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


, 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) - Get Report

, 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


by breaking out asset-sale gains. "They need to put their disclosure where their mouth is," concludes Off Wall Street's Roberts.

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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.