by the Company or any of its
Subsidiaries.

but this sub-clause will not prevent him (including his spouse
and children under 18 years of age) from holding or acquiring
by way of bona fide investment only an interest not exceeding
5 per cent of any class of securities in (i) a company any
part of whose share capital is listed or dealt in on a
recognised stock exchange of (ii) any other company whose
business does not compete with any business carried on by any
Group Company;

(b) during the Restricted Period either on his own account or for
any other person directly or indirectly solicit interfere with
or endeavour to entice away from the Company or any of its
Subsidiaries the custom of any person who at the Termination
Date or who in the period of 12 months immediately prior to
such date and to the knowledge of the Employee was a customer
or client of or in the habit of dealing with the Company or
any of its Subsidiaries for the purpose of offering to that
person goods of services similar to those with which he was so
provided;

(c) during the Restricted Period either on his own account or for
any other person solicit the services of or endeavour to
entice away from the Company or any of its Subsidiaries
whether directly of indirectly any director, employee or
consultant of the Company or any Subsidiary who was such at
the Termination Date.

5
<PAGE> 6

10.3 In 10.2 above, references to acting directly or indirectly include
(without prejudice to the generality of that expression) references to
acting alone or jointly with or by means of any other person.

10.4 The Employee hereby agrees that he will at the request and cost of the
Company enter into a direct agreement or undertaking with any Group
Company whereby he will accept restrictions and provisions
corresponding to the restrictions and provisions above (or such of them
as may be reasonable and appropriate in the circumstances) in relation
to such activities and such areas and for such a period not exceeding
12 months as such Company or Companies may reasonably require for the
protection of its or their legitimate interest.

10.5 The Employee agrees that having regard to the facts and matters
aforesaid the restrictive convenants herein contained are reasonably
and necessary for the protection of the legitimate interests of the
Company or any Group Company and the Employee agrees that having regard
to those circumstances the convenants do not work unfairly or harshly
on him. While the restrictions aforesaid are considered by the parties
to be reasonable in all the circumstances it is agreed that if any such
restriction shall be adjudged to be void or ineffective for whatever
reason but would be adjudged to be valid and effective if part of the
wording thereof were deleted or the periods thereof reduced or the area
thereof reduced in scope, the said restrictions shall apply with such
modifications as may be necessary to make them valid and effective. The
convenants contained in 10.1 above are separate and severable and
enforceable accordingly.

TERMINATION OF EMPLOYMENT

11. If the Employee shall:

(a) be or become bankrupt or compound with his creditors; or

(b) be guilty of conduct tending to being the Company of himself
into disrepute; or

(c) commit any serious or persistent breach of any of his
obligations to the Company or any Group Company under this
Agreement; or

(d) become prohibited by law from being a director of any company;
or

(e) resign as director of the Company or any Group Company or in
the event of his retiring from that office by rotation, he
fails to offer himself for re-election; or

(f) be incapacitated from performing his duties for any continuous
period of 180 days or for periods exceeding 125 working days
in any period of 12 months.

then the Company shall be entitled by notice in writing given within 3
months of one of the events specified at (a) to (f) above to terminate
his employment under this Agreement

6
<PAGE> 7

with immediate effect whereupon the Employee shall have no claim
against the Company for damages or otherwise by reason of such
termination. Any termination of the employment of the Employee will be
without prejudice to his continuing obligations under this Agreement.

11.2 Upon the termination of this Agreement for whatever reason the Employee
shall, if so requested by the Company, forthwith resign from any
offices held by him in the Company or any other Group Company and in
the event of his failure to do so the Company is hereby irrevocably
authorised to appoint some person in his name and on his behalf to so
all such things and execute all such documents as may be necessary or
desirable to bring about such resignation.

11.3 The Employee shall not, during the continuance of his employment
hereunder, resign any office he had with the Company or (other than
with the approval of the Board) any Group Company or do anything which
would cause him to be disqualified from continuing to act as an office
holder.

RE-ORGANISATION

12. Should the Company (or any part of the Group of Companies of which the
Company from time to time forms part) undergo any process of
reconstruction, amalgamation or administrative re-organisation (whether
or not involving the liquidation of the Company) and should in the
process the Employee's job cease to exist or the scope or title be
varied or it appears desirable to the Company or its Holding Company,
if any, that the Employee should be employed by some other Group
Company then, provided that the terms and conditions of service (other
than the duties involved in the job) offered to the Employee in respect
of the proposed new employment or his existing employment as varied, as
the case may be, are, taken as a whole, not less advantageous to him
than those contained herein and the duties thereof are within his
capabilities and of a nature which in the circumstances it is not
unreasonable to expect the Employee to perform, the Employee shall
(whether or not he accepts such alternative or varied employment)
except as allowed by statute have no claim for compensation against the
Company in respect of the termination or variation (actual or proposed)
of his employment hereunder.

