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Enron Mail |
Why One Firm Thinks Enron Is Running Out of Gas
The Street.com, 05/10/01 Enron's Lay: California Power Crisis and Generation Bloomberg, 05/10/01 Enron's Kenneth Lay on California Power Crisis: Comment Bloomberg, 05/10/01 USA: UPDATE 1-Cooler weather gives Calif. a break from blackouts. Reuters English News Service, 05/10/01 Talking Stocks CNNfn: The Money Gang, 05/10/01 USA: NewPower beats its expectations, reaffirms 2001 view. Reuters English News Service, 05/10/01 NewPower Has Narrower-Than-Expected 1st-Quarter Loss (Update1) Bloomberg, 05/10/01 Why One Firm Thinks Enron Is Running Out of Gas By Peter Eavis Senior Columnist Originally posted at 5:23 PM ET 5/9/01 on RealMoney.com TheStreet.com, 05/10/01 A small research boutique with a reputation for rigorous analysis is telling clients to quickly dump Enron (ENE:NYSE - news), believing that the energy trading giant's 2001 earnings will fall well short of Wall Street's forecasts. Cambridge, Mass.-based Off Wall Street, led by analyst Mark Roberts, thinks Enron's 2001 earnings will fall 6 cents short of the consensus estimate of $1.79. The firm also believes Enron stock should trade around $30, nearly 50% below Wednesday's $59.20. The firm's 26-page report, published May 6, highlights Enron's declining profitability and increasing leverage and suggests that the company should trade on the same sort of multiple as a trading firm like Goldman Sachs (GS :NYSE - news), which has a 2001 price-to-earnings ratio about half of Enron's 33 times. OWS also alleges that Enron's earnings quality is poor and that key parts of its financial statements are confusing and opaque. Houston-based Enron didn't comment by publication time on elements of the report that Detox sent the company. An energy analyst who is bullish on Enron's outlook says the OWS report contains fundamental misunderstandings about the energy market and Enron's business model, but he says the report does include some ground-breaking and valid insights. (The analyst's firm doesn't give stock recommendations.) Economies of Scale Why care what Off Wall Street writes, compared with, say, analysts at Merrill Lynch (MER:NYSE - news)? For one, OWS has an excellent track record. Particularly sweet was 2000, when the tech stocks it had bashed came crashing down. It has also shown itself to be well ahead of the curve, recommending that clients sell e-tailer priceline.com (PCLN:Nasdaq - news) in June 1999, when faith in Internet stocks was at its blindest and their prices at their most insane. Pulling Back Enron retreats after long rally Enron, with its domination of a burgeoning energy market, annual revenue of over $100 billion and impressive earnings growth, can hardly be ranked alongside the likes of priceline. But OWS thinks Enron is set for a precipitous drop nonetheless. Why? OWS's main beef is that key profitability measures are in decline. Margins on Enron's pretax operating earnings (which the company's earnings releases call IBIT, or income before interest, taxes and other items) are falling. Total IBIT of $795 million in the first quarter amounted to only 1.59% of the $50 billion in revenue for the period, compared with a 2.08% margin in the fourth quarter and 4.75% in the year-earlier period. Revenue in the first quarter was nearly quadrupled from the year-earlier period, yet IBIT rose only 27%. This shrinkage is due to lower-margin trading income making up an increasingly large share of Enron's revenue base. OWS thus calculates that for the remainder of 2001 Enron needs to generate an extra $2.1 billion in revenue for each additional penny it makes over its 2000 EPS of $1.47 to reach analysts' expectation of $1.79. The energy analyst counters that OWS apparently hasn't grasped how Enron can continue to increase earnings even when margins shrink. It does so simply by increasing volumes as the energy market balloons in size. In other words, margins may decline, but since revenues are so much higher, earnings still go up. Illustrating this, first-quarter 2001 EPS of 49 cents was 23% ahead of the year-ago figure, even though the IBIT margin shrank by 3.2 percentage points. The analyst thinks Enron will make $1.82 per share in 2001. Growing On You In addition, the huge growth in the energy market that has so helped Enron is likely to continue for several years, according to the analyst. He notes that roughly 75% of the electricity available in the U.S. still isn't traded in a market. "Eventually it will be part of a competitive environment, but it'll take five to 10 years," says the analyst. And he believes the extreme volatility in energy-related commodities that has also benefited Enron will exist for longer than OWS projects. Still, OWS's point on profitability is bolstered by other profit measures. Return on capital (net income as a percentage of equity plus debt) was 6.6% in 2000, down on 1999's 6.9% and well below the 2000 returns on capital at Duke (DUK:NYSE - news) (11.8%), Dynegy (DYN:NYSE - news) (12.1%) and even Goldman (8.9%). Even Enron bulls will admit that its financials are hard to follow. For example, it doesn't give a gross margin number for its wholesale services, or trading, business, which accounts for 96% of revenue. But one area of the company's financial statements registered