Enron likes to say about half its earnings come from businessesthat didn’t even exist five years ago. Considering the company’sresults for 1Q 1999, that bodes well for areas where the big E isjust now getting its feet wet, such as retail energy services,water, and communications.

Enron Corp. first quarter net income grew 18% to $253 millioncompared to $214 million in the first quarter of 1998, excludingaccounting changes recorded 1Q 1999. Results were powered mainly bythe commodity sales and services portion of the wholesale side ofthe company’s business. While Enron Energy Services is still in thestart-up phase and lost a few million more this first quarter thanlast, an Enron spokesman said EES is on track to turn a profit inthe fourth quarter as previously promised.

“Our first quarter results reflect the continued strength of ourworldwide energy businesses. Each region of our wholesale businesscontinued to grow during the quarter in terms of both volumes ofenergy delivered and profitability. Also, during the quarter, EnronEnergy Services added $1.7 billion of retail contracts, includingseveral large, multi-location energy outsourcing agreements,” saidKenneth L. Lay, CEO. “We expect 1999 to be another excellent yearat Enron for both earnings growth and return to our shareholders.”

PaineWebber’s natural gas group concurred. In a research notePaineWebber said it is raising its 1999 earnings per share estimateto $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) inthe wholesale business increased 29% in the first quarter of 1999to $320 million compared to $249 million in the first quarter of1998.

“I guess I would suggest to you the impressive growth rate thatthey’ve had in this wholesale energy service segment is still ontrack to keep going,” said Merrill Lynch analyst Donato Eassey.”That’s the most impressive thing to me in the quarter is howthey’ve been able to keep growing that business in a rather docilefirst quarter.”

Earnings in the Commodity Sales and Services business increased74% to $224 million in the first quarter of 1999, as Enroncontinued to increase profitability and volumes from its gas andpower marketing businesses in North America and Europe. About 55%of growth in commodity sales and services is from power, 30% fromnatural gas, and the rest came from new products and services, suchas weather and coal derivatives, and pulp and paper products,spokesman Mark Palmer said. “The bulk of the volume was NorthAmerica, but we did see quite a bit of activity coming from Europeas well and pan-European activity.”

In the first quarter of 1999, physical deliveries of energycommodities increased more than 30% to 29.3 trillion Btu/d comparedto the same period last year. These volumes included a 31% increasein gas deliveries and a 16% increase in electricity marketed.

U.S. gas sales were 9,088 billion Btue/d, up from 7,726 billionBtue/d. Canadian figures were 3,954 billion Btue/d, up from 2,876billion Btue/d. Europe accounted for 1,792 billion Btue/d, up from1,125 billion Btue/d. These figures include the third-partytransactions of Enron Energy Services.

Enron’s Energy Assets and Investments business generated $136million of IBIT during the first quarter of 1999. The earnings areprimarily attributable to strong results from the internationalwholesale business, including earnings from a growing operatingasset base, project development and construction activities and, toa lesser extent, merchant asset sales. Looking ahead, three regionsstand out for growth: the southern cone of South America, Europe,and India, Palmer said. In South America, Enron envisions a totallyintegrated energy services business akin to what the company has inNorth America. In Europe the plan is to be the first and foremostpower marketer wherever markets are open, such as the Nordiccountries, where Enron enjoys a No. 1 position. In India, Enron hasE&ampP interests, a power plant, and the company is now talkingabout a gas pipeline.

Transportation and Distribution includes both the Gas PipelineGroup and Portland General Electric. It generated $218 million ofIBIT in the first quarter of 1999 compared to $205 million in lastyear’s first quarter. In the Gas Pipeline Group, total throughputincreased due largely to the high utilization of the 700 MMcf/dexpansion of Northern Border Pipeline placed into service in late1998. Enron’s four pipes, Northern Natural Gas, Transwestern,Florida Gas Transmission, and Northern Border, moved 9,785 billionBtu/d, up from 9,151 billion Btu/d in the first quarter of 1998.

In 1Q99, Enron Energy Services reported a loss before interestand taxes of $31 million in the first quarter of 1999 compared to aloss of $27 million in the first quarter of 1998.

“Worth reiterating is that the Street often forgets to associateany value creation with the ongoing losses at EES (losses whichdecrease Enron’s earnings, ‘artificially’ increasing its P/E),”PaineWebber said. “In short, this business could evolve into a keygrowth driver by the turn of the century and should be given valuetoday, despite lingering losses.”

EES losses mainly reflect continuing start-up costs and theincrease in losses this quarter reflects more activity in thebusiness. “It just takes more people,” Palmer said. “We’reprojecting we’re going to more than double our contracting activityfrom the previous year. We are on track to do that, and as thosecontracts begin to come on stream and replace the fixed costs ofstarting up that business, then we go earnings positive.” Palmersaid plans are still for that to happen in the fourth quarter.Without details of EES contracts, analysts can’t model thebusiness, Eassey said. However, “my belief is that this managementwould not set itself up for a market disappointment.”

Speaking of adding more people, Enron Corp. is continually doingthat. Earlier this year the company announced plans for a new40-story downtown Houston office tower, not to replace its existing50-story silver glass behemoth but to augment it. Groundbreakingfor the new building is planned for July.

Exploration and Production includes the operations of Enron Oil&amp Gas Co. (EOG) and Enron’s hedging of its exposure to commodityprices related to its majority ownership of EOG. Enron said it’sstill in negotiations that could lead to EOG’s sale but would notcomment further. In the first quarter of 1999, Exploration andProduction generated $12 million of IBIT compared with $43 millionin the first quarter of 1998. These results are despite an 11%increase in total production. During the quarter, Enron’s commodityprice hedges contributed $23 million to IBIT. U.S. E&ampP gasvolumes were 677 MMcf/d, up from 644 MMcf/d. Canadian volumes were104 MMcf/d, up from 101 MMcf/d. The average U.S. wellhead gas pricewas $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 NorthAmerican Composite price was $1.58/Mcf in the first quarter of1999, down from $1.93 in 1Q 1998.

While he wouldn’t name names, Eassey said there are many whowould love to get their hands on EOG’s two strongest assets: itsreserves and its people. “The fact of the matter is they want tosell it, but they don’t want to give it away. There’s no sense ofurgency. There’s no requirement for them to sell.” Especially, asmany believe, now that oil and gas prices are in recovery mode.

EOG itself had 1Q 1999 net income of $5.1 million, compared tonet income of $27.0 million for the first quarter of last year. Thefirst quarter of 1999 included non-recurring income of $18.2million after tax while the first quarter of 1998 included sale ofassets, net, and non-recurring tax benefits of $16.8 million aftertax. 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

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