thestreet . com : trade winds blowing enron further south trade winds blowing enron further south
by peter eavis
senior columnist
08 / 30 / 2001 02 : 45 pm edt
url :
enron ( ene : nyse - news - commentary ) appears to be relying on asset sales to offset weakness in its high - profile energy trading operation .
a billion - dollar sale of power plants likely made a hefty contribution to the energy giant ' s second - quarter profits , which are supposed to owe their rapid growth to the company ' s well - publicized trading acumen . a smaller sale of impaired assets to an affiliate company also may have helped nudge second - quarter numbers past wall street earnings estimates . one energy market source alleges the price tag on this deal was inflated . complicating matters , enron ' s financials make it difficult to determine exactly how much these deals may have contributed to earnings .
for its part , enron flatly denies that it used one - time gains to meet estimates or that the price of the impaired - assets sale was inflated . but dependence on asset sales would mark a big step backwards for houston - based enron , which has long told investors that trading is its future . by shrewdly capturing a dominant position in the nation ' s fast - growing energy market , enron has expanded trading profits exponentially over the last couple of years . operating earnings from trading surged 160 % in 2000 to $ 1 . 6 billion , causing the stock to double .
now there ' s chatter that enron ' s swashbuckling traders were caught out by the second quarter ' s unexpected drop in the prices of power and other energy commodities . in addition , the company booked a large loss in its broadband unit . if asset sales can ' t be repeated and trading income weakens , earnings could crater , observers say , which could pull enron ' s already battered stock down even lower .
in fact , fear that enron ' s prodigious profits growth won ' t be sustained is the chief reason its stock price has dropped by half this year . other factors have contributed as well : investor dissatisfaction over enron ' s opaque and confusing financial statements have risen throughout the year , and earlier this month ceo jeff skilling quit after only six months on the job . skilling ' s departure sparked all sorts of dark theories about the real reason for his sudden move .
enron chairman ken lay , who has now reassumed the ceo post , said this week that he aims to improve enron ' s disclosure . he has moved to allay concerns over top - level instability by promoting two experienced enron executives to the positions of president , also vacated by skilling , and vice chairman .
but skeptics remain unconvinced . " i think the second - quarter performance was bad in the trading operations and was covered up by asset sales , " says mark roberts , director of research at off wall street , a cambridge , mass . - based stock analysis firm that doesn ' t do underwriting . ( off wall street issued a critical report on enron in may . ) for the quarter , enron made 45 cents a share , 3 cents more than analysts had expected .
details , details
one transaction investors want details on is the sale by enron north america of three gas - fired power plants to allegheny energy supply , a unit of allegheny energy ( aye : nyse - news - commentary ) , hagerstown , md . the deal took place in may for a price of $ 1 . 05 billion , according to allegheny ' s recent securities and exchange commission disclosures . ( allegheny declined to comment on the deal . )
enron ' s second - quarter earnings got a huge boost from the sale of these three so - called peaker plants , says roberts . he believes the gain on the sale may have been as high as $ 500 million . an energy company analyst at a wall street brokerage thinks it may have been closer to $ 300 million . ( his firm hasn ' t done recent underwriting for enron . )
enron ' s financial statements don ' t specify the size of the gain from the peakers , so called because they supply power when demand is strong . the company declines to offer a number , saying the gain figure is hard to isolate because it must be netted against gains or losses on contracts associated with the assets sold .
however , enron ' s public disclosure states that proceeds from the sale are included in its commodity sales - and - services line , which is by far the biggest contributor to enron ' s earnings , producing $ 762 million in operating profits in the second quarter .
the problem is that the firm ' s trading profits also are booked in this segment . as a result , investors can ' t know how much of the quarter ' s blowout commodity sales - and - services earnings came from the peaker sale and how much from straight trading . if roberts ' $ 500 million estimate is correct , trading may have accounted for only $ 262 million in second - quarter operating profit .
partners indeed
the other deal that ' s raising eyebrows is the sale in june by enron of texas - based assets that are used to produce mtbe ( methyl tertiary - butyl ether ) , the chemical compound added to gasoline to make it burn more efficiently .
the assets were sold for $ 120 million by one subsidiary of enron to another subsidiary , called eott energy partners ( eot : nyse - news - commentary ) , chiefly a marketer and transporter of crude oil . any gain on the sale would have been booked in enron ' s wholesale line .
the issues with the deal are plenty . it took place on june 30 , right at the end of the second quarter . this could be construed as a sign that enron pressed eott to do the deal then so it could include any gain in second - quarter results .