NOTICES

13. Any notice in writing to be served hereunder may be given personally to
the Employee or to the Secretary of the Company (as the case may be) or
may be posted by first class post to the Company (for the attention of
the Secretary) or may be posted by first class post to the Company (for
the attention of the Secretary) at its registered office for the time
being or to the Employee at his last known address. Any such notice
sent by post shall be deemed served 48 hours after it is posted and in
proving such service it shall be sufficient to prove that the notice
was properly addressed and put in the post.

7
<PAGE> 8

OTHER AGREEMENTS

14. This Agreement takes effect in substitution for all previous agreements
and arrangements whether written, oral or implied between the Company
and the Employee relating to the Employee and which agreements and
arrangements shall be deemed to have been terminated by mutual consent
and without liability on either side as from the effective date of this
Agreement.

MISREPRESENTATION

15. The Employee shall not at any time make any untrue statement in
relation to the Company or any Group Company, and in particular shall
not after the termination of his employment hereunder wrongfully
represent himself or permit himself to be held out as being employed by
or connected with the Company or any other Group Company.

DISCIPLINE AND GRIEVANCE

16. (a) A copy of the disciplinary rules of the Company for the time
being in force can be obtained from the Secretary of the
Company.

(b) If the Employee is dissatisfied with any disciplinary decision
or has any grievance relating to his employment, he should
refer the matter to the Board and the reference will be dealt
with by discussion and decision at a meeting of the Board.

THE SCHEDULE

17. The Schedule hereto shall form part of this Agreement and accordingly
the employment of the Employee hereunder shall also be subject to the
terms set out therein (and to any documents referred to therein).

GOVERNING LAW

18. This Agreement shall be governed by and construed in accordance with
English law.

IN WITNESS whereof this Agreement has been executed as a Deed the day and year
first before written.

8
<PAGE> 9

THE SCHEDULE

above referred to

RENUMERATION

(pound)111,500 per annum subject to review under Clause 3.1.

MEDICAL INSURANCE

You will be entitled to such private medical insurance arrangements as may be
provided by the Company from time to time. You shall attend for health screening
at the Company's request.

ACCIDENT/LIFE INSURANCE

You will be entitled to participate in the accident/whole life insurance cover
as may be provided by the Company from time to time.

RELOCATION EXPENSES

You will be eligible to benefit from the Company's relocation arrangements as
provided from time to time.

PENSION

You will be eligible to be a member of the Wessex Water Pension Scheme, Wessex
Water Executive Pension Scheme and any other pension arrangements approved by
the Board and notified to you in writing.

OTHER TERMS AND CONDITIONS

Other terms and conditions of employment may be agreed between the Company and
the Employee from time to time.

9
<PAGE> 10

CONTINUOUS EMPLOYMENT

No period of employment with any previous employer counts as part of the
Employee's continuous period of employment with the Company for the purposes of
the Act and accordingly the said period commenced on 1 September 1989 but the
Company shall nevertheless treat the Employee, for the purpose of any claim by
him in respect of redundancy or unfair dismissal as if his continuous employment
with the Company included any period of continuous employment with, or as a
member of, Wessex Water Authority and its predecessors in title.

The Common Seal of the Company )
was hereunto affixed in the )
presence of: )

Director /s/

Secretary /s/

Signed as a Deed by the )
Employee in the presence of: )

/s/

10
<PAGE> 11

FIRST AMENDMENT TO AGREEMENT

This Agreement, entered into on this 9th of December, 1998, and made
effective as of the 1st day of September, 1998, by and between WESSEX WATER PLC,
a United Kingdom corporation ("Company") having its headquarters at Wessex
House, Passage Street, Bristol, BS2, 0JQ, and COLIN FRANK SKELLETT ("Employee"),
an individual residing at Hentley Brake, North Stoke, Bath BA1 9AS, is an
amendment to that certain Agreement between the Company and Employee entered
into the 24th day of February, 1995, and made effective as of February 24, 1995
(the "Agreement").

WHEREAS, the parties desire to amend the Agreement as provided herein;

NOW, THEREFORE, in consideration thereof and of the mutual covenants
contained herein, the parties agree as follows:

1. The Schedule attached to the Agreement is hereby deleted in
its entirety and the attached Schedule is inserted in its entirety.

