Enron's 2Q Exceeds Expectations; Sees Power Growth
Enron deliveries of energy commodities grew 47% from the second
quarter of last year, including a 10% increase in gas deliveries
and a more than 100% increase in power marketed. However, results
of the gas pipeline group and exploration and production were off
slightly, and the retail business, Enron Energy Services (EES),
lost more money than it did a year ago.
Enron Corp. had 1998 second quarter earnings of $0.42 per
diluted share, compared to $0.38 (excluding the $1.66/share charge
for its J-block settlement) in the second quarter of 1997. Results
were led by growth in the company's largest business, Wholesale
Energy Operations and Services.
"These results confirm the operating strength of each Enron
business unit and our ability to produce consistent, predictable
earnings in spite of rapidly changing, highly volatile energy
markets," said Kenneth L. Lay, CEO. "In addition to the strength of
our traditional businesses, our newer activities are firmly
established, particularly the U. S. wholesale power marketing
business and Enron Energy Services. Combined with a very
substantial backlog of projects and opportunities, our business
outlook is the strongest in the company's history."
Enron's results exceeded PaineWebber Natural Gas Group estimates
by two cents/share and Wall Street estimates by three cents/share.
"As a result of the stronger than expected results and the outlook
for continued solid momentum in its Wholesale Energy group, we are
raising our 1998 diluted earnings per share estimate on Enron to
$2.05 from $1.95 and our 1999 diluted earnings per share estimate
to $2.35 from $2.25," PaineWebber said. adding its 12- to 18-month
stock price target is $62/share.
Edward Jones analyst Zach Wagner continues to rate Enron a
"buy." He said he wasn't concerned by EES' second quarter losses of
$43 million. "As they bring in and sign on more and more new
contracts, you can expect expenses associated with that to
increase." EES is ahead of schedule in signing up customers. So far
this year, EES has signed contracts worth about $1.5 billion, more
than half of its $2.4 billion target for 1998, Wagner said.
"The electricity trading continues to be a huge contributor in
terms of improvement quarter over quarter. It was profitable again
this quarter for the second consecutive quarter. I think we're
really seeing Enron's experience and market position come into
play. Even though electricity trading is relatively new, Enron's
been trading natural gas for years and year, so that's where
they're kind of getting all their experience."
Wagner said transmission and distribution and exploration and
production results weren't troublesome given warm weather and the
low commodity price environment. In fact, considering these
factors, the results are impressive, he said.
Enron's core businesses, Wholesale Energy Operations and
Services, Transportation and Distribution, and Exploration and
Production, realized earnings per diluted share of $0.50 for the
second quarter of 1998 compared to $0.44 for the second quarter of
Enron's wholesale business includes development and construction
of energy infrastructure, commodity sales and services, risk
management products and financial services. The wholesale business
generated income before interest, minority interests and taxes
(IBIT) of $241 million in the second quarter, an 85% increase over
the $130 million of IBIT reported in the second quarter of 1997.
In the second quarter, physical deliveries of all energy
commodities increased 47% from a year ago to 24.2 trillion Btu/d.
Compared to a year ago, these volumes included a 10% increase in
gas deliveries and a more than doubling of electricity marketed to
over 86 million MWh. Finance and Investing activities benefited
from the growing earnings and increased value of Enron's energy and
asset portfolio, which is made up of volumetric production
payments, loans and equity in energy-intensive businesses and
projects. The Asset Development and Construction business also
grew. Enron has nine international power plant and pipeline
projects financed and in construction, representing more than $6
billion in capital costs. The projects are on schedule, including
Enron's 826 MW power project in Dabhol, India, which is more than
90% complete and expected to be operating in December.
Enron's Transportation and Distribution group includes the Gas
Pipeline Group and Portland General electric in Oregon. Despite
warmer weather in the upper Midwest service area, the Gas Pipeline
Group generated $72 million of IBIT in the second quarter compared
with $73 million in the second quarter of 1997. In the second
quarter, Portland General generated $62 million of IBIT. Because
the merger with Enron was effective in July 1997, Portland General
was not included in Enron's earnings during the second quarter of
The Exploration and Production group includes operations of
Enron Oil & Gas (EOG) and related price risk hedging. In the
second quarter, Exploration and Production generated $29 million of
IBIT compared with $30 million in the second quarter of 1997.
According to PaineWebber, Enron said it will continue to hedge
EOG's North American gas production at a price of about $2.30/MMBtu
for the rest of the year. For next year, Enron has said it hedged
about one-third of its production at a price near $2.40/MMBtu.
Enron Energy Services in the second quarter signed contracts
worth about $650 million in future revenues from energy delivery.
The contracts include energy services, such as in one case, a full
outsourcing of a customer's nationwide energy requirements. EES
reported an operating loss before interest and taxes of $43 million
in the second quarter compared to a loss of $25 million in the
second quarter of 1997, or $(0.08) and $(0.06) per diluted share,
respectively. The losses reflect start-up costs, Enron said.
Joe Fisher, Houston