then there ' s the question of price . enron took a $ 440 million impairment charge against these mtbe assets at the end of 1999 , responding to what it described at the time as " significant changes in state and federal rules regarding the use of mtbe . " some environmental authorities believe mtbe to be a dangerous substance and claim the mtbe content in drinking water has reached unacceptably high levels .
skeptics ask : how can enron turn around 18 months after a massive impairment charge and sell the assets for $ 120 million ?
in addition , an executive at another energy company that talked to enron about buying the mtbe assets claims they ' re worth $ 50 million at most ; he claims enron has long been trying to sell them for around $ 150 million .
put bluntly , did enron stuff eott with overpriced assets to meet earnings expectations ?
an enron spokeswoman responds : " eott views buying these assets as an expansion from its core business . it makes good business sense . "
and a recent eott sec disclosure states that eott ' s audit committee , made up of three directors who aren ' t employees or officers of any enron affiliate , as well as an investment bank , judged the sale price to be fair . however , the chairman of the audit committee , daniel whitty , is a director for two other enron subsidiaries . he declined to comment on the deal .
a person familiar with enron ' s business adds that it was eott that wanted to get the deal done before the end of the second quarter so it could include the assets in third - quarter numbers .
this person also says the gain was " immaterial " to enron ' s second - quarter numbers , since there wasn ' t a big difference between the fair value the assets were marked down to and the price at which they were sold . most important , this person insists , the $ 120 million price isn ' t based only on the assets sold . eott is also paying for a contract with enron that gives eott 10 years ' worth of mtbe - related business . what ' s more , enron has agreed to retain the price risk associated with the commodities involved in mtbe production , this person states .
whatever the case with the mtbe assets , enron would go a long way toward fulfilling lay ' s promises of glasnost by breaking out asset - sale gains . " they need to put their disclosure where their mouth is , " concludes off wall street ' s roberts .
know any companies that the market may be misvaluing ? detox would like to hear about them . please send all feedback to peavis @ thestreet . com .
in keeping with tsc ' s editorial policy , peter eavis doesn ' t own or short individual stocks . he also doesn ' t invest in hedge funds or other private investment partnerships .
thestreet . com : trade winds blowing enron further south
trade winds blowing enron further south
by peter eavis
senior columnist
08 / 30 / 2001 02 : 45 pm edt
url :
enron ( ene : nyse - news - commentary ) appears to be relying on asset sales to offset weakness in its high - profile energy trading operation .
a billion - dollar sale of power plants likely made a hefty contribution to the energy giant ' s second - quarter profits , which are supposed to owe their rapid growth to the company ' s well - publicized trading acumen . a smaller sale of impaired assets to an affiliate company also may have helped nudge second - quarter numbers past wall street earnings estimates . one energy market source alleges the price tag on this deal was inflated . complicating matters , enron ' s financials make it difficult to determine exactly how much these deals may have contributed to earnings .
for its part , enron flatly denies that it used one - time gains to meet estimates or that the price of the impaired - assets sale was inflated . but dependence on asset sales would mark a big step backwards for houston - based enron , which has long told investors that trading is its future . by shrewdly capturing a dominant position in the nation ' s fast - growing energy market , enron has expanded trading profits exponentially over the last couple of years . operating earnings from trading surged 160 % in 2000 to $ 1 . 6 billion , causing the stock to double .
now there ' s chatter that enron ' s swashbuckling traders were caught out by the second quarter ' s unexpected drop in the prices of power and other energy commodities . in addition , the company booked a large loss in its broadband unit . if asset sales can ' t be repeated and trading income weakens , earnings could crater , observers say , which could pull enron ' s already battered stock down even lower .
in fact , fear that enron ' s prodigious profits growth won ' t be sustained is the chief reason its stock price has dropped by half this year . other factors have contributed as well : investor dissatisfaction over enron ' s opaque and confusing financial statements have risen throughout the year , and earlier this month ceo jeff skilling quit after only six months on the job . skilling ' s departure sparked all sorts of dark theories about the real reason for his sudden move .
enron chairman ken lay , who has now reassumed the ceo post , said this week that he aims to improve enron ' s disclosure . he has moved to allay concerns over top - level instability by promoting two experienced enron executives to the positions of president , also vacated by skilling , and vice chairman .
