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Enron Earnings Soar; Emphasis on Communications

Enron Earnings Soar; Emphasis on Communications

Enron Corp. turned in second quarter results that beat Wall Street expectations. Also yesterday, Enron Energy Services (EES) announced its biggest energy outsourcing deal yet, and the parent company touted its nascent communications business to analysts, saying Communications, which plans to enter bandwidth trading, now will be classified as a core business. While the company's energy services business continued to lose money, it still appears to be on track to at least break even in the fourth quarter, the company and analysts said.

Enron posted a 29% increase in earnings for the second quarter to $0.54/diluted share compared to second quarter 1998 results of $0.42/diluted share. Net income increased 53% to $222 million compared to $145 million in the prior year's quarter. Revenues also were up significantly in the second quarter of 1999 to $9.7 billion compared to $6.6 billion in the same period of 1998, a 47% increase.

PaineWebber raised its 1999 earnings per share estimate for Enron to $2.40 from $2.35. Earnings per share in 2000 is projected by PaineWebber to be $2.70, up from $2.65. "We note that our earnings projections would likely be higher if it were not for the ongoing high level of start-up expenses at Communications," PaineWebber's Ron Barone wrote in a research note.

That same note also suggested Enron Oil & Gas could still be up for grabs, and Enron might consider a public offering if the market for E&P assets improves as PaineWebber expects. "If the gas markets develop that we think are going to develop this winter and next year, I think the price of the stock could get up to the $24 range, and we could see an offering," Barone told Daily GPI. In December Enron reported it had received an unsolicited offer for EOG (see Daily GPI Dec. 17, 1998). Talks with a potential buyer were later abandoned.

Despite the strong second quarter results, Enron shares fell 1 1/8 Tuesday to close at $84.

Enron Oil & Gas (EOG) reported second quarter 1999 net income of $20.6 million compared to net income of $13.3 million for the comparable period a year ago. Net of non-recurring items, 1999 second quarter net income was $12.9 million, or $0.08/share.

Gas deliveries in the second quarter increased 6% to 959 MMcf/d, versus 1998 second quarter deliveries of 907 MMcf/d. "EOG was able to increase total volumes on a natural gas equivalent basis by 7% per common share from the comparable period in 1998, while maintaining a focus on low production costs and a commitment to high rates of return," EOG President Mark G. Papa said. Total North America wellhead gas deliveries averaged 754 MMcf/d in the second quarter of 1999, a 4% increase over 1998 second quarter volumes of 722 MMcf/d. Second quarter 1999 North America wellhead gas prices averaged $1.93/Mcf, down slightly from an average of $1.96/Mcf in the second quarter of 1998.

Barone said in his research note Enron told analysts that as its high-growth businesses increasingly contribute to the bottom line, the company will consider shedding some of its slower growing asset-intensive operations. Possibilities for sale here include regulated businesses, even the hard-won Portland General, Barone said. Pipelines for sale? "I think that's possible. I'm not looking for a significant peeling back there. They do throw off a significant cash flow," Barone said.

Merrill Lynch analyst Donato Eassey said he would be disappointed if Enron management weren't continuously evaluating the company's portfolio of assets.

"Enron's consistent earnings growth reflects the very strong market positions in all of our businesses," said CEO Kenneth L. Lay. "We have established unique networks in natural gas, electricity and, most recently, communications, that each have distinct advantages of scale and scope. Combining this strong market presence with our core skills and market knowledge, we are positioned to be the leading player in the largest and fastest growing markets in the world. The outlook for the company is excellent, and we are pleased to demonstrate that confidence by declaring the two-for-one stock split."

Enron's businesses are reported as Wholesale Energy Operations and Services (which includes Enron's newly-formed communications business), Transportation and Distribution, Exploration and Production and Retail Energy Services. Enron's wholesale group consists of Commodity Sales and Services (the marketing of energy commodities and services and the management of the associated contract portfolios) and Energy Assets and Investments (the development, construction and operation of energy assets and Enron's finance and investing activities).

Income before interest, minority interest and taxes (IBIT) in the wholesale business increased 48% in the second quarter, reflecting Enron's positions in large and growing markets. IBIT for the wholesale business increased to $356 million for the current period from $241 million in the second quarter of 1998.

The Commodity Sales and Services business increased earnings to $81 million from $23 million a year ago, as the wholesale group continued growth in its natural gas, oil and power marketing activities in every region. Physical deliveries of energy commodities increased to 33.7 trillion Btu/d, an increase of nearly 40% over the second quarter of 1998.

IBIT from the Energy Assets and Investments business increased to $325 million in the second quarter of 1999 from $258 million a year ago.

Transportation and Distribution includes Enron's Gas Pipeline Group and Portland General Electric. Both businesses continue to provide stable sources of earnings and cash flow, as reflected by the $128 million of IBIT generated in second quarter 1999, compared to $134 million in the same quarter of 1998.

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. Including the benefits of Enron's hedge results, the segment reported IBIT of $20 million in the quarter just ended, compared with $29 million in the same quarter of 1998. PaineWebber noted Enron is working to fully hedge its exposure to EOG again during 2000. The company has 45% of its gas production hedged at $2.45/MMBtu.

Enron Energy Services provides energy outsourcing products and services to commercial and industrial end-use customers throughout the United States. Contracting continued during the second quarter, representing $1.7 billion of customers' future expenditures for energy and services, or nearly three times the $650 million reported in the second quarter of 1998. The current quarter's results include the largest contract signed since inception, a 10-year outsource agreement with major food processor and distributor Suiza Foods. Business activity is expected to accelerate further in the second half of the year, resulting in 1999 contracts for customers' future energy and service expenditures of more than $8 billion.

Enron Energy Services reported a loss before interest and taxes of $26 million in the second quarter of 1999, compared to a loss before interest and taxes of $43 million in the second quarter of 1998. The new business continues to expect to make a positive earnings contribution during the fourth quarter of 1999. Analysts Barone and Eassey both said they think that's likely to happen.

Enron Tuesday also announced a two-for-one common stock split effective Aug. 13, 1999, to shareholders of record as of July 23. And if that weren't enough, the company also turned the first shovel of dirt for construction of its new 40-story office tower in downtown Houston.

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