Power Sales Surge Enron's 2Q Profit 40%

Houston-based Enron Corp., hit in the past few months with accusations of overcharging in California and sagging stock performance, wiped the slate clean Thursday with its second quarter earnings release, announcing profit was up 40% over a year ago, boosted by surging electricity and gas sales in North America and Europe. The company said it sold almost twice as much power in North America and five times as much in Europe in the quarter.

CEO Jeffrey Skilling gave credit for the outstanding quarter to Enron's wholesale division, which has reported 22 consecutive earnings of growth. Beating Wall Street estimates, Enron reported a 32% increase in diluted earnings per share to $0.45 for the second quarter, up from $0.34 a year ago. Enron reported a 40% increase in net income to $404 million (up from $289 million in second quarter 2000). It also had a 58% increase in energy volumes delivered to 74 T Btue/d and an 89% increase in new retail energy services contracts to $7.2 billion.

The wholesale business, which has led the company's growth for more than 10 years, did not disappoint, and income before interest and taxes (IBIT) increased 93% to a record level of $802 million. Most impressive were Enron's power sales, both in North America and worldwide. Skilling noted that Enron was "close to the point where power overtakes gas."

Enron's wholesale commodities sales and services sector increased 81% to $762 million, with physical volumes significantly up in gas, power and crude-related activities. Total wholesale volumes were up worldwide 58% to 76 trillion Btue/d, with a 21% increase in natural gas volumes to 32.2 trillion Btu/d and a 108% increase in power volumes to 285 million MWh. In North America, Enron had a 9% increase in natural gas sales volumes for the quarter to 215 T Btu/d and a 71% increase in power volumes to 212 million MWh.

EnronOnline also continued to show its mettle, with a 200% increase in the quarter relative to last year, more than doubling its delivered volumes in weather, metals, lumber and steel in the second quarter from a year ago. Skilling said that as of this week, 60% of Enron's total transactions were made through its online arm, with more than $685 billion in total gross transactions to date since its inception in November 1999.

Wholesale profitability also scored with Enron's deep contract access to gas and power supplies in North America, which enabled a reduction in energy asset ownership, including a sale in the second quarter of three power plants totaling 1,710 MW that directly supported commodity sales contracts. Enron's European wholesale business also has been expanding, and Skilling said he expected continued high growth overseas for the next few years.

Enron's retail services division provides energy management services in North America and Europe, and Skilling said it is taking off better than the company had expected. IBIT for the division increase 30% to $60 million in the second quarter, and Skilling said the retail end was on track this year to "more than double" last year's $225 million total.

New retail energy contracts totaled $7.2 billion in the second quarter, a 89% increase compared to second quarter 2000. Its outsourcing energy product includes new contracts with large companies in the hospitality, entertainment and retail food markets in the United States and Europe, and Skilling said there had been a significant demand for products and services from existing and new customers.

"We're moving to an environment where the customer and the producer are much more flexible," Skilling said of retail service contracts. "We have a higher degree of interest from the customers, and we're seeing that anything can happen. There's been a huge demand for relatively simple commodities contracts at the retail level. There's a sense of how people are concerned about it."

Enron's regulated Transportation Services and Portland General Electric also saw earnings increase for the quarter. Enron Transportation, comprised primarily of its North American interstate gas pipelines, reported $77 million of IBIT. A pipeline expansion project recently completed by Florida Gas added 200 MMcf/d of new capacity to Florida, and a 425 MMcf/d expansion is under way. A 150 MMcf/d capacity expansion on the Transwestern pipeline to California is slated for completion in 2002.

IBIT for Portland General was $65 million in the second quarter, which is continuing to "optimize over 2,000 MW of owned generation," Skilling said. The utility was once on the sales block, but Skilling did not indicate that it would be sold, although it has been a consideration (see NGI, April 30).

The only disappointing earnings in the second quarter was in Enron's emerging broadband business, with Skilling admitting it had been a "difficult quarter." Enron Broadband Services reported a $102 million IBIT loss for the second quarter, compared with an $8 million loss a year ago. The loss related to "significantly lower revenues and comparable operating expenses from a year ago." Because the industry itself is so weak, Skilling said that going forward, Enron will focus its broadband activities on two areas: intermediary services and turnkey credit packages.

Commenting on California, where Enron has filed a lawsuit over the investigation of western marketing and trading activities (see related story), Skilling was upbeat and optimistic.

"The whole California thing has passed the high water mark," he said. "We're seeing cooler weather and I think they will get through the summer just fine. In the grand scheme of things, that will lower the whole tone of what is going on."

Regarding the method used by the California Independent System Operator (ISO) to determine how much should be refunded to the state in overcharges it says were made by the marketers, Skilling laughed and said, "From Enron's standpoint, if you look at the method that ISO used, and if we used the same system at Enron, ISO would owe us $44 million."

UBS Warburg analyst Ronald Barone, commenting on Enron's second quarter earnings, said the energy giant faces "heightened levels of competition; unfavorable changes in the regulatory environment; marketing losses beyond value-at-risk limits; and the inability to achieve full and timely deployment of its Broadband Services strategy."

Despite the risks, Barone said that because the company has "momentum in wholesale (admittedly furthered somewhat by harvesting activities), as well as expectations for continued growing contributions from Enron Energy Services; the company's efforts to rapidly reduce Broadband's current structure; and management's comfort with a $2.15 figure, we are raising our recurring 2002 earnings per share estimate on Enron to $2.15 from $2.10. The Street consensus is $2.12, reflecting a range of $2.02-2.25."

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