On a consolidated basis, Intercontinental achieved 2002 revenues of $125.5 million with pre-tax profits of $52.3 million and cash flow from operations of $50.7 million. The Company's 2002 financial results are subject to audit.
The majority of Intercontinental's consolidated revenues, profits and cash generation were derived from the Company's over-the-counter ("OTC") digital trading platform, which contributed 70% of the Company's total revenues, 67% of its total pre-tax profits, and 73% of cash flow from operations for 2002. This profitability was achieved despite the costs borne by Intercontinental's OTC business to develop the new electronic futures trading infrastructure for The International Petroleum Exchange of London ("IPE"), its wholly owned subsidiary.
Capital expenditures in 2002 totaled $20.8 million, and included the technology provided to the IPE, disaster recovery enhancements, the development of OTC cleared products, and systems for the collection and dissemination of market data. EBITDA was $65.3 million and Intercontinental ended the year with no outstanding long-term debt, having paid down all of its long-term debt in 2002.
For the fourth quarter of 2002, revenues were $26.1 million, with pre-tax profits of $6.7 million, with the number of OTC transactions flat versus 2001's fourth quarter when Intercontinental's volumes surged following the collapse of Enron.
Jeffrey Sprecher, Chairman and Chief Executive Officer, said: "In a difficult year for the broader economy and merchant energy trading as a whole, Intercontinental made substantial gains in market share in the OTC markets. Revenue from the OTC business grew by 72% compared to 2001. Our multilateral business model, unique credit management tools, transparent order book and global reach are without question attracting and meeting the needs of a growing customer base. More than 780 firms accessed our digital platform in 2002, for an increase in participant firms of 50% over the prior year."
Said Sprecher, "Intercontinental has become an important source of liquidity in energy trading. While many of the initial order flow agreements that seeded and helped to establish liquidity on Intercontinental's platform expired in 2002, we have not seen a material change in the trading of those participants. While a small number of dealers continue to have order flow agreements for natural gas and power, today 85% of Intercontinental's business originates from the hundreds of customers that do not have trading obligations.
We have successfully reached out to bring new types of market participants to OTC trading, including hedge-funds, banks, proprietary trading firms and, recently, futures exchange locals."
Sprecher continued, "We are also pleased to note that 2002 results for Intercontinental exceeded the pro-forma forecasts that served as the basis for our 2001 acquisition of the IPE. In addition, Intercontinental successfully leveraged the clearing, back office infrastructure, and relationships surrounding the IPE to provide OTC participants with newly designed credit enhanced contracts, and thus originated the concept of OTC clearing for the energy markets."
Sprecher concluded: "As we look ahead, we are confident that our platform will continue to be a key source of liquidity for a broad range of market participants. We are focused on our mission to continue building the global digital energy, metals and derivatives markets, and we are well positioned to benefit from the accelerating shift to digital trading platforms as evidenced by the approximately 6,000 users that access Intercontinental. We will continue to take the lead in meeting the demand for side-by-side OTC and futures trading, enhanced credit capabilities in bi-lateral markets, improvements in data gathering and price reporting, and tools for back-office cost controls."
International Petroleum Exchange ("IPE")
The IPE recently announced that 2002 marked its fifth consecutive record year for trading volume. Volumes rose in all futures contracts, with IPE Brent Crude futures volumes up 17% and Gas Oil futures volumes up 13% over the previous year. IPE Natural Gas futures volumes, saw the highest growth at 21% over the previous year, and were boosted in particular when trade in those contracts was moved to the Intercontinental platform in October, setting record trading volumes each month since.
In the first quarter of 2003, Intercontinental will deliver an after-hours trading platform to the IPE, allowing the IPE to provide digital equivalents of all of its floor-traded futures contracts. The timetable for completing this alternative offering continues to be determined by the IPE Board of Directors and a consultative transition committee.
Said Sprecher, "Working together with the IPE and its customers to develop an unprecedented digital futures and OTC trading platform, we made great progress in bringing the IPE online and are fully on track with the Company's obligations agreed to upon the acquisition."
Additional Volume and Product Detail
The number of North American product and global oil transactions on Intercontinental's OTC platform increased 150% in 2002 compared to 2001, to approximately 1.9 million commission-based transactions. In European power and gas, the number of OTC transactions was 20 times greater in 2002 compared to 2001. Cleared trades represent a growing part of Intercontinental's volume, with over 8,400 cleared transactions in the North American natural gas market in the fourth quarter. Intercontinental's European cleared-OTC business was launched in September, with over 1,100 cleared transactions in the fourth quarter. Intercontinental's trade confirmation business, eConfirm, took hold following its launch in the second quarter, with over 75,000 trades submitted by the back offices of its subscribers. eConfirm subscribers comprise 34 of the world's largest banks and trading firms who have chosen to automate their trade confirmation process. To facilitate digital customer links, Intercontinental developed and promulgated an XFML (eXchangeable Faceted Metadata Language) data schema for wholesale energy trading and this XFML data standard was rapidly accepted.
Also during 2002, Intercontinental launched a market data business, The 10x Group, to introduce more transparent, reliable price information that which is currently available in the OTC market. The "10x Report" is now the North American OTC energy industry's only auditable, electronic and real-time price reporting service. Intercontinental's electronic platform and eConfirm database, with its unprecedented data repository continues to be accessed by the Company as well as various government agencies, to identify market abuses that may occur.
Board of Directors and Governance
Intercontinental installed an independent Board of Directors comprised of five outside directors. Jeffrey Sprecher and Sir Bob Reid, IPE Chairman also serve on the Board. Intercontinental attracted accomplished global corporate leaders, under whose stewardship the Company has adopted an independent governance structure that is intended to achieve the type of independent governance recommended or required under the standards adopted by various regulatory and self-regulatory agencies. Intercontinental took a leadership role in 2002, addressing the self-regulatory needs of the merchant energy industry by adopting a Fair Trading Initiative, with which all of its participants are required to comply. Further, to ensure the highest standards in internal controls and monitoring on the platform, Intercontinental adopted extensive security policies covering, among other things, access to and archiving of trade data, and retained Ernst &Young to review and report on certain controls surrounding the platform.