with the Securities and Exchange Commission that consistently bugs analysts is the part that describes Enron's related party transactions, which are the deals it does with entities that have some sort of link to the firm. In fact, one of the related entities that Enron has traded with is headed by Enron's CFO, Andrew Fastow. The energy analyst comments: "Why are they doing this? It's just inappropriate." The reason for maintaining these hard-to-follow related party deals has been a source of speculation. But OWS analysis shows how a sales of optical fiber to a related party may have been used to goose earnings in the second quarter of 2000. Estimated profits from the so-called dark fiber (optical cable without the gear to send data over it) transaction allowed Enron to beat analysts' second-earnings earnings estimate by 2 cents a share, rather than missing by 2 cents. How soon before Wall Street follows Off Wall Street on Enron? Enron's Lay: California Power Crisis and Generation 2001-05-10 10:31 (New York) White Sulfur Springs, West Virginia, May 9, 2001 (Bloomberg) -- Kenneth Lay, chairman of Enron Corp., talks with Bloomberg's Dylan Ratigan about the outlook for the California power crisis, Enron's role in power generation and supply, and success of Enron's e-commerce platform. They speak at the Business Council CEO Summit. 01:20 Outlook for the California power crisis and energy pricing 02:54 Enron's role in power generation and supply; margins 00:31 The possibility of legal liabilities related to California Enron's Kenneth Lay on California Power Crisis: Comment 2001-05-10 12:45 (New York) White Sulfur Springs, West Virginia, May 10 (Bloomberg) -- The following are comments by Kenneth Lay, chairman of Enron Corp., the world's largest energy trader, on the California power crisis. He made the comments in an interview on Bloomberg TV. On consumer rate increases and the future of Edison International's and PG&E Corp. The two companies own California's two largest utilities, Southern California Edison and Pacific Gas & Electric Co. ``The higher rates, which have now finally been approved, which go into effect this month, appear to be just about right in order to get the utilities, at least So Cal Edison, back on (their) feet and maybe PG&E out of bankruptcy. But then again there are so many other pieces to that, from the standpoint of restructuring the market where you do have direct access where consumers can pick their supplier. ``Maybe over time, 18 months to two years down the road, even the large industrial customers will be able to do their electricity the same way they do their gas. They buy it directly from companies that are competitors and buy it from people other than the utilities.'' On electricity pricing and generation: ``At the same time we need to be pushing very hard on peak pricing this summer. We need much higher prices during the peak periods and much lower prices during the non-peak periods. We need a more aggressive demand buy-down (conservation) program.'' ``They absolutely need more generation. As you well know throughout the 90s there were no new power plants built in the state of California. They've got to start building power plants in the state of California'' On Enron benefiting from California crisis: ``We don't' have any generation in the state of California, though we are major suppliers of natural gas and electricity. Obviously there has been a lot of volatility there and it's been a strong market, but we are not well served by a market that is that volatile and unstable. That is why we have been working very hard to see if we can come together with other people to see if we can solve it. ``We have benefited somewhat, but keep in mind that we have to buy supply to sell supply since we don't have generation in the state. We have to pay high prices to buy it and sell it at high prices.'' On the possibility of legal action against power suppliers in California: ``We in fact believe there is absolutely nothing we have done that is illegal or incorrect in the state of California. This is largely a matter of trying to demagogue the issue, trying to distract from the issue of not putting into place a comprehensive plan to solve the issue.'' USA: UPDATE 1-Cooler weather gives Calif. a break from blackouts. By James Jelter 05/10/2001 Reuters English News Service (C) Reuters Limited 2001. SAN FRANCISCO, May 10 (Reuters) - Cooler weather lifted some of the load from California's straining power grid on Thursday, sharply reducing the likelihood of rolling blackouts, state energy officials said. "Generator outages have crept up but the temperatures are cooler so we don't expect to have to call for blackouts today," Stephanie McCorkle, a spokeswoman for the California Independent System Operator (ISO) said. The ISO, the agency that manages most of the state's electricity transmission grid, ordered two consecutive days of blackouts on Monday and Tuesday as the state's power crisis again resulted in critical energy shortages. Blackouts were narrowly averted Wednesday, in part because temperatures began to fall. Lower temperatures mean a drop in air conditioning, which on hot days accounts for about a third of overall electricity demand from the state's 34 million residents. "Temperatures are especially lower in the (San Francisco) Bay Area