This Amendment is a First Amendment to the Agreement, and the parties
agree that all other terms, conditions and stipulations contained in the
Agreement, and any amendments thereto, shall remain in full force and effect and
without any change or modification, except as provided herein.

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.

WESSEX WATER PLC

By: /s/ NICHOLAS HOOD
--------------------------------
Name: Nicholas Hood
Title: Director
This 9th day of December, 1998

COLIN FRANK SKELLETT

/s/ COLIN F. SKELLETT
-----------------------------------
This 4th day of December, 1998

1
<PAGE> 12

THE SCHEDULE

NAME: Colin Frank Skellett

REMUNERATION:

ANNUAL BASE SALARY: (pound)255,000

o Effective September 1, 1998.

o Any future increases will be
reviewed annually and shall be made
at the sole discretion of Azurix
management

o Pensionable under applicable Wessex
pension schemes.

BONUS: Eligible for bonus payments under any Bonus
Scheme approved from time to time for this
purpose by the Company, Enron Corp., or any
replacement board.

o Bonus for 1998 will be paid in
February 1999 and will be prorated
from the time of the last bonus
payment.

o Bonus thereafter will be paid in
February of each year.

o Bonus payments will be
non-pensionable.

UNITED STATES FOREIGN
CORRUPT PRACTICES ACT
AND OTHER LAWS: Employee shall at all times comply with United States
laws applicable to Employee's actions on behalf of
Company, including specifically, without limitation,
the United States Foreign Corrupt Practices Act,
generally codified in 15 USC 78 (FCPA), as the FCPA
may hereafter be amended, and/or its successor
statutes. If Employee pleads guilty to or nolo
contendere or admits civil or criminal liability
under the FCPA or other applicable United States law,
or if a court finds that Employee has personal civil
or criminal liability under the FCPA or other
applicable United States law, or if a court finds
that Employee committed an action resulting in any
Enron entity having civil or criminal liability or
responsibility under the FCPA or other applicable
United States law with knowledge of the activities
giving rise to such liability or

2
<PAGE> 13

knowledge of facts from which Employee should have
reasonably inferred the activities giving rise to
liability had occurred or were likely to occur, such
action or finding shall constitute "cause" for
termination under this Agreement unless Company's
management committee (or, if there is no management
committee, the highest applicable level of Company's
management) determines that the actions found to be
in violation of the FCPA or other applicable United
States law were taken in good faith and in compliance
with all applicable policies of Company and Enron.

LONG TERM COMPENSATION: Employee shall be eligible to participate in the
Azurix Corp. stock plan. Upon finalization of the
plan, Employee shall receive a grant with a
theoretical three-year total value of $1,500,000. The
theoretical value methodology shall be the same
methodology used for other executives of the Company
participating in the plan. Employee shall vest
33 1/3% on each grant date anniversary (three-year
vesting).

MEDICAL INSURANCE: Employee will be entitled to such private medical
insurance arrangements as may be provided by the
Company from time to time. Employee shall attend for
health screening at the Company's request.

ACCIDENT/LIFE INSURANCE: Employee will be entitled to participate in the
accident/whole life insurance cover as may be
provided by the Company from time to time.

RELOCATION EXPENSES: Employee will be eligible to benefit from the
Company's relocation arrangements as provided from
time to time.

PENSION: With the exception of the Bonus payments which are
non-pensionable as described above, Employee will be
eligible to be a member of the Wessex Water Mirror
Image Pension Scheme, Wessex Water Executive Pension
Scheme and any other pension arrangements approved by
the Board and notified to Employee in writing and
Employee shall continue to benefit from the Unfunded
Pension Arrangement set forth in the letter dated 24
February 1995 attached hereto as Exhibit "A".

OTHER TERMS AND
CONDITIONS: Other terms and conditions of employment may be
agreed between the Company and the Employee from time
to time.

CONTINUOUS EMPLOYMENT: No period of employment with any previous employer
counts as part of the Employee's continuous period of
employment with the

3
<PAGE> 14

Company for the purposes of the Act and accordingly
the said period commenced on 1 September 1989 but the
Company shall nevertheless treat the Employee, for
the purposes of any claim by him in respect of
redundancy or unfair dismissal as if his continuous
employment with the Company included any period of
continuous employment with, or as a member of, Wessex
Water Authority and its predecessors in title.

