Enron Corp. turned in second quarter results that beat WallStreet expectations. Also yesterday, Enron Energy Services (EES)announced its biggest energy outsourcing deal yet, and the parentcompany touted its nascent communications business to analysts,saying Communications, which plans to enter bandwidth trading, nowwill be classified as a core business. While the company’s energyservices business continued to lose money, it still appears to beon track to at least break even in the fourth quarter, the companyand analysts said.

Enron posted a 29% increase in earnings for the second quarterto $0.54/diluted share compared to second quarter 1998 results of$0.42/diluted share. Net income increased 53% to $222 millioncompared to $145 million in the prior year’s quarter. Revenues alsowere up significantly in the second quarter of 1999 to $9.7 billioncompared to $6.6 billion in the same period of 1998, a 47%increase.

PaineWebber raised its 1999 earnings per share estimate forEnron to $2.40 from $2.35. Earnings per share in 2000 is projectedby PaineWebber to be $2.70, up from $2.65. “We note that ourearnings projections would likely be higher if it were not for theongoing high level of start-up expenses at Communications,”PaineWebber’s Ron Barone wrote in a research note.

That same note also suggested Enron Oil & Gas could still be upfor grabs, and Enron might consider a public offering if the marketfor E&P assets improves as PaineWebber expects. “If the gasmarkets develop that we think are going to develop this winter andnext year, I think the price of the stock could get up to the $24range, and we could see an offering,” Barone told Daily GPI. InDecember Enron reported it had received an unsolicited offer for EOG(see Daily GPI Dec. 17, 1998). Talkswith a potential buyer were later abandoned.

Despite the strong second quarter results, Enron shares fell 11/8 Tuesday to close at $84.

Enron Oil & Gas (EOG) reported second quarter 1999 netincome of $20.6 million compared to net income of $13.3 million forthe comparable period a year ago. Net of non-recurring items, 1999second quarter net income was $12.9 million, or $0.08/share.

Gas deliveries in the second quarter increased 6% to 959 MMcf/d,versus 1998 second quarter deliveries of 907 MMcf/d. “EOG was ableto increase total volumes on a natural gas equivalent basis by 7%per common share from the comparable period in 1998, whilemaintaining a focus on low production costs and a commitment tohigh rates of return,” EOG President Mark G. Papa said. Total NorthAmerica wellhead gas deliveries averaged 754 MMcf/d in the secondquarter of 1999, a 4% increase over 1998 second quarter volumes of722 MMcf/d. Second quarter 1999 North America wellhead gas pricesaveraged $1.93/Mcf, down slightly from an average of $1.96/Mcf inthe second quarter of 1998.

Barone said in his research note Enron told analysts that as itshigh-growth businesses increasingly contribute to the bottom line,the company will consider shedding some of its slower growingasset-intensive operations. Possibilities for sale here includeregulated businesses, even the hard-won Portland General, Baronesaid. Pipelines for sale? “I think that’s possible. I’m not lookingfor a significant peeling back there. They do throw off asignificant cash flow,” Barone said.

Merrill Lynch analyst Donato Eassey said he would bedisappointed if Enron management weren’t continuously evaluatingthe company’s portfolio of assets.

“Enron’s consistent earnings growth reflects the very strongmarket positions in all of our businesses,” said CEO Kenneth L.Lay. “We have established unique networks in natural gas,electricity and, most recently, communications, that each havedistinct advantages of scale and scope. Combining this strongmarket presence with our core skills and market knowledge, we arepositioned to be the leading player in the largest and fastestgrowing markets in the world. The outlook for the company isexcellent, and we are pleased to demonstrate that confidence bydeclaring the two-for-one stock split.”

Enron’s businesses are reported as Wholesale Energy Operationsand Services (which includes Enron’s newly-formed communicationsbusiness), Transportation and Distribution, Exploration andProduction and Retail Energy Services. Enron’s wholesale groupconsists of Commodity Sales and Services (the marketing of energycommodities and services and the management of the associatedcontract portfolios) and Energy Assets and Investments (thedevelopment, construction and operation of energy assets andEnron’s finance and investing activities).

Income before interest, minority interest and taxes (IBIT) inthe wholesale business increased 48% in the second quarter,reflecting Enron’s positions in large and growing markets. IBIT forthe wholesale business increased to $356 million for the currentperiod from $241 million in the second quarter of 1998.

The Commodity Sales and Services business increased earnings to$81 million from $23 million a year ago, as the wholesale groupcontinued growth in its natural gas, oil and power marketingactivities in every region. Physical deliveries of energycommodities increased to 33.7 trillion Btu/d, an increase of nearly40% over the second quarter of 1998.

IBIT from the Energy Assets and Investments business increasedto $325 million in the second quarter of 1999 from $258 million ayear ago.

Transportation and Distribution includes Enron’s Gas PipelineGroup and Portland General Electric. Both businesses continue toprovide stable sources of earnings and cash flow, as reflected bythe $128 million of IBIT generated in second quarter 1999,compared to $134 million in the same quarter of 1998.

Exploration and Production includes the operations of Enron Oil& Gas Co. (EOG) and Enron’s hedging of its exposure tocommodity prices related to its majority ownership of EOG.Including the benefits of Enron’s hedge results, the segmentreported IBIT of $20 million in the quarter just ended, comparedwith $29 million in the same quarter of 1998. PaineWebber notedEnron is working to fully hedge its exposure to EOG again during2000. The company has 45% of its gas production hedged at$2.45/MMBtu.

Enron Energy Services provides energy outsourcing products andservices to commercial and industrial end-use customers throughoutthe United States. Contracting continued during the second quarter,representing $1.7 billion of customers’ future expenditures forenergy and services, or nearly three times the $650 millionreported in the second quarter of 1998. The current quarter’sresults include the largest contract signed since inception, a10-year outsource agreement with major food processor anddistributor Suiza Foods. Business activity is expected toaccelerate further in the second half of the year, resulting in1999 contracts for customers’ future energy and serviceexpenditures of more than $8 billion.

Enron Energy Services reported a loss before interest and taxesof $26 million in the second quarter of 1999, compared to a lossbefore interest and taxes of $43 million in the second quarter of1998. The new business continues to expect to make a positiveearnings contribution during the fourth quarter of 1999. AnalystsBarone and Eassey both said they think that’s likely to happen.

Enron Tuesday also announced a two-for-one common stock spliteffective Aug. 13, 1999, to shareholders of record as of July 23.And if that weren’t enough, the company also turned the firstshovel of dirt for construction of its new 40-story office tower indowntown Houston.

©Copyright 1999 Intelligence Press Inc. All rights reserved. Thepreceding news report may not be republished or redistributed, inwhole or in part, in any form, without prior written consent ofIntelligence Press, Inc.