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Enron's 2Q Exceeds Expectations; Sees Power Growth

Enron's 2Q Exceeds Expectations; Sees Power Growth

Enron deliveries of energy commodities grew 47% from the second quarter of last year, including a 10% increase in gas deliveries and a more than 100% increase in power marketed. However, results of the gas pipeline group and exploration and production were off slightly, and the retail business, Enron Energy Services (EES), lost more money than it did a year ago.

Enron Corp. had 1998 second quarter earnings of $0.42 per diluted share, compared to $0.38 (excluding the $1.66/share charge for its J-block settlement) in the second quarter of 1997. Results were led by growth in the company's largest business, Wholesale Energy Operations and Services.

"These results confirm the operating strength of each Enron business unit and our ability to produce consistent, predictable earnings in spite of rapidly changing, highly volatile energy markets," said Kenneth L. Lay, CEO. "In addition to the strength of our traditional businesses, our newer activities are firmly established, particularly the U. S. wholesale power marketing business and Enron Energy Services. Combined with a very substantial backlog of projects and opportunities, our business outlook is the strongest in the company's history."

Enron's results exceeded PaineWebber Natural Gas Group estimates by two cents/share and Wall Street estimates by three cents/share. "As a result of the stronger than expected results and the outlook for continued solid momentum in its Wholesale Energy group, we are raising our 1998 diluted earnings per share estimate on Enron to $2.05 from $1.95 and our 1999 diluted earnings per share estimate to $2.35 from $2.25," PaineWebber said. adding its 12- to 18-month stock price target is $62/share.

Edward Jones analyst Zach Wagner continues to rate Enron a "buy." He said he wasn't concerned by EES' second quarter losses of $43 million. "As they bring in and sign on more and more new contracts, you can expect expenses associated with that to increase." EES is ahead of schedule in signing up customers. So far this year, EES has signed contracts worth about $1.5 billion, more than half of its $2.4 billion target for 1998, Wagner said.

"The electricity trading continues to be a huge contributor in terms of improvement quarter over quarter. It was profitable again this quarter for the second consecutive quarter. I think we're really seeing Enron's experience and market position come into play. Even though electricity trading is relatively new, Enron's been trading natural gas for years and year, so that's where they're kind of getting all their experience."

Wagner said transmission and distribution and exploration and production results weren't troublesome given warm weather and the low commodity price environment. In fact, considering these factors, the results are impressive, he said.

Enron's core businesses, Wholesale Energy Operations and Services, Transportation and Distribution, and Exploration and Production, realized earnings per diluted share of $0.50 for the second quarter of 1998 compared to $0.44 for the second quarter of 1997.

Enron's wholesale business includes development and construction of energy infrastructure, commodity sales and services, risk management products and financial services. The wholesale business generated income before interest, minority interests and taxes (IBIT) of $241 million in the second quarter, an 85% increase over the $130 million of IBIT reported in the second quarter of 1997.

In the second quarter, physical deliveries of all energy commodities increased 47% from a year ago to 24.2 trillion Btu/d. Compared to a year ago, these volumes included a 10% increase in gas deliveries and a more than doubling of electricity marketed to over 86 million MWh. Finance and Investing activities benefited from the growing earnings and increased value of Enron's energy and asset portfolio, which is made up of volumetric production payments, loans and equity in energy-intensive businesses and projects. The Asset Development and Construction business also grew. Enron has nine international power plant and pipeline projects financed and in construction, representing more than $6 billion in capital costs. The projects are on schedule, including Enron's 826 MW power project in Dabhol, India, which is more than 90% complete and expected to be operating in December.

Enron's Transportation and Distribution group includes the Gas Pipeline Group and Portland General electric in Oregon. Despite warmer weather in the upper Midwest service area, the Gas Pipeline Group generated $72 million of IBIT in the second quarter compared with $73 million in the second quarter of 1997. In the second quarter, Portland General generated $62 million of IBIT. Because the merger with Enron was effective in July 1997, Portland General was not included in Enron's earnings during the second quarter of 1997.

The Exploration and Production group includes operations of Enron Oil &amp Gas (EOG) and related price risk hedging. In the second quarter, Exploration and Production generated $29 million of IBIT compared with $30 million in the second quarter of 1997. According to PaineWebber, Enron said it will continue to hedge EOG's North American gas production at a price of about $2.30/MMBtu for the rest of the year. For next year, Enron has said it hedged about one-third of its production at a price near $2.40/MMBtu.

Enron Energy Services in the second quarter signed contracts worth about $650 million in future revenues from energy delivery. The contracts include energy services, such as in one case, a full outsourcing of a customer's nationwide energy requirements. EES reported an operating loss before interest and taxes of $43 million in the second quarter compared to a loss of $25 million in the second quarter of 1997, or $(0.08) and $(0.06) per diluted share, respectively. The losses reflect start-up costs, Enron said.

Joe Fisher, Houston

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ISSN © 2577-9877 | ISSN © 1532-1266
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