and Los Angeles, but the inland areas are still really hot," McCorkle said. Central Valley cities like Sacramento, Fresno and Bakersfield were all expected to see afternoon temperatures Thursday around 88-100 degrees Fahrenheit (31-38 C). And electricity supplies were still far from healthy. The ISO went to a Stage Two alert shortly after 1 p.m. (2000 GMT) when reserves dropped to a precariously thin 5 percent of demand - well below the ideal 15 percent reserve margin. Should reserves drop to just 1.5 percent, triggering a top level Stage Three alert, the ISO will call on utilities to start rolling blackouts, cutting power to blocks of customers in a bid to avoid collapsing the grid. BETTER, BUT NOT GREAT ISO operators, locked in a minute-by-minute battle to balance supply and demand on the system, said about 13,000 megawatts of generation were offline for repair or maintenance Thursday, roughly enough to serve the needs of 13 million homes at any given moment. "That's about 1,000 megawatts more than yesterday," McCorkle said. California, the nation's most populous state and the world's sixth largest economy, endured two days of rolling blackouts earlier this week, the fifth and sixth days so far this year the lights have gone out. State energy officials warn the number and duration of these outages will likely rise through the summer, depending on how hot it gets, how much Californians can conserve, and how much power can be added to the grid through the state's accelerated power plant construction program. Though blackouts look unlikely over the next few days, the ISO warns May remains a tough month, with many power plants shut for maintenance needed to put them in top shape for the hot summer months ahead. "We're at that point where we can't afford to defer outages any longer. We're trying really hard to get as much generation ready and on line for June," McCorkle said. Another 600 megawatts is shut for financial reasons, the result of the state's cash-strapped utilities failing to pay plant owners for the power they desperately need. ROCKETING PRICES Prices in California's volatile wholesale power market have exploded tenfold over the past year, the result of failing to keep pace with its citizens' rapidly growing power needs and a badly flawed bid to deregulate its electricity industry. California is currently spending $50-90 million a day buying emergency power. On Wednesday, state legislators approved a $13.4 billion bond issue to covert this staggering cost. Gov. Gray Davis, after months of accusing independent power generators of using California's energy crisis to line their own pockets, met Wednesday with executives of several of those companies to discuss a way out of the mess. The four-hour, closed door meeting produced no concrete results, but gave Davis an opportunity to ask producers to accept a 30 percent cut in payments they are owed by California. Enron Corp., Mirant, Reliant, Dynegy Inc. and other merchant generators at the meeting reiterated they have done nothing wrong and that their steep wholesale prices fairly reflect rising fuel costs and the financial risks they bear by continuing to do business in California's volatile power market. Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved. Business Talking Stocks David Haffenreffer, Christine Romans 05/10/2001 CNNfn: The Money Gang © Copyright eMediaMillWorks, Inc. (f/k/a Federal Document Clearing House, Inc.). All Rights Reserved. CHRISTINE ROMANS, CNNfn ANCHOR, THE MONEY GANG: You are watching "The Money Gang," and we are "Talking Stocks". DAVID HAFFENREFFER, CNNfn ANCHOR, THE MONEY GANG: And we are with Charles White, from Avatar Associates. We have on the phone, Jack, from Texas. Hi, Jack. ROMANS: Actually, it`s Jeff in Indiana. HAFFENREFFER: All right. ROMANS: Hi, Jeff? CALLER: Hi, I was just wondering what your take on Service Corporation International (URL: http://www.sci-corp.com/) was-and if you`d recommend a buy? CHARLES WHITE, AVATAR ASSOCIATES: This is one where, you know, for the longest time, this had been a very dependable stock in the-I guess, deaf care services industry. They do have a road out planned here for the financial distress that the company has been under. It`s one where as an institutional investor, we`ve been avoiding the name, avoiding the sector for a few years now. We do look at the sector from time to time, but it`s not something we want to get involved in here. ROMANS: OK. Let`s go to the phones again now. John, in New York has a question. Hi, John. CALLER: Hi. With all of the talk about energy today, why aren`t companies like Enron (URL: http://.www.enron.com/) and Williams Energy (URL: http://www.williamsenergy.com/) doing better? WHITE: These are companies where-you know, on the Enron side, and Williams side, part of the multiple and part of the valuation that was in them was for the telecom services piece of that. And it`s not secret that telecom services has been slightly under distress here. It`s not clear how all of the issues with California are going to play out and there`s a little bit of uncertainty layered on to that. So, that may explain why these stocks haven`t performed better. But we think that Enron is still probably a stock you would want to have a core position in your portfolio. HAFFENREFFER: OK. Our last call of the afternoon goes to