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 businesses where the big Eis just 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, a spokesman for the big E said EES is on track to turn aprofit in the 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.

Enron’s energy businesses include Wholesale Energy Operationsand Services, Transportation and Distribution, Exploration andProduction, and Retail Energy Services.

Enron’s wholesale group includes Commodity Sales and Services(the marketing of energy commodities and services and themanagement of the related contract portfolios), and Energy Assetsand Investing (the development, construction and operation ofenergy assets and Enron’s finance and investing activities).

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.

Earnings in the Commodity Sales and Services business increased74% to $224 million in the first quarter of 1999 from $129 millionin the first quarter of 1998, as Enron continued to increaseprofitability and volumes from its gas and power marketingbusinesses in North America and Europe. About 55% of growth incommodity sales and services is from power, 30% from natural gas,and the rest came from new products and services, such as weatherand coal derivatives, and pulp and paper products, spokesman MarkPalmer said. “The bulk of the volume was North America, but we didsee quite a bit of activity coming from Europe as well andpan-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&P 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.Quarterly earnings for Portland General reflect continued growth inits retail customer base, reduced operating expenses and favorablehydroelectric conditions.

EES provides energy outsource products to commercial andindustrial end-use customers throughout the United States. In thefirst quarter of 1999, Enron Energy Services continued to contractwith customers to provide gas, electricity and energy managementand outsource services, and added $1.7 billion of customers’ futureenergy expenditures to its contract portfolio.

EES reported a loss before interest and taxes of $31 million inthe first quarter of 1999 compared to a loss of $27 million in thefirst 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.

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. Enron also recently swunga deal for naming rights to the Houston Astros’ new baseballstadium. Enron Field is under construction.

Exploration and Production includes the operations of Enron Oil& Gas Co. (EOG) and Enron’s hedging of its exposure tocommodity prices related to its majority ownership of EOG. Enronsaid it’s still in negotiations that could lead to EOG’s sale butwould not comment further. In the first quarter of 1999,Exploration and Production generated $12 million of IBIT comparedwith $43 million in the first quarter of 1998. These results aredespite 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 averageU.S. wellhead gas price was $1.62/Mcf, down from $2.01/Mcf. TheCanadian average was $1.39/Mcf both in the first quarter of 1999and 1998. The North American Composite price was $1.58/Mcf in thefirst quarter of 1999, down from $1.93 in 1Q 1998.

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