Enron’s fourth quarter will be worse than expected, execs say

Ann de Rouffignac
OGJ Online

HOUSTON, Nov. 14, 2001 – Enron Corp. executives Wednesday said fourth quarter earnings will be hit by negative events of the last several weeks, but they didn’t provide specific guidance for the quarter.

In a conference call with investors, CEO Kenneth Lay said company businesses have been reassessed and divided into three parts. As a result, Enron will stick with core North America and European gas and power businesses; exit all nonenergy operations and all non-European global businesses, including energy; and review the potential for continued trading of metals, pulp and paper, and oil.

Gas and power -trading rival Dynegy Inc. agreed to buy Enron Friday in a stock deal valued at $8.5 billion and to assume $15 billion of Enron debt, but the deal isn’t expected to close until next summer.

Lay conceded the marketing and trading business has been hurt by the meltdown in the company’s stock price and concerns over liquidity. He said severance and restructuring costs related to disposal of some of Enron’s noncore businesses and layoffs will affect quarterly results.

“There will be a negative impact on fourth quarter earnings,” Lay said. “We are doing it (charges and write-downs) now to be able to return to normal business in 2002.” He said there will be “deep cuts” in costs of the noncore businesses and cost cutting throughout the company to reduce overhead and conserve cash.

Lay said there is no intention to “downsize” the core energy businesses, but the core marketing and trading units have experienced “difficult” times recently. “It was difficult last week working with the counterparties. There is improvement this week,” Lay said.

Most deals involving long-term structured energy products were put on hold, he said. Getting Enron’s short- term business back on an even keel is the company’s goal, he said. “I’m hoping to see normal levels next week,” said Greg Whalley, chief operating officer.

Enron’s emphasis will be on restoring confidence in core businesses, identified as all North American and European gas and power assets, marketing and trading of gas and power, natural gas pipelines, retail energy, and coal.

Exit noncore businesses
Lay said that Enron will exit all noncore businesses, including all global (non-European) assets and broadband. He called the return on $8 billion worth of so-called noncore asssets “dismal.” Cash from the sales will be used to pay down debt and redeployed into the core businesses. About $800 million of sales of noncore assets are set to be completed in the fourth quarter.

Executives reported another group of assets with strong future prospects is “under review.” It includes the wholesale marketing and trading business of all other commodities, including metals, pulp and paper, and crude oil.

Financial analysts quizzed executives about off-balance sheet transactions that are the subject of a Securities and Exchange Commission investigation. “The overhang of liabilities is still there,” said Louis Gagliardi, analyst with John S. Herold, Stamford, Conn. “It’s a moving target everyday. You don’t know the scope.”

Gagliardi said he understood the value of the debt of the off-balance sheet transactions is tied to Enron’s stock value, making them difficult to decipher. “This is still a hard nut to crack. We raised the question flag for our clients. Proceed but proceed with caution.”

Events continued to develop with respect to Enron, including:

– Noting Enron reportedly is seeking the right to appoint three members of a new Dynegy board, the California Public Employees’ Retirement System (Calpers) board said it will oppose appointment of any current Enron board member to the board of any company with which Enron might be contemplating a merger. “There have been seriously allegations of self-dealing on the part of Enron’s senior management,” said Michael Flaherman, chair of Calpers investment committee. “And it appears that Enron’s board may have failed in its responsibility to monitor the activities of Enron’s corporate officers.” Until the issues are sorted out, Calpers said shareholders are best served by retiring all of the current directors from involvement in Enron’s successor entities. Calpers owns about 3 million shares of Enron and is also invested in Dynegy.

– After company employees complained, Lay decided not to accept a $60 million payment due him, if a proposed buyout by Dynegy Inc goes through, a company spokeswoman said Wednesday.

– ChevronTexaco Corp.’s 26.5% stake in Dynegy would increase to nearly 45% if the Dynegy acquisition of Enron is completed. The oil company has agreed to advance Dynegy $2.5 billion to complete the deal in exchange for various securities and a lien on Enron pipelines.

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