Paul Commins (TMF Buster)
Sorry, David, but your comparisons to utility and steel companies just don't hold up. Enron is simply not this kind of company. Not anymore.
Let's look at natural gas distribution, Enron's onetime primary business. In calendar year 2000, Enron sold 28,319 billion units (British Thermal Unit Equivalents) of natural gas to local distributors. Of this total, only 649 billion units, or 2.3%, were sourced from Enron-owned pipelines. The balance was bought from other suppliers and resold by Enron, typically in the fulfillment of long-term contracts. Moreover, the volume of third-party gas sold by Enron last year increased a striking 82%, versus just a 13% gain in gas from Enron's pipes.
On the electricity front, the true picture is even further removed from that nasty "utility" label. Enron is certainly a player in electricity market, as electricity represented one-third of Enron's total wholesale energy sales last year (based on electricity volumes converted to gas units). But the amount of this electric power actually generated by Enron-owned assets is negligible. In fact, the only electrical utility of consequence owned by Enron, Portland General Electric, is being sold off under an agreement reached last November.
In short, Enron still owns some energy-generating assets, but only strategically important ones. For example, Enron finances, promotes, and sometimes even builds energy plants, but it picks areas with historically unmet peak demand, or developing countries, or developed countries with newly deregulated markets. Like large stock brokerages -- who have parlayed the duel role of market maker and supply/demand generator into tidy profits -- Enron gains control of these key assets, exploits this ownership during times of peak market volatility, and then sells out its ownership stake when the markets settle.
Look at the current crisis in California. While the local utilities (the distributors) are going bankrupt, Enron has barely been touched. It happens to be on the lucrative side at the moment (the wholesale suppliers) but the beauty of making markets is that it doesn't really matter which side you're on. As long as there is volatility and associated risk, and provided you play the game smartly, the market maker's service is always in demand and profitable.
Don't believe me? Take a look at the trading profits for major brokerages in last year's down market. And if you think making markets is a dirty business, consider the fact that had California regulators allowed for the kind of long-term contracts traded by Enron (as opposed to forcing retail utilities onto the daily spot market), they wouldn't be facing their current crisis.
I haven't even touched on two of the fastest-growing Enron businesses: retail energy and the marketing of broadband capacity. In the retail business, energy-fussy companies like Cisco (Nasdaq: CSCO) outsource their total energy needs to Enron. This business took off last year, in its first year of profitability, generating $103 million in recurring income before interest and taxes, or nearly 4% of Enron's total for the year.
The broadband marketing business is not yet profitable, but it displays all the hallmarks of the successful Enron strategy. Using old gas and power-line routes, Enron has built a state-of-the-art Internet cable network, a key asset that it will parlay into a premium, on-demand broadband service. Over the long term, though, Enron wants to buy and sell everybody's bandwidth capacity using technology it has developed over years of managing complex infrastructure networks.
No, David. Enron is no utility. In fact, it compares most directly to Commerce One (Nasdaq: CMRC), the B2B infrastructure leader that is banking on a cut of future Net market transactions to bankroll its future. Based on this vision, unprofitable Commerce One is currently trading at over 12 times trailing 12-month sales, even after the recent Nasdaq haircut, while Enron trades at less than one times sales. Consider this in light of the fact that Commerce One's ultimate offering, its Global Trading Web, is barely off the ground, while Enron is already brokering hundreds of billions of dollars in B2B transactions in 13 international currencies. Now that's a global trading web!
Paul Commins does not own shares in Enron or any of the other companies he talks about in this week's Duel. Like all Fool staff members, he maintains a current list of stocks he owns in his personal profile, but he wants to remind you that Motley Fool writers are mere investors writing for investors, and not Wall Street analysts.
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