The Common Seal of the Company )
was hereunto affixed in the presence of: )

Director

Secretary

Signed as a Deed by the Employee )
in the presence of : )

4
<PAGE> 15

C F Skellett Esq EXHIBIT "A"
20 Common Road
Hanham
Bristol BS15 3LJ PRIVATE AND CONFIDENTIAL

24 February 1995

Dear Mr Skellett

UNFUNDED PENSION ARRANGEMENT

Further to our recent discussions, I am pleased to advise you that Wessex Water
Plc ("Wessex") has agreed to provide you with a pension under an Unfunded
Pension Arrangement. This Arrangement will provide you with benefits additional
to those provided under the Wessex Water Mirror Image Pension Scheme and the
Wessex Water Executive Pension Scheme ("the Executive Scheme").

The terms of the Unfunded Pension Arrangement are as follows:

1. YOUR OWN RETIREMENT PENSION

If you stay in employment with Wessex until 1 January 1000 you will
receive an annual pension of 10% of your Final Pensionable Salary (as
defined in the Rules of the Wessex Water Executive Pension Scheme) when
you leave employment.

2. YOUR SPOUSE'S PENSION

If you die in service leaving a widow, she will receive a pension for
life equal to 4 percent of your Final Pensionable Salary at the date of
death.

If you die after retirement leaving a widow, she will receive a pension
for life of two-thirds of the pension which you were receiving under
this Arrangement at the date of death.

3. INCREASES OF PENSION IN PAYMENT

Once the pension comes into payment it will be increased annually at
the rate of 5% or the increase in the RPI if lower. Further increases
will be awarded in line with any discretionary increases granted form
the Executive Scheme.

5
<PAGE> 16

4. LEAVING EMPLOYMENT

If you cease to be an active member of the Wessex Water Mirror Image
Pension Scheme and the Wessex Water Executive Pension Scheme then you
will be treated for the purposes of this letter as having left
employment with Wessex. If you are treated as having left employment,
or if you leave employment with Wessex before 1 January 2000 then you
will be entitled to a deferred pension payable form 1 January 2000
calculated on the basis set out in column 1 of the attached schedule.
The deferred pension will increase in deferment in accordance with
deferred pensions payable under the Executive Scheme.

However, if you leave employment

a) on the grounds of incapacity (as defined in the Executive
Scheme) or

b) if Wessex decides that there are compassionate grounds for
your leaving employment or

c) if you are required to retire by Wessex or

d) if you are made redundant as a result of the cancellation of
the listing of Wessex's securities by the London Stock
Exchange or

e) if Wessex so decides in any other case

you will be entitled to an immediate pension calculated on the basis
set out in Column 2 of the attached schedule and based on your Final
Pensionable Salary at the date of leaving employment.

5. GENERAL

The pensions payable under this Arrangement will be treated as taxable
income when they become due and will be payable directly by Wessex.

Wessex may change the terms of this Arrangement at any time, but only
with your agreement.

6
<PAGE> 17

If you agree to and accept the terms of the Arrangement as set out in
this letter please sign and return the attached copy of this letter.
You should be aware that the terms of this letter will not affect the
right of Wessex or yourself to terminate your employment in accordance
with your service agreement.

Yours sincerely
/s/
for Wessex Water Plc
D N A McLure
Deputy Chairman

7
<PAGE> 18

SCHEDULE

<TABLE>
<CAPTION>
Year of Leaving Service Percentage of Final Pensionable Salary
- ----------------------- --------------------------------------
Column 1 Column 2
-------- --------
<S> <C> <C>
1995 Nil 5%
1996 Nil 6%
1997 4% 7%
1998 6% 8%
1999 8% 9%
2000 onwards 10% 10%
</TABLE>

8
<PAGE> 19

I acknowledge receipt of a letter dated 24 February 1995 of which the attached
is a copy and accept the arrangements as set out in that letter.

