Enron Corp., the world’s leading energy trader, reported a large third quarter loss Tuesday, recording non-recurring charges of $1.01 billion against the cost of several failed investments, including segments of its retail energy sales, broadband and water ventures. Before charges, however, profits for the company were up 35%, and Chairman Kenneth Lay attempted to assuage investor worries by assuring analysts that the third quarter charges were part of a plan “to clear away issues that have clouded the performance and earnings potential of our core energy businesses.”

In a one-hour conference call with investors, Lay deferred putting too much emphasis on projects that had contributed to the net loss of $618 million, or 84 cents a share after a preferred dividend payment. He noted that “about half of the losses,” or $544 million, were related to investments in new ventures within the retail electricity and natural gas sales business — New Power Co. — its fiber optics business, and “termination of certain structured finance arrangements with a previously disclosed entity.” However, Lay said Enron remains on track to hit its fourth quarter estimate of 45 cents per share, $1.80 for the entire year 2001 and $2.15 for 2002.

When asked by an analyst how confident Enron was that there would be no future charges like the ones announced Tuesday, Lay was direct. “If we thought we had any other impaired assets,” he said, the company would attempt to correct the problem. However, he noted “there are three other areas of uncertainty in the company…one’s California,” but he said that the “regulatory” aspects of the problems there were “beginning to move our way.”

The second problem still not resolved is with investments in India, where Enron has committed resources toward power plant development. Now the company is attempting to withdraw from the venture there. “We’re trying to achieve settlement on that, and actively pursuing all of our legal remedies and believe there are substantial (remedies),” said Lay. Finally, the third area that has lost money and will continue to do so into next year is Enron’s broadband business, Lay said. “We still think there’s a big viable business there, but we’re still looking at a number of strategy options.”

Said Lay, “We are trying to clean up anything we thought needed cleaning up and get these distractions out of the way and concentrate on our core businesses.” The clean-up included $287 million related to asset impairments recorded by its water business Azurix Corp., and Lay said “these impairments primarily reflect Azurix’s planned disposition of its North American and certain South American service-related businesses.” Enron also had charges of $180 million associated with its restructuring of its Broadband Services unit, which included severance charges, loss on the sale of inventory and an impairment to reflect the reduced value of Enron’s content services business.

Distractions aside, the company had remarkable earnings — anchored by its core wholesale and retail energy business and natural gas pipelines — which reported a 26% hike in recurring third quarter earnings of $.43, up from $.34 a year ago. Total recurring net income increased to $393 million, compared with $292 million for the third quarter of 2000.

“Our 26% increase in recurring earnings per diluted share shows the very strong results for our core wholesale and retail energy businesses and our natural gas pipelines,” said Lay. “The continued excellent prospects in these businesses and Enron’s leading market position make us very confident in our strong earnings outlook.”

With the non-recurring charges totaling $1.01 billion after tax, Enron reported a loss of $1.11 per diluted share in the third quarter. The total net loss for the quarter, including non-recurring items, was $618 million or 84 cents a diluted share.

In line with a promise Lay made to shareholders in August to provide more details on how Enron makes its money, the earnings were broken into smaller segments, with wholesale divided into two businesses, Americas and Merchant Activities. Retail services also was reported in segments, as well as its transportation and distribution unit, which was broken down to separate its natural gas pipelines unit from Portland General and global asset earnings. Also separated in the earnings release were Enron’s broadband services unit and its “corporate and other” earnings.

Wholesale services again was the engine for Enron, with total income before interest, minority interests and taxes (IBIT) increasing 28% to $754 million in the third quarter, compared with $589 million a year earlier. Total wholesale physical volumes increased 65% to 88.2 TBtu/d. Under wholesale services, the Americas, which consists of Enron’s gas and power market-making operations and merchant energy activities in North and South America, IBIT grew 31% to $701 million from $536 million a year earlier “driven by strong results from the North America natural gas and power businesses.” Natural gas volumes increased 6% to 26.7 TBtu/d, and power volumes grew 77% to 290 MM MWh. IBIT for Europe and other commodity markets remained unchanged at $53 million.

Retail services, which offers pricing and delivery of natural gas and power, along with demand-side management services in North America and Europe, generated IBIT of $71 million in the third quarter, compared with $27 million a year ago. Lay said the unit shows “great potential” to reach smaller customers in the future, but noted that Enron had pocketed contracts with Wendy’s Restaurants, Wal-Mart operations in California, Northrop Grumman and the City of Chicago, among others. In the first nine months, Enron has completed more than 95,000 transactions for its management services, he said.

Within the transportation and distribution unit, Enron’s natural gas pipelines segment provided $85 million of IBIT in the third quarter, up slightly from a year ago. Pipeline expansions are under way in high growth areas, including a 428 MMcf/d expansion by Florida Gas Transmission and a 150 MMcf/d expansion by Transwestern, Lay said.

Portland General, which Enron is selling to Northwest Natural Gas, reported an IBIT loss of $17 million compared with a gain of $74 million in the third quarter of 2000. Lay said the company had entered into power contracts in prior periods to ensure adequate supply for the recent quarter at prices that “were significantly higher than actual settled prices” in the third quarter of 2000.

Broadband services losses were $80 million in the third quarter, compared with a $20 million loss in the third quarter of 2000. However, Lay noted that most of the losses were investment related and he expected losses to be much lower following the first quarter of 2002.

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