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Persistent problems chinking Enron's armor

C Bryson Hull in Houston

The teflon around energy and trading powerhouse Enron Corp is starting to show some scratches, as negative events over the past few months from India to its broadband unit, begin to take their toll, analysts say.

Make no mistake, Wall Street still sees the Houston-based giant as the energy convergence sector leader. Analysts polled by Thomson Financial/First Call still believe Enron will meet its earnings per share targets of $1.75 for 2001.

But the stock has dropped to its lowest levels since late 1999, a slide which started with news that Enron's keystone broadband content deal with Blockbuster Inc. had fallen apart.

The stock had traded in the mid-$80s as recently as February, before the stock market's recent collapse and a string of negative news. On Friday, it traded at $57.45 on the New York Stock Exchange, down $1.06 cents or 1.8 percent, and well off its high of $90.56 last August.

"Their share price hasn't been bulletproof and that's what counts. They were up pushing $90 and they're now in the $50s while the energy sector has done quite well, so they have underperformed quite a bit and that doesn't seem bulletproof to me," analyst Andre Meade of Commerzbank Securities said.

Meade said the price fall came as investors took the bad news out of Enron's valuation, particularly in devaluing the broadband business.

"With broadband the market initially gave them full credit. But investors got smart over the next year, and once you got some bad news out there, you could argue that valuation was pulled," Meade said.

But the bad news neither starts nor ends there.

The latest negative item came Wednesday, when a California federal judge ordered Enron to return the University of California and California State University systems to direct power access, which Enron says will cost them $12 million a month.

The universities' lawsuit which claimed Enron Energy Services breached their power management contract, could cast a shadow over the Houston-based company's power risk management arm which recently saw a huge upsurge in business involving similar multimillion dollar deals with large corporations.

Other bad news includes broadband layoff talk, failed water company spinoff Azurix Inc.'s impending sell-off its North American assets, the failure of the video on demand deal with Blockbuster, word that the $2 billion sale of utility Portland General is unlikely to go through and continuing payment problems at the Dabhol power plant in India.

That long-running dispute in India reared its head again on Monday. Enron confirmed it issued a notice of political force majeure to the Maharashstra State Electricity Board, which has consistently defaulted on payments.

Force majeure is an event beyond the control of a contractual party that could not have been prevented.

"It's one of the steps in the process of protecting our rights. It's one step, but it's not the only step," Enron spokesman John Ambler said.

Enron has already invoked payment guarantees from the Indian national government, but it has refused to cover MSEB's $21.9 million December bill until Enron and MSEB settle another dispute over a fine. The MSEB wants the $85.8 million fine, which it levied, to cover its outstanding bills.

Layoffs or redeployments?

Another nettling problem for Enron is news of trouble at Enron Broadband Services, the cutting-edge unit that encompasses a nascent bandwidth trading operation and a broadband content services business.

Most recently, Enron has had to answer questions about a reduction in the number of employees at EBS because of the stock market's faltering confidence in telecoms generally.

Two weeks ago, the company characterised word of layoffs at the broadband unit as nothing more than an internal redeployment of staff to areas that were growing at a higher rate.

"It's word games. Initially they said they were redeploying, and that was not the word I heard from inside the company, but that was the way they put it. It's probably a little of both," said analyst John Olson of Houston investment house Sanders Morris Harris.

EBS spokeswoman Kelly Kimberly on Monday said 227 employees were leaving the broadband unit to work in other areas of the company.

"Most of them have elected to go into the redeployment pool or are already moved into corporate or another business," Kimberly said.

Kimberly did not have an exact figure on the number who have opted to take a severance package, but characterised it as a small percentage.

It has been a rough few weeks for EBS, which also suffered from the Blockbuster debacle. Last month, the two announced a mutual end to a 20-year exclusive video on-demand deal, which had been considered a cornerstone of EBS' content services push.

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