Wholesale Helps Drive Enron Net Income Up 18%
Enron likes to say about half its earnings come from businesses
that didn't even exist five years ago. Considering the company's
results for 1Q 1999, that bodes well for areas where the big E is
just now getting its feet wet, such as retail energy services,
water, and communications.
Enron Corp. first quarter net income grew 18% to $253 million
compared to $214 million in the first quarter of 1998, excluding
accounting changes recorded 1Q 1999. Results were powered mainly by
the commodity sales and services portion of the wholesale side of
the company's business. While Enron Energy Services is still in the
start-up phase and lost a few million more this first quarter than
last, an Enron spokesman said EES is on track to turn a profit in
the fourth quarter as previously promised.
"Our first quarter results reflect the continued strength of our
worldwide energy businesses. Each region of our wholesale business
continued to grow during the quarter in terms of both volumes of
energy delivered and profitability. Also, during the quarter, Enron
Energy Services added $1.7 billion of retail contracts, including
several large, multi-location energy outsourcing agreements," said
Kenneth L. Lay, CEO. "We expect 1999 to be another excellent year
at Enron for both earnings growth and return to our shareholders."
PaineWebber's natural gas group concurred. In a research note
PaineWebber said it is raising its 1999 earnings per share estimate
to $2.35 from $2.30, versus an analyst consensus of $2.33.
PaineWebber also raised its 2000 estimate to $2.65 from $2.60,
versus an analyst consensus of $2.64.
Income before interest, minority interests and taxes (IBIT) in
the wholesale business increased 29% in the first quarter of 1999
to $320 million compared to $249 million in the first quarter of
"I guess I would suggest to you the impressive growth rate that
they've had in this wholesale energy service segment is still on
track to keep going," said Merrill Lynch analyst Donato Eassey.
"That's the most impressive thing to me in the quarter is how
they've been able to keep growing that business in a rather docile
Earnings in the Commodity Sales and Services business increased
74% to $224 million in the first quarter of 1999, as Enron
continued to increase profitability and volumes from its gas and
power marketing businesses in North America and Europe. About 55%
of growth in commodity sales and services is from power, 30% from
natural gas, and the rest came from new products and services, such
as weather and coal derivatives, and pulp and paper products,
spokesman Mark Palmer said. "The bulk of the volume was North
America, but we did see quite a bit of activity coming from Europe
as well and pan-European activity."
In the first quarter of 1999, physical deliveries of energy
commodities increased more than 30% to 29.3 trillion Btu/d compared
to the same period last year. These volumes included a 31% increase
in gas deliveries and a 16% increase in electricity marketed.
U.S. gas sales were 9,088 billion Btue/d, up from 7,726 billion
Btue/d. Canadian figures were 3,954 billion Btue/d, up from 2,876
billion Btue/d. Europe accounted for 1,792 billion Btue/d, up from
1,125 billion Btue/d. These figures include the third-party
transactions of Enron Energy Services.
Enron's Energy Assets and Investments business generated $136
million of IBIT during the first quarter of 1999. The earnings are
primarily attributable to strong results from the international
wholesale business, including earnings from a growing operating
asset base, project development and construction activities and, to
a lesser extent, merchant asset sales. Looking ahead, three regions
stand out for growth: the southern cone of South America, Europe,
and India, Palmer said. In South America, Enron envisions a totally
integrated energy services business akin to what the company has in
North America. In Europe the plan is to be the first and foremost
power marketer wherever markets are open, such as the Nordic
countries, where Enron enjoys a No. 1 position. In India, Enron has
E&P interests, a power plant, and the company is now talking
about a gas pipeline.
Transportation and Distribution includes both the Gas Pipeline
Group and Portland General Electric. It generated $218 million of
IBIT in the first quarter of 1999 compared to $205 million in last
year's first quarter. In the Gas Pipeline Group, total throughput
increased due largely to the high utilization of the 700 MMcf/d
expansion of Northern Border Pipeline placed into service in late
1998. Enron's four pipes, Northern Natural Gas, Transwestern,
Florida Gas Transmission, and Northern Border, moved 9,785 billion
Btu/d, up from 9,151 billion Btu/d in the first quarter of 1998.
In 1Q99, Enron Energy Services reported a loss before interest
and taxes of $31 million in the first quarter of 1999 compared to a
loss of $27 million in the first quarter of 1998.
"Worth reiterating is that the Street often forgets to associate
any value creation with the ongoing losses at EES (losses which
decrease Enron's earnings, 'artificially' increasing its P/E),"
PaineWebber said. "In short, this business could evolve into a key
growth driver by the turn of the century and should be given value
today, despite lingering losses."
EES losses mainly reflect continuing start-up costs and the
increase in losses this quarter reflects more activity in the
business. "It just takes more people," Palmer said. "We're
projecting we're going to more than double our contracting activity
from the previous year. We are on track to do that, and as those
contracts begin to come on stream and replace the fixed costs of
starting up that business, then we go earnings positive." Palmer
said plans are still for that to happen in the fourth quarter.
Without details of EES contracts, analysts can't model the
business, Eassey said. However, "my belief is that this management
would not set itself up for a market disappointment."
Speaking of adding more people, Enron Corp. is continually doing
that. Earlier this year the company announced plans for a new
40-story downtown Houston office tower, not to replace its existing
50-story silver glass behemoth but to augment it. Groundbreaking
for the new building is planned for July.
Exploration and Production includes the operations of Enron Oil
& Gas Co. (EOG) and Enron's hedging of its exposure to commodity
prices related to its majority ownership of EOG. Enron said it's
still in negotiations that could lead to EOG's sale but would not
comment further. In the first quarter of 1999, Exploration and
Production generated $12 million of IBIT compared with $43 million
in the first quarter of 1998. These results are despite an 11%
increase in total production. During the quarter, Enron's commodity
price hedges contributed $23 million to IBIT. U.S. E&P gas
volumes were 677 MMcf/d, up from 644 MMcf/d. Canadian volumes were
104 MMcf/d, up from 101 MMcf/d. The average U.S. wellhead gas price
was $1.62/Mcf, down from $2.01/Mcf. The Canadian average was
$1.39/Mcf both in the first quarter of 1999 and 1998. The North
American Composite price was $1.58/Mcf in the first quarter of
1999, down from $1.93 in 1Q 1998.
While he wouldn't name names, Eassey said there are many who
would love to get their hands on EOG's two strongest assets: its
reserves and its people. "The fact of the matter is they want to
sell it, but they don't want to give it away. There's no sense of
urgency. There's no requirement for them to sell." Especially, as
many believe, now that oil and gas prices are in recovery mode.
EOG itself had 1Q 1999 net income of $5.1 million, compared to
net income of $27.0 million for the first quarter of last year. The
first quarter of 1999 included non-recurring income of $18.2
million after tax while the first quarter of 1998 included sale of
assets, net, and non-recurring tax benefits of $16.8 million after
tax. First quarter 1999 volumes increased to 1.2 Bcfe/d, up 11%
over first quarter 1998 volumes of 1.1 Bcfe/d.
Joe Fisher, Houston