If Houston-based Enron Corp., the acknowledged largest energy trader in the world, had a wish list of things it might want to add to its bartering bag, it might be to trade in this entire year. So far, the news seems to have gone from bad to worse, with business deals gone sour, the CEO abruptly departing last summer, the first quarterly loss in more than four years, rumors of shady business deals, and as of Friday, a plunging stock price that seems to find no floor.
However, while the company appears to be sinking in rumors and innuendo deeper with each passing day, some analysts believe the once high flyer, whose innovative style has long been envied, will soar again. For Chairman Kenneth Lay and his shattered team, tomorrow could not come soon enough. While the bad news has continued throughout the year for Enron, anyone watching the happenings at the Houston corporation might have raised eyebrows by several occurrences since mid-2000. There were public indications more than a year ago that some of Enron’s businesses were not doing well, and despite the optimism continually pronounced by Lay and Jeffrey Skilling, once COO and for six months CEO (see NGI, Aug. 20), the cracks were forming as early as the summer of 2000.
For instance, take Azurix Corp., the global water company Enron formed in December 1998. A year ago, Rebecca Mark, an Enron vice chairman and Azurix CEO, unexpectedly resigned (see NGI, Aug. 28, 2000). Mark had been credited with being instrumental in moving Enron from a U.S. energy services and pipeline company to a major player in integrated energy businesses around the world. However, her departure, while noteworthy, made more sense when Enron announced its fourth quarter 2000 earnings, which showed a 77% decline in net income on charges related to Azurix. Net income for the fourth quarter 2000 was $60 million, or five cents per diluted share, because of the Azurix charges, compared with earnings of $259 million, or 31 cents a share in 1999.
In May 2000, Enron partnered with America Online and IBM to branch out into another kind of business with The New Power Co., set up to take advantage of the growing deregulated electricity market (see NGI, May 22, 2000). It had plans to grab 5% of the marketplace where it operated within five years. But so far, results from the venture have not been as promising or profitable for Enron. On Friday, New Power filed a Form 8-K with the Securities and Exchange Commission (SEC) reporting that it has revised its master netting agreement with subsidiaries Enron North America Corp., Enron Energy Services Inc. and Enron Power Marketing Inc. on the types of collateral it could use.
“With the amendment and New Power’s cost reduction efforts, and absent a similar rate of decline in commodity prices or other significant events, New Power believes that it has sufficient financial resources to conduct its business until it secures ongoing asset-backed financing, which will be necessary upon the expiration of the amendment,” said the filing. “New Power has been and is actively seeking to arrange asset-backed financing with other parties, although to date no such arrangements have been secured.”
But most startling to outsiders, and perhaps insiders as well, was the sudden resignation last August of CEO Skilling, who had only held the high post for six months. Handpicked by Lay, Skilling’s departure fueled rumors that something else was going on that the company did not want to reveal. Then came third quarter earnings last week, and the rumors have continued unabated.
Holding to a promise by Lay to be more forthcoming on earnings statements, Enron did provide more details in its earnings statement for the third quarter last week, breaking them 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.
However, it was what was left out — and what Lay revealed during a telephone conference with investors to discuss earnings — that continued the deluge of bad press reports. On Tuesday, Enron reported a large third quarter loss, recording non-recurring charges of $1.01 billion against the cost of several failed investments, including Azurix, New Power and its poorly performing broadband venture. Even though profits were up 35%, Lay’s attempts 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” seemed to have clouded the issues even more.
In a one-hour conference call with investors, Lay had 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.
But the distractions continued. During the telephone call, Lay revealed information concerning the write down and other transactions not included in the revamped third quarter release, as first reported by The Wall Street Journal last week. The Journal reported that two years ago, CFO Andrew S. Fastow entered into an “unusual” business arrangement with Enron. With approval by the Enron board of directors, Fastow apparently set up and ran partnerships that “stood to make him millions or more,” according to the Journal. Although Enron noted that the arrangement was legal, “some corporate-governance watchdogs have questioned whether a CFO, who is responsible for overseeing the financial interests of the company, should have been involved in such a partnership that was, among other things, looking to purchase assets from Enron.”
Enron had no comment on the growing controversy, but investors were taking notice, as the company’s stock continued to fall sharply through the week. On Friday, it plunged more than 10% to $26.05 after losing more than $2 a share by 3 p.m. In the past year, it has traded higher than $84 a share. Following the write down, Moody’s Investor Service placed all of Enron’s long-term debt obligations on review for a possible downgrade. And other analysts also expressed concern about the charges.
UBS Warburg analyst Ron Barone said that “given past material credibility problems that have helped decimate this stock, we found it disconcerting that the company waited to disclose the additional $1.2 billion charge to equity in a fleeting comment in the middle of the conference call (and not in the nine-page press release that came out hours in advance). Moreover, we were not thrilled with the discussion suggesting that the ratings agencies were very comfortable with the material quarterly charges (S&P and Fitch were briefly mentioned), only to have Moody’s place Enron on review for downgrade immediately upon the close of the call.”
Barone said despite progress in some areas, “there appears to be much more work ahead before the lingering credibility issues that have vexed this company in the past are fully resolved. Until that time, we believe Enron will not be able to command a high-end P/E multiple in the energy merchant space, regardless of the earnings it posts or the segment data it discloses.”
Enron did have remarkable earnings in the otherwise awful quarter, anchored by its core wholesale and retail energy business and natural gas pipelines, which reported a 26% hike in recurring third quarter earnings of $0.43, up from $0.34 a year ago. Total recurring net income increased to $393 million, compared with $292 million for the third quarter of 2000. 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.
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.
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.
Â©Copyright 2001 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.
© 2024 Natural Gas Intelligence. All rights reserved.
ISSN © 2577-9877 | ISSN © 1532-1266 |