Signed /s/ Date 24-2-95
------------ -------------

<PAGE> 1
EXHIBIT 21

AZURIX CORP. SUBSIDIARIES
-------------------------

Azurix Jose Holdings Ltd.
Azurix Jose Investment Ltd.
Azurix Jose Ltd.
Enron Argentina Holding Inc.
Azurix Misiones SRL
Azurix Cancun B.V.
Azurix Cancun SRL
Enron Water Israel Ltd.
Azurix Suez Ltd.
Azurix Colombia Holdings Ltd.
Azurix Colombia Investments Ltd.
Azurix Colombia Ltd.
Azurix Isla Mujeres B.V.
Operadora de Buenos Aires SRL
Operadora de Misiones SRL
Azurix Mendoza Investments Ltd.
Azurix Chengdu Holdings Ltd.
Azurix Chengdu Ltd.
Azurix Misiones Holdings Ltd.
Azurix Misiones Ltd.
Azurix U.K. Ltd.
Azurix Rio Holdings Ltd.
Azurix Rio Investments Ltd.
SPE-Sociedade PAULISTA de Energia Ltda.
SCE-Sociedade Carioca de Energia Ltda.
Azurix Kuwait Ltd.
Azurix AGOSBA Holdings Ltd.
Azurix AGOSBA Ltd.
Azurix AGOSBA SRL
Azurix Chaoyang Holdings Ltd.
Azurix Chile Holdings Ltd.
Azurix Chile Ltd.
Azurix Suzhou Holdings Ltd.
Azurix Vietnam Holdings Ltd.
Azurix Vietnam Investments Ltd.
Azurix Vietnam Ltd.
Azurix Jordan Ltd.
Azurix Lebanon Ltd.
Azurix Tangiers Ltd.
Azurix Philippines Holdings Ltd.
Azurix Philippines Investments Ltd.
Azurix Philipppines Ltd.
Azurix Guam Corporation
Azurix Panama Holdings Ltd.
Azurix Panama Investments Ltd.
Azurix China Holdings Ltd.
Azurix China Investments Ltd..
Azurix Projects Holdings Ltd.
Azurix Projects Ltd.
Azurix Saigon Holding Co.
Azurix Saigon Ltd.
Azurix Ltd.
Azurix Finance Corp.
Azurix ESSEL Ltd.
Azurix ESSAL Ltd.
Azurix EMOS Ltd.
Azurix ESSBIO Ltd.
Azurix International Limited
Azurix Guangdong Holdings Ltd.
Azurix Europe Ltd.
Wessex Water Ltd.
Wessex Water Services Ltd.
Desarrollos Hidraulicos de Cancun S.A. de C.V.
Aguakan, S.A.
Azurix Mexico City B.V.
Azurix Mexico City SRL
PUMC, Inc.
PUMC Canada Company
Inversiones Azurix Santiago Ltda.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement (Registration No. 333-74379).

/s/ ARTHUR ANDERSEN LLP

--------------------------------------

Arthur Andersen LLP

Houston, Texas

May 5, 1999

<PAGE> 1

EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

As independent accountants we hereby consent to the use of our reports (and to
all references to our Firm) included in or made a part of this registration
statement (Registration No. 333-74379).

/s/ ARTHUR ANDERSEN

--------------------------------------

Arthur Andersen

London, England

May 5, 1999

<PAGE> 1

EXHIBIT 23.3

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this Registration Statement on Form S-1
(Registration No. 333-74379) of our report dated March 12, 1999 on our audit of
the consolidated financial statements of Wessex Water Ltd (formerly Wessex Water
Plc) as at March 31, 1998 and for the years ended March 31, 1998 and 1997 and
our report dated March 12, 1999 on our audit of Schedule II as it relates to
Wessex Water Ltd (formerly Wessex Water Plc) for the years ended March 31, 1998
and 1997. We also consent to the reference to our firm under the caption
"Experts".

/s/ PRICEWATERHOUSECOOPERS

- --------------------------------------

PRICEWATERHOUSECOOPERS

CHARTERED ACCOUNTANTS
Bristol, England

May 4, 1999

<PAGE> 1
EXHIBIT 24

POWER OF ATTORNEY

The undersigned, Herbert S. Winokur, Jr., a director of Azurix Corp.
("Azurix"), does hereby constitute and appoint Rodney L. Gray, Edward N.
Robinson and John C. Ale, and each of them, with full power of substitution, my
true and lawful attorneys-in-fact and agents to do any and all acts and things
in my name and behalf in my capacity as director, and to execute any and all
instruments for me and in my name in the capacity as director which such person
may deem necessary or advisable to enable Azurix to comply with the Securities
Act of 1933, as amended (the "Act"), and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with the
Registration Statement filed under Registration No. 333-74379, including,
specifically, but not limited to, power and authority to sign for me, in the
capacity of director and any and all amendments (including pre-effective and
post-effective amendments or any other registration statement filed pursuant to
the provisions of Rule 462(b) under the Act) hereto; and I do hereby ratify and
confirm all that such person or persons shall do or cause to be done by virtue
hereof.

Dated this 27th day of April, 1999.

/s/ HERBERT S. WINOKUR, JR.
---------------------------
Herbert S. Winokur, Jr.