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 businesses 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, a spokesman for the big E 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.
Enron's energy businesses include Wholesale Energy Operations
and Services, Transportation and Distribution, Exploration and
Production, and Retail Energy Services.
Enron's wholesale group includes Commodity Sales and Services
(the marketing of energy commodities and services and the
management of the related contract portfolios), and Energy Assets
and Investing (the development, construction and operation of
energy assets and Enron's finance and investing activities).
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
Earnings in the Commodity Sales and Services business increased
74% to $224 million in the first quarter of 1999 from $129 million
in the first quarter of 1998, 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
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.
Quarterly earnings for Portland General reflect continued growth in
its retail customer base, reduced operating expenses and favorable
EES provides energy outsource products to commercial and
industrial end-use customers throughout the United States. In the
first quarter of 1999, Enron Energy Services continued to contract
with customers to provide gas, electricity and energy management
and outsource services, and added $1.7 billion of customers' future
energy expenditures to its contract portfolio.
EES 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.
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. Enron also recently swung
a deal for naming rights to the Houston Astros' new baseball
stadium. Enron Field is under construction.
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.