Enron pursues “asset light” strategy

By Ann de Rouffignac, Online Editor

Enron Corp. reported a $326 million charge to fourth quarter earnings from losses on its investment in Azurix Corp., the fledgling water company Enron spun off a few years earlier.

Fourth quarter earnings fell by 77 percent to $60 million from $259 million in the 1999 comparable quarter. For the year, Enron reported income increased to $979 million, compared to $893 million in 1999, a 9 percent increase.

Including the Azurix charge, earnings per share for the year still increased slightly to $1.12 per share from $1.10 per share last year. Revenue more than doubled to $94.9 billion from $36.2 billion.

The jump in performance for 2000 was attributed to increases in performance for the wholesale services business. Officials also said the company will not experience a negative financial impact from the California energy crisis.

“We continue to see phenomenal opportunities in wholesale business in all commodity segments across the world,” said Jeffrey Skilling, CEO of Enron, in a conference call with financial analysts.

Analysts questioned how the impact of possible bankruptcies of utilities in California and the pending demise of the California Power Exchange would impact the company’s earnings going forward.

Skilling reassured the financial community Enron is not “overexposed” to California.

“Nothing that could happen in California will significantly impact our business in 2001,” he said.

Skilling explained evaluating credit is key to Enron’s wholesale business and he company also has no generation in California.

Also of concern, is the competition building from other commodity trading platforms that might take volume away from Enron Online, Enron’s in-house trading platform in which the company is always either on the buy or sell side of a transaction.

Other platforms, such as Intercontinental Exchange, host transactions from multiple buyers and sellers. Experts have looked at the so-called many-to-many trading sites as eventually winning a potential advantage in liquidity.

Skilling denied that other trading platforms would in any way threaten Enron Online’s volume. “We will maintain volumes in the future and continue to hit new records,” Skilling predicted. But growth targets for Enron Online have not been released.

In response to an analyst inquiry, Skilling said income for the wholesale services group was two-thirds attributable to asset sales and one-third to the value of merchant activities.

Enron is expected to continue selling assets as it pursues an “asset light” strategy and redeploys capital from lower return areas to the higher returns associated with the wholesale services business. Investments in broadband will continue as well.

“We no longer need the assets to assure physical delivery of the commodity,” Skilling said referring to recent sales of new peaking plants and Houston Pipe Line, an intrastate pipeline in Texas. The sales of the hard assets have been reflected in Enron’s financial statements as recurring activity as opposed to one-time operating gains.

Analysts questioned how such sales could be classified as recurring income, unless Enron is planning to buy or build more hard assets on an ongoing basis. Enron officials said more data about this will be available when documents such as the 10-K are filed with the U.S. Securities and Exchange Commission.

Other Enron businesses performed well with the exception of broadband which reported a $60 million loss in IBIT for 2000. This is a new business for Enron that just got started last year. Skilling said the loss is “right in line” with expectations given the stage of development of that market.

Transportation and distribution generated $732 million IBIT compared to $685 million last year and retail energy services reported $103 million IBIT compared to a loss of $68 million for 1999.

Separately, Enron reported Enron Energy Services and Owens-Illinois Inc. (O-I), signed a 10-year energy management agreement covering 53 Owens-Illinois manufacturing facilities in 20 states with energy purchases exceeding $2 billion.

Under the initial agreement, Enron will work with Owens-Illinois to manage the supply of electricity and natural gas to O-I facilities.

Ann de Rouffignac is a power editor for PennWell’s Oil & Gas Journal online (www.ogjonline).
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