The sharp downturn in the economy since the Sept. 11 terrorist attacks caused a significant reassessment of quarterly and annual earnings expectations among energy companies last week. AES had the worst news with expectations of dramatically lower earnings because of its currency exposure in Brazil, changes in the power market in the United Kingdom and events affecting some of its domestic operations. Exelon also will suffer and will reduce its work force by another 450 jobs. Meanwhile, Duke Energy, PPL, NRG and Entergy all reaffirmed their earnings expectations.

PPL is still expecting 20% earnings growth this year, and Duke sees its earnings increasing 10-15%, perhaps more.

“Given the significant concerns being expressed by investors in the energy sector, we feel it is important to confirm our forecast to earn at least $4.00 per share for 2001,” said PPL CFO John R. Biggar. “This expected level of earnings reflects more than 20% growth over the company’s adjusted earnings per share of $3.28 last year.

PPL’s generation portfolio, its marketing and trading operation and the hedging strategy that it employs, “will allow us to meet the 2001 earnings projection that we made in April,” said Biggar. He said the company’s electricity delivery operations in the United States and overseas also are contributing to the continued strong earnings for the year. Biggar also said that the company expects to exceed the Wall Street third quarter consensus for PPL of 88 cents per share. PPL expects to release third quarter 2001 results before the financial markets open on Oct. 24.

Duke Energy reaffirmed its guidance of 10-15% compound growth in earnings per share from an earnings base of the $2.10/share in 2000. CFO Robert Brace said that for 2001 the company expects earnings to be at the high end of the range with upside potential.

“Much attention has been focused…on the earnings outlook of various companies in the energy sector,” said Brace. “As we have stated in several public forums recently, not only do we expect to deliver on our promises for 2001, we have a good outlook for earnings in 2002 as well. Our confidence extends from our continued execution on a diversified energy portfolio strategy that has enabled us to extract value from strong positions in merchant generation, trading and marketing and an expanding natural gas pipeline business,” he added. “Duke Energy is uniquely positioned to capture value in volatile markets that so many others fear.” Duke Energy will release its third-quarter financial results on Oct. 16 following the market close.

NRG Energy said it remains on course to deliver on its previously forecast of $1.35/share earnings for 2001. The company also addressed concerns on international exposure and currency risk in the energy sector. “Investors in the energy sector are concerned about companies’ exposure to Latin America and the United Kingdom, but they shouldn’t worry about NRG’s ability to deliver on its earnings per share forecasts,” said David H. Peterson, NRG’s CEO. “NRG’s diverse portfolio is what enables us to navigate rough waters, and setbacks in one geographic area can be offset by successes in another.

“We know the risks of doing business in countries with potentially wide foreign currency fluctuations and we mitigate those risks with contracts that are tied to the U.S. dollar. Only 2% of NRG’s net megawatts of operating projects are in Latin America. Approximately 97% of the electricity we generate from those assets is under contracts that call for payment that is tied to the U.S. dollar,” Peterson added. The company said almost 80% of its net megawatts are located in the United States with risk mitigation strategies implemented throughout its entire portfolio.

“We understand the UK market has become more challenging following the introduction of the New Electricity Trading Arrangements (NETA),” Petersen continued. “In the near term, any disappointing results from the approximately 3.5% of NRG’s total net MW that we own in the UK have been offset by better than expected results in the U.S. and mid-continent Europe. In the next few years we expect the UK market to rationalize just as the Australian market has, when supply and demand for electricity approaches equilibrium.”

Due to the company’s recent strong acquisition record this year, Peterson said NRG Energy remains confident that it will deliver 25% earnings growth per year for the “foreseeable future.”

The dramatic currency changes and difficulties in the UK had a severe impact on AES, which is far more globally spread out that either Duke or NRG. AES sharply lowered its earnings forecast. The market trauma is expected to wipe out at least 50 cents/share, AES CEO Dennis W. Bakke said during a difficult conference call. He said AES basically missed an entire year of earnings growth because of the Sept. 11 bombings and the global economic turmoil they caused. The impact would have been 75 cents per share, Bakke said, if strong performance by some of AES’ subsidiaries were not able to offset the negative impact.

