DRIP PORTFOLIO
Conversing With Enron

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By George Runkle (TMF Runkle)
March 20, 2000

Last week I spoke with Tom Gros from Enron's (NYSE: ENE) Broadband Service division. In essence, Mr. Gros confirmed every bit of information that we obtained from the discussion I had the week before with Mrs. Sharon Crow of Williams Communications (NYSE: WCG) about broadband trading. However, some other interesting information came out of the discussion with Mr. Gros.

First, there is the challenge of describing broadband services for trading. Enron made a proposal to the industry in May 1999 for standardizing broadband services. They proposed "time division multiplexing" (TDM), which is the most commonly used architecture, and the New York to Los Angeles "city pair" as the benchmark route for trading.

The idea of the benchmark route is the same concept used in the oil-trading industry where West Texas Intermediate Crude is used as a benchmark crude. In the oil industry, crude oil requires different efforts to refine; for example, "sour" crude requires removal of sulfur. Heavy crudes have longer polymer chains in the molecules, and require more "cracking." So, in that industry an intermediate grade of oil is a way to define how valuable a barrel of crude is by how hard it is to refine related to that benchmark. The New York to Los Angeles pair will be used in broadband as the same kind of benchmark in that some runs will be shorter, others longer. Also, New York and Los Angeles are launching points for Asia and Europe. Mr. Gros also mentioned as an aside that Enron will have their service to London operating in the middle of this year.

Mr. Gros agrees that more participants in the market introduces more liquidity, allows better management of risk, serves the client, and allows the broadest number of players. Where he disagrees with the folks at Williams is the relative importance of its network. Enron has about 15,000 miles of fiber optic network; however, Mr. Gros states, "Broadband trading gives you an infinite number of route miles."

We talked about risk management at length. Broadband trading for Enron means "having the means to manage risk and access to an infinite network, which gives the ability to offer customers innovative services -- such as peak vs. off-peak bandwidth." Risk management will allow better balancing of supply vs. demand, and initially the market for bandwidth trading will be from producer to producer, in his opinion.

Obviously, the big question is, how will bandwidth trading affect the company's earnings? Mr. Gros did not have a specific figure (Mrs. Crow did not, either). He did state that it "will enhance revenue because it will provide clients services they really need." It also will allow them to supply "a host of new services to the client." In particular, a client can get bandwidth at the time it is needed. If a client needs bandwidth off-peak, that time can be purchased without having to pay for on-peak time. If the client needs peak periods for bandwidth, it will be cheaper overall for them anyway, since the off-peak time will be sold to someone else. Also, companies will quickly provide communications to clients in response to surges in needs.

As a final note, I asked Mr. Gros about Enron's network, which is pure IP (Internet Protocol) whereas Williams Communications has an ATM network. Mr. Gros says that "ATM is the network of the past, IP is the network of the future." He said that IP "treats digital transmissions as elements of a portfolio," providing more efficient utilization of the network. Basically, IP breaks messages up into small packets that may use different routes to get to the same destination. This way, available routes are used more efficiently, making communication much cheaper.

So, in the end, where do we stand as Drip investors? The trading of bandwidth is a Rule Breaking enterprise since it hasn't been done before. It also promises to be an important industry. And what is interesting is that having competitors in this arena is not necessarily a bad thing. It's almost like what I discovered when I worked for an oil company -- when several gas stations opened on a corner, all saw business increase. Bandwidth trading is risky, since we don't know how it will affect the revenue streams of the companies involved. However, I think that Enron is providing us with a unique opportunity as Drip Investors: We can consider a Rule Breaking company in a traditional Drip.

I received a lot of interesting e-mail about Enron and this sector. Next week, I'm going to wrap up this series by devoting a column to you Fools that were kind enough to send me your input. After that, I'd like to take a long, hard look at another Pathfinder company, Lucent Technologies (NYSE: LU). Lucent has had some trouble, but is this a concern to us as Drip investors? We'll study the company Foolishly and decide if the current problems are a buying opportunity, or a signal to hang up.

To discuss this column and its topics, please visit the Drip message boards linked below.

Drip Portfolio

3/20/2000 Closing Numbers
Ticker Company Dly Pr Chg Price
CPBCAMPBELL SOUP15/16$33.81
INTCINTEL CORP1/8$135.00
JNJJOHNSON & JOHNSON-1/4$79.31
MELMELLON FINANCIAL CORP-1 7/16$30.88

  Day Week Month Year
To Date
Since
7/28/1997
Annualized
Drip 1.59% 1.59% 14.29% 20.88% 57.04% 18.59%
S&P 500 -.54% -.54% 6.60% -.86% 55.16% 18.05%
S&P 500(DA) -.54% -.54% 6.60% -.86% 57.78% 18.80%
S&P 500(DCA) n/a n/a n/a n/a 28.32% 9.88%
NASDAQ -3.92% -3.92% -1.85% 13.29% 193.71% 50.22%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/199722.9859INTC45.653$135.00195.71%
11/14/199713.323JNJ79.310$79.310.00%
11/5/199831.5773MEL34.290$30.88-9.96%
4/13/19988.269CPB54.401$33.81-37.85%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/199722.9859INTC$1,049.37$3,103.10$2,053.73
11/14/199713.323JNJ$1,056.65$1,056.68$0.04
11/5/199831.5773MEL$1,082.79$974.95($107.84)
4/13/19988.269CPB$449.84$279.60($170.24)
  Cash: $24.47  
  Total: $5,438.79  


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.