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Wholesale gas and power boost Enron’s second quarter

Enron Corp. reported strong second quarter growth in earnings to $404 million, compared to $289 million in the 2000 second quarter, pushed by a doubling of profits before taxes in wholesale gas and power services.

Revenue for the 2001 second quarter increased to $50 billion, compared to $16.8 billion in the same 2000 quarter.

At mid-day the stock was trading at $48.65/share, down from $49.10/share on 3 million shares traded.

Losses in its broadband division jumped to $102 million, compared to $8 million for last year’s second quarter. Growth in wholesale power and gas services more than compensated for the near meltdown in the broadband markets.

Enron’s wholesale services earned $802 million in income before interest and taxes, compared to $415 million in the second quarter last year.

In an accounting approach controversial among some analysts, Enron recorded as recurring income sales from two large peaker plants, which yielded profits before taxes of $134 million, compared to similar sales of $55 million for the same period in 2001.

Enron’s dramatic increase in wholesale gas and power services was helped by access to sales liquidity from Enron Online, said Enron CEO Jeffrey Skilling. He also said power sales are close to over taking natural gas sales at the company. Currently, Enron Online accounts for 60% of the company’s total transactions.

European wholesale commodity services transactions are also growing rapidly with volumes up 205% overall. Skilling noted there was a trend toward a more bilateral marketplace especially in the UK, a trend Enron favors.

Looking to the future in the energy wholesale commodity division, Skilling said the Federal Energy Regulatory Commission’s draft order issued July 10 that could lead to consolidation of the nation’s electricity grid into four large regions will stimulate growth at Enron.

“The FERC mandate for four regional RTOs will vastly improve our business by opening up the North American market,” he said.

Today only about 20-25% of the wholesale national market is open to business. The FERC order should open 95% of the market, Skilling said. The advantage will be elimination of rate ‘pancaking’ (stacking power rates on top of rates as power crosses from one part of the grid to another). Skilling said this means Enron can link more supply sources to many more customers.

He predicted if the FERC order becomes law in 2003 it will also cause a “massive increase” in Enron’s retail business. “All lights are green for us in North America and Europe,” Skilling said.

Despite past optimistic projections, Skilling admitted broadband will not be an engine of growth for Enron any time soon. “Someone turned out the light switch and the market just dried up,” said Skilling. “We will decrease the burn rate for broadband in the next several weeks.”

Skilling did not elaborate on how he will reduce the $100 million quarterly ‘burn rate’. He said Enron’s broadband business would be adjusted so the company can keep it “indefinitely at no cost to shareholders.”

Analysts questioned Skilling about the continuing fallout from the California energy crisis and numerous investigations into the legitimacy of Enron profits from power marketing in that state. Skilling downplayed any future impact.

“California is past the high water mark now,” he said. The refund case involving alleged overpayments to generators and marketers pending before FERC will yield few problems for Enron, he said.

“If Enron used the same methodology as the California Independent System Operator in calculating the overcharges, then the ISO would owe us $44 million,” he said. “There will be more screaming and yelling out there. But it [fallout] is over for Enron.”