AES Corp. reduced its annual earnings per share estimate (excluding certain charges) to a range of $1.25 to $1.45/share because of the failure of its planned acquisition of the Mohave power plant, its currency exposure in Brazil and the decline in power prices in the United Kingdom. AES shares plummeted last week to nearly $12/share from a 52-week high of $72.81.

“Even before Sept. 11, I think the state of the world economy was causing us some concern,” said Bakke. “This led us to think that the likelihood of achieving the upper part of our original range was slim… But after Sept. 11 our chances have diminished even further. It looks essentially like we are going to lose a year of growth, a year out of our economic lives.” Bakke said earnings in the third quarter likely would come in at 25-30 cents/share compared to consensus estimates of about 47 cents/share.

The revised expectations exclude certain charges, including restructuring charges related to the IPALCO merger, any gains or losses arising from the application of Financial Accounting Standards Board (FASB) Statement 133, and any potential charges that may result from divestiture of certain businesses and foreign currency transaction charges on U.S. dollar denominated debt in Brazil.

Bakke noted that most of the company’s recent projects are greenfield construction plans. “They will add to operating earnings in future years, but not in 2001. In addition, we have not successfully closed major new acquisitions of operating businesses that would add to earnings in the current year. The problems encountered in 2001 remind us of our fallibility and strengthen our resolve to continually improve the operating performance of our businesses.”

The company’s generating assets include interests in 160 facilities totaling over 58 GW of capacity. AES’s electricity distribution network sells over 126,000 GWh of power per year to over 17 million end-use customers.

Economic and market weakness, combined with volatile energy markets, forced Chicago-based Exelon Corp. to reduce its 2001 earnings guidance. It previously issued guidance that its third quarter earnings per share (EPS) would represent between 30-40% of its $4.50 EPS target for the year. Now, it expects its third quarter earnings to be in the range of $1.10-1.20 per share, which would reduce its full year earnings guidance to a range of $4.30-$4.45. For the third quarter of 2000, Exelon had earnings of $1.27 per share.

Exelon said its core operations are “continuing to perform well.” Its nuclear fleet has operated above target with a 96% capacity factor through Aug. 31. Energy delivery operations have provided “improved reliability” with below-budget expectations, and merger related synergies “continue to be on target” for $148 million in savings this year. Basically, what is bringing earnings down now are the same things that are bringing earnings down for other players in the market.”

John Rowe, Exelon co-CEO, added, “The world has changed significantly over the course of this year, but the fundamentals of our core businesses remain strong.”

As part of a move to streamline operations, Exelon will cut 450 positions more than its previously announced 2,900 job cuts announced as part of its merger (Commonwealth Edison and PECO). Additional severance charges, however, will be incurred in the third and fourth quarters related to the 450 positions. Going forward, operating costs will be lower, but in the third quarter, Exelon will incur $30 million in severance charges and in the fourth quarter, it will incur $18 million in charges. Exelon will release third quarter results on Oct. 23.

New Orleans-based Entergy Corp. said it expects to meet or exceed its third quarter earnings estimate of $1.17 a share, excluding the impact of weather, which it expects to be below normal for the quarter. Entergy also reaffirmed its operational earnings guidance for the full year 2001, estimated to be in a range of $3.00 to $3.20 per share, excluding the impact of weather. Guidance for 2002 was also reaffirmed to be in the range of $3.30 to $3.50 per share.

Entergy’s earnings boost in the third quarter is expected to come from its nuclear unit, which expects “solid results” compared to a year ago after acquiring three new facilities: Indian Point 2, Indian Point 3 and FitzPatrick nuclear plants. Also expected to contribute to the bottom line is Entergy’s merchant energy businesses, Entergy-Koch and Entergy Wholesale Operations, which are expected to contribute “improved trading results” compared to the third quarter of 2000. The merchant energy business earnings are offset by the absence of liquidated damages recorded in the third quarter 2000 following the construction delays on its Saltend project.

However, Entergy noted that its earnings in the utility and parent units are expected to be lower than a year ago because of lower sales volumes, a “weaker economy and lower investment income.” Third quarter earnings will be released on Oct. 22.

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