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Enron Pondering Portland General's Future

Enron Pondering Portland General's Future

Only two-years after winning its hard-fought battle to acquire Portland General Electric, Enron Corp. President Jeffrey K. Skilling last week said the company is considering "alternatives" for the electric utility.

"We have gotten significant strategic benefit from Portland, from the wholesale operations that we acquired with Portland and from the telecommunications that was actually acquired as part of the Portland acquisition, so we feel very good about it," Skilling told analysts during a 3Q earnings conference call last week. "We're constantly looking at alternatives. We, I think in general, would say that Portland is probably not as strategic as it was before when it had a strong wholesale business that we could integrate with our nationwide wholesale business. So we are looking at alternatives."

Enron last week announced a 33% increase in 3Q net income. While Enron Energy Services signed its largest contract ever in the third quarter, the unit has yet to show a profit. However, the company said strong performance to date all but ensures a profit in the fourth quarter.

Enron Energy Services (EES) offers energy outsourcing products to business customers throughout the U.S. During the third quarter, EES entered into contracts representing $2.5 billion of customers' future expenditures for energy services, or three times the $850 million contracted in the third quarter a year ago. The current quarter's results include the largest contract signed to date - a more than $1 billion 10-year outsourcing agreement with Owens Corning (see NGI Sept. 27).

EES is expected to meet or exceed its target of signing $8 billion of contracts in 1999 for future energy needs of its customers, more than double the value of contracts signed during 1998. EES third quarter results improved over all prior quarters, with a loss before interest and taxes of $18 million compared to a $23 million loss for the same period in 1998. EES is on track to make a positive contribution to earnings during the fourth quarter, the company said.

Just last week, EES announced another deal. This one is a $1.5 billion energy management agreement with Simon Brand Ventures, an initiative of Simon Property Group, the country's largest retail real estate investment trust (REIT). Enron will supply or manage all of the energy commodity requirements of Indianapolis, IN-based Simon Property Group's portfolio for 10 years.

"Given management's optimistic comments regarding the ability to exceed $8 billion in contracting this year (with nine-month results currently at the $5.9 billion level), there will likely be large contracts announced in the near-term - possibly as early as this week," PaineWebber said in a research note on the earnings announcement. "Looking toward 2000, though no dollar amount was released, management noted that contracting levels could substantially exceed that of the $8 billion (or greater) level projected in 1999.

"With regard to margins, the company noted that contracting activity continues to show a high margin component, ahead of original expectations. Management also mentioned that it is currently working on expanding EES into the international markets and that it continues to see little threat from competition."

The EES results were just part of overall earnings reported last week by Enron. The company realized a 33% increase in net income to $223 million for the third quarter of 1999, compared to $168 million in the third quarter of 1998. Results exclude the net benefit of nonrecurring items in the third quarter of 1999. Revenues increased to about $12 billion for the third quarter of 1999.

"The scale and scope of Enron's wholesale businesses provide tremendous competitive advantages in the rapidly growing, deregulating energy markets, enabling Enron to consistently achieve strong earnings growth," said Kenneth L. Lay, CEO. "Our new retail energy network has similar operating advantages and continues to exceed our own expectations both for signing long-term outsourcing contracts and for profitability. We are extending our network skills to the high bandwidth communications market and are pursuing a market-oriented, low-asset approach, patterned after our very successful global energy business."

Enron's wholesale group consists of two primary lines of business: Commodity Sales and Services and Energy Assets and Investments. Income before interest, minority interest and taxes (IBIT) in the wholesale business increased 36% in the third quarter of 1999 to $378 million from $277 million a year ago.

Total gas volumes increased almost 19% in the third quarter, including increases in every area of Enron's wholesale operations. Total power volumes for the third quarter of 1999 exceeded both first and second quarter levels but were down from the unusually high third quarter level last year.

Enron's Energy Assets and Investments business reported $240 million of IBIT in the third quarter of 1999 compared to $160 million in the third quarter of 1998.

Transportation and Distribution, which includes Enron's Gas Pipeline Group and Portland General Electric, generated $137 million of IBIT in the third quarter, compared to $130 million last year.

Including nonrecurring items, Enron had a 73% increase in third quarter net income to $290 million, compared to $168 million in the third quarter of 1998. Third quarter 1999 results included a nonrecurring after-tax gain of $345 million for the sale of Enron's share in Enron Oil & Gas Co. Enron has integrated the remaining exploration and production operations in India and China into its wholesale businesses in those regions. Also included in the reported results is a nonrecurring, after-tax charge of $278 million related to adjust Enron's MTBE gasoline additive asset to its estimated fair value.

Joe Fisher, Houston

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