O`Neil in Texas. Hi, O`Neil. CALLER: Hi, thanks for taking my call. My was on Cisco. And, Charles, you were here last month, if I remember correctly, on April 10th. And at that time you appeared negative on technology but today I see you have been recommending Intel-and what do you think of Cisco? WHITE: Cisco is-you`re correct, we were fairly negative on tech at that time. We`ve moved back to a closer to market weighting as the Fed has gotten more aggressive here. But in Cisco`s case, this is a stock that I think longer term, you probably do want to be in. But the earnings announcement we saw the other day, all of the cloudiness about the outlook for the future, I think this is one where you want to wait and watch. You know, try and accumulate it on a bad day for the stock in the face of some negative news. But this is not one where we can come out and pound the table and say we want to be involved. They still have-the sector in general, for networking still has some issues to get through. Not as-not like the semiconductor sector. Semiconductor sector we think will be quicker to recover. So, that`s why we`re more favorably disposed on an Intel or Applied Materials (URL: http://www.appliedmaterials.com/) . ROMANS: What do you think about EMC? That is our stock of the day today. WHITE: That`s one where they do have a very good and solid competitive position, although the-it is dwindling a bit. Again, uncertainty in demand. If the storage sector is going to work longer term-and we believe it is-you can buy the stock today, come back to it in three or four years and be happy you bought it today. Unfortunately, there aren`t probably 3 percent of the people who are watching this show right now, that have a time frame of three to five years. So we think it`s a good holding in the portfolio longer term, but we`d say there are probably better opportunities to buy it here if you already own some. Add to it on bad days are because longer term, this is one of the names that`s a winner. ROMANS: OK. Just for the record, your picks are Wal*Mart (URL: http://www.wal-mart.com/) , Cummins Engine (URL: http://www.ml.com/) . Charles White, Avatar Associates. Thanks so much. WHITE: Your welcome. Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved. USA: NewPower beats its expectations, reaffirms 2001 view. 05/10/2001 Reuters English News Service (C) Reuters Limited 2001. PURCHASE, N.Y., May 10 (Reuters) - U.S. retail power provider NewPower Holdings Inc. posted a first-quarter loss narrower than it expected on Thursday and reaffirmed its outlook for the year. The company, the parent of The New Power Co., a provider of electricity and natural gas to residential and small commercial customers, reported a net loss of $50.2 million, or 86 cents per basic and diluted share. The company had forecast a loss of 88 to 95 cents a share. Revenues were $126 million for the first quarter. The company forecast a second-quarter net loss of $52 million to $56 million, or 89 cents to 96 cents a share, on revenues between $70 and $75 million. NewPower reiterated its forecast that 2001 revenues would be between $530 million and $540 million. The company still expects the net loss for 2001 to be between $210 million and $215 million, or between $3.61 and $3.70 per share. Analysts had expected a loss of $4.21 a share, according to research firm Thomson Financial/First Call. "NewPower continues to forge ahead with its growth strategies as demonstrated by delivering on key financial metrics, net revenue, gross margin and energy delivered," said President and Chief Executive H. Eugene Lockhart. Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved. NewPower Has Narrower-Than-Expected 1st-Quarter Loss (Update1) 2001-05-10 16:35 (New York) NewPower Has Narrower-Than-Expected 1st-Quarter Loss (Update1) Purchase, New York, May 10 (Bloomberg) -- NewPower Holdings Inc., a venture formed last year by Enron Corp., had a narrower loss than it projected in the first quarter on sales of power and natural gas to homes and small businesses. The loss was $50.2 million, or 86 cents a share. NewPower had forecast a per-share loss of 88 cents to 95 cents, spokeswoman Gael Doar said. Revenue was $126 million, more than the company expected. NewPower, which sold shares to the public in October, competes for sales in Pennsylvania, Texas, Georgia and other states with deregulated retail-energy markets. The Purchase, New York-based company expects to have 1.2 million customers by the end of this year. The company sees revenue of $70 million to $75 million in the second quarter because of lower seasonal demand for power and gas. It sees a second-quarter loss of $52 million to $56 million, or 89 cents to 96 cents a share, which is better than it expected. NewPower still projects a loss of $210 million to $215 million, or $3.61 to $3.70 a share, this year on revenue of $530 million to $540 million. NewPower had a fourth-quarter loss of $57.5 million, or $1.02 a share, on revenue of $64.7 million. Houston-based Enron, the largest energy trader, owns about 24 percent of NewPower. Enron, which sells power and gas to utilities and large energy users, is NewPower's biggest shareholder. Shares of NewPower fell 47 cents to $9.03. They have fallen 57 percent since the stock sale.
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