but skeptics remain unconvinced . " i think the second - quarter performance was bad in the trading operations and was covered up by asset sales , " says mark roberts , director of research at off wall street , a cambridge , mass . - based stock analysis firm that doesn ' t do underwriting . ( off wall street issued a critical report on enron in may . ) for the quarter , enron made 45 cents a share , 3 cents more than analysts had expected .
details , details
one transaction investors want details on is the sale by enron north america of three gas - fired power plants to allegheny energy supply , a unit of allegheny energy ( aye : nyse - news - commentary ) , hagerstown , md . the deal took place in may for a price of $ 1 . 05 billion , according to allegheny ' s recent securities and exchange commission disclosures . ( allegheny declined to comment on the deal . )
enron ' s second - quarter earnings got a huge boost from the sale of these three so - called peaker plants , says roberts . he believes the gain on the sale may have been as high as $ 500 million . an energy company analyst at a wall street brokerage thinks it may have been closer to $ 300 million . ( his firm hasn ' t done recent underwriting for enron . )
enron ' s financial statements don ' t specify the size of the gain from the peakers , so called because they supply power when demand is strong . the company declines to offer a number , saying the gain figure is hard to isolate because it must be netted against gains or losses on contracts associated with the assets sold .
however , enron ' s public disclosure states that proceeds from the sale are included in its commodity sales - and - services line , which is by far the biggest contributor to enron ' s earnings , producing $ 762 million in operating profits in the second quarter .
the problem is that the firm ' s trading profits also are booked in this segment . as a result , investors can ' t know how much of the quarter ' s blowout commodity sales - and - services earnings came from the peaker sale and how much from straight trading . if roberts ' $ 500 million estimate is correct , trading may have accounted for only $ 262 million in second - quarter operating profit .
partners indeed
the other deal that ' s raising eyebrows is the sale in june by enron of texas - based assets that are used to produce mtbe ( methyl tertiary - butyl ether ) , the chemical compound added to gasoline to make it burn more efficiently .
the assets were sold for $ 120 million by one subsidiary of enron to another subsidiary , called eott energy partners ( eot : nyse - news - commentary ) , chiefly a marketer and transporter of crude oil . any gain on the sale would have been booked in enron ' s wholesale line .
the issues with the deal are plenty . it took place on june 30 , right at the end of the second quarter . this could be construed as a sign that enron pressed eott to do the deal then so it could include any gain in second - quarter results .
then there ' s the question of price . enron took a $ 440 million impairment charge against these mtbe assets at the end of 1999 , responding to what it described at the time as " significant changes in state and federal rules regarding the use of mtbe . " some environmental authorities believe mtbe to be a dangerous substance and claim the mtbe content in drinking water has reached unacceptably high levels .
skeptics ask : how can enron turn around 18 months after a massive impairment charge and sell the assets for $ 120 million ?
in addition , an executive at another energy company that talked to enron about buying the mtbe assets claims they ' re worth $ 50 million at most ; he claims enron has long been trying to sell them for around $ 150 million .
put bluntly , did enron stuff eott with overpriced assets to meet earnings expectations ?
an enron spokeswoman responds : " eott views buying these assets as an expansion from its core business . it makes good business sense . "
and a recent eott sec disclosure states that eott ' s audit committee , made up of three directors who aren ' t employees or officers of any enron affiliate , as well as an investment bank , judged the sale price to be fair . however , the chairman of the audit committee , daniel whitty , is a director for two other enron subsidiaries . he declined to comment on the deal .
a person familiar with enron ' s business adds that it was eott that wanted to get the deal done before the end of the second quarter so it could include the assets in third - quarter numbers .
this person also says the gain was " immaterial " to enron ' s second - quarter numbers , since there wasn ' t a big difference between the fair value the assets were marked down to and the price at which they were sold . most important , this person insists , the $ 120 million price isn ' t based only on the assets sold . eott is also paying for a contract with enron that gives eott 10 years ' worth of mtbe - related business . what ' s more , enron has agreed to retain the price risk associated with the commodities involved in mtbe production , this person states .
whatever the case with the mtbe assets , enron would go a long way toward fulfilling lay ' s promises of glasnost by breaking out asset - sale gains . " they need to put their disclosure where their mouth is , " concludes off wall street ' s roberts .
know any companies that the market may be misvaluing ? detox would like to hear about them . please send all feedback to peavis @ thestreet . com .
in keeping with tsc ' s editorial policy , peter eavis doesn ' t own or short individual stocks . he also doesn ' t invest in hedge funds or other private investment partnerships .