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Enron to Focus on Core Assets, Streamline Operations
In hindsight, said Enron Chairman and CEO Kenneth L. Lay, the company made some “very bad investments in its non-core businesses,” and as a result, the fourth quarter earnings will reflect that. However, Lay emphasized during an investor update conference call that “everything we know, you know.” Enron is expected to update guidance on its fourth quarter earnings in the next few weeks, but going forward, Lay said merger-bound Enron will go “back to basics” and focus on the core assets that had propelled the Houston-based company into the Fortune 100.
“We fully understand and regret that the combination of events led to a loss in investor confidence,” said Lay, and “we will take the steps necessary to address all of these matters.” Although no specifics were offered to reflect the expected downturn in fourth quarter earnings, Enron’s current executive team, including President Greg Whalley and CFO Jim McMahon, joined Lay to address shareholder concerns about how the company plans to boost investor confidence.
“The recent events…I believe to be temporary,” said Whalley, who will become an executive vice president in the Dynegy merger, but he admitted that the disclosures regarding writedowns and inaccurate earnings figures over a four-year period will have a “negative impact on fourth quarter profitability.”
Noting that Enron was “halfway through the quarter,” Whalley said it was still “too early to tell what the impact will be on operational results.” He said the fourth quarter also would be negatively impacted by severance costs and restructuring costs, which he said would be addressed as the company prepares its budget for 2002. “I remain optimistic that the actions we have taken over the last few weeks have substantially answered the questions on credit” and other issues.
Whalley also is optimistic that confidence in Enron’s operations has begun to grow. “We have seen an improvement in the relationship with our counterparties this week,” said Whalley. “The current transaction level is lower but it has remained strong and there is growing acceptance [of] our stability.” He did not have specific figures on the trading activity, but said it was improved from what the company had seen last week before the Dynegy announcement late Friday. He added that he expected the trading activity to “return to normal levels later this week or sometime next.”
As explained by Whalley, Enron has begun to regroup, and is dividing its assets into three segments: core, non-core and those businesses under review. The core businesses, he explained, are Enron’s “consistent franchise businesses” where the company holds an advantage, including its natural gas pipeline assets, wholesale natural gas business in North America and Europe and retail operations. In the core assets, Whalley said Enron had “no intention to downsize.”
However, non-core assets, those that “do not provide value to the core assets,” which are primarily part of Enron’s global assets and the failing broadband segment, will be streamlined.
“We have $8 billion in investments in these non-core [businesses] and the return is dismal,” Whalley said, emphasizing that Enron plans to “exit these businesses in an orderly fashion” to generate “billions in cash” which will be used to repay debt and to redeploy into its core assets.
Businesses defined as being under review, said Whalley, are those that Enron believes “have strong future prospects, however, under the current environment, we will look at each” to determine both near- and long-term earnings and cash generation. Those assets under review include “primarily the wholesale business outside of gas and power,” including energy-related and industrial activity assets. Whalley said Enron planned an in-depth assessment of each business and would then determine whether it should “extend more resources” or get rid of them.
CFO McMahon, whom Lay said has been directed to righting Enron’s financial stability, said that Tuesday, Enron had received $1.5 billion from Dynegy as an equity investment. When added to the $3 billion in credit extended three weeks ago, commitment letters of secured credit lines, and the nearly $800 million in asset sales expected to close by the end of this year, McMahon said investors should have “much more confidence” in the company’s access to daily liquidity.
“The company’s over leveraged…that’s just a fact, said McMahon. “We needed to raise equity cash and in this environment, we cannot raise public equity capital very efficiently, so obviously, we have gone to other sources as a means to get the balance sheet on the road to a healthier level…and combined with our asset sales, we feel confident that over time, we will get this company back to where it ought to be.”
Of Enron’s credit rating, McMahon said that the “liquidity enhancement will strengthen our balance sheet immensely.” He noted that the company is meeting “regularly” with all three credit ratings agencies — Moody’s Investor Services, Fitch and Standard & Poors — to assure them of the Enron’s financial status. “Beginning with this call,” he said, “we are beginning to mitigate concerns.” McMahon also went into detail on the questionable financial arrangements that led to Enron’s dive in shareholder prices, disclosing that “once everyone fully understands these arrangements, concerns will diminish and we can return to our capital funding program.”
When asked if there were any other potential partnerships still to be uncovered or disclosed by Enron, McMahon said that he believed that the company had identified all of its related-party transactions, and said that “as far as we know, everything was exposed in the 8-K” released earlier this week.
Lay also reported that the investigation by the U.S. Securities and Exchange Commission (SEC) was ongoing, and added that the company’s internal investigation also continues. He said the company’s special committee was meeting two to three days a week along with its outside legal firm and accounting firm. He did not know when the work by either SEC or the special committee would be completed, adding it was “still going to be a few weeks.”
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