Enron, Dynegy Click On All Cylinders In Q1

A confluence of positive trends, including continued robustness in wholesale energy trading activity, helped to propel first quarter 2001 earnings at energy marketing and trading powerhouse Enron Corp. and its energy marketing competitor Dynegy Inc. above and beyond expectations previously locked in by Wall Street analysts.

Enron last Tuesday said that earnings per diluted share in the first quarter of 2001 increased 18% to $0.47, from $0.40 a year ago, on revenues of an eye-popping $50.1 billion. The first quarter 2001 results exclude a non-recurring after-tax gain of $19 million, or $0.02 per diluted share, related to the required adoption of new accounting standards, leading to reported earnings for the first quarter of 2001 of $0.49 per diluted share. Enron's first-quarter results easily beat Wall Street expectations. According to Thomson Financial/First Call, the analysts' earnings consensus estimate was for Enron to earn $0.45 per share.

For its part, Dynegy reported a 73% increase in first quarter 2001 recurring net income to $137.5 million, or $0.41 per diluted share, compared to first-quarter 2000 recurring net income of $79.4 million, or $0.26 per diluted share. The company's latest first-quarter results edged out the consensus earnings estimate carried by Thomson Financial/First Call of $0.40 per share.

Looking at specific segments, Enron reported that income before interest, minority interests and taxes (IBIT) jumped 76% in its wholesale services division to $755 million in the most recent first quarter. Enron said that IBIT related to its wholesale commodity activities skyrocketed 207% to $785 million in the first quarter of 2001. Meanwhile, Dynegy's marketing and trade unit was able to increase recurring net income an impressive 99% to $100.3 million in the first quarter of 2001, which compares with $50.3 million in the first quarter of 2000.

Both Enron and Dynegy offered up a positive prognosis for their electronic commerce transaction efforts. Enron said that new records for average weekly volume at its EnronOnline e-commerce transaction platform continued to be set throughout the recent quarter. And Dynegydirect, Dynegy's electronic commerce portal, posted nearly $9 billion in notional transactions during the first quarter of 2001. Since Dynegydirect's launch in November 2000, approximately 40% of the portal's transactions are new business.

On the broadband front, Enron's broadband services unit reported a $35 million IBIT loss for the first quarter. But there was plenty of encouraging news nevertheless, with Enron noting that its global broadband platform is substantially complete. For its part, Dynegy disclosed that its newly established Dynegy Global Communications unit experienced an $11.6 million quarterly loss, or $0.03 per diluted share, resulting from start-up costs tied to the expansion of the company's global communications business.

With the wind at their backs, Dynegy and Enron each offered up fairly bullish outlooks for 2001. "All in all, we're very comfortable with our previous guidance for the second quarter 2001 at 35 cents and I see nothing on the horizon but good news, good opportunity for Dynegy for all of 2001," said Chuck Watson, the company's chairman and CEO, in a conference call with analysts. Enron last Tuesday announced that it was increasing its recurring earnings expectation for 2001 to a range of $1.75 to $1.80 per diluted share.

In the wake of the positive earnings announcements by Enron and Dynegy, UBS Warburg raised its earnings estimates on both companies. In the case of Dynegy, UBS Warburg, in a research note issued last Wednesday, said it was raising its recurring 2001 EPS estimate on Dynegy to $2.00 from $1.95. UBS Warburg also said it was raising its preliminary 2002 EPS estimate on Dynegy five cents, to $2.40 from $2.35. Turning to Enron, UBS Warburg, in a separate research note, raised its 2001 EPS estimate on the company to $1.80 from $1.75. UBS Warburg also raised its preliminary 2002 EPS estimate to $2.10 from $2.05.

Not surprisingly, the ongoing saga of California's energy crisis was a topic of discussion in each company's earnings conference call with analysts.

During Enron's call, Jeff Skilling, the company's president and CEO, addressed recent news reports related to California and Pacific Gas & Electric's recent bankruptcy filing. "The press recently reported a $580 million receivable to Enron from PG&E," Skilling said. He emphasized that Enron fully expects to be paid the amounts due to the company. "In addition, we have adequate reserves and other credit offsets in place to cover this exposure," Skilling said. "As we have stated previously, we remain confident that the situation in California will have no material impact on our financial condition and no inverse impact on 2001 earnings," he said.

Dynegy executives were quizzed on whether long-term contracts being signed in California may reduce volatility in that part of the country. "I still think you're going to see a bunch of volatility in the West; it's going to continue to be very volatile," said Steve Bergstrom, Dynegy president.

Finally, in an interesting aside, things got rather heated on Enron's conference call last Tuesday after Richard Grubman, managing director for Highfields Capital Management, pressed Skilling on the availability of balance sheet data for Enron.

"You're the only financial institution that can't produce a balance sheet or a cash flow statement with their earnings," Grubman charged. "Well, thank you very much, we appreciate it, asshole," Skilling responded with a chuckle.

When asked about the exchange, Mark Palmer, an Enron spokesperson, told NGI that "Jeff tends to wear his feelings on his sleeve." Palmer asserted that the caller in question is a short seller and was therefore motivated to "make some money." But the purpose of such conference calls is for "informed discussion," Palmer went on to note.

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