Fool.com: Enron Growing Old and New Businesses (News) October 12, 1999

Enron Growing Old and New Businesses

By Richard McCaffery (TMF Gibson)
October 12, 1999

Natural gas, electricity, and communications company Enron (NYSE: ENE) reported net income (excluding nonrecurring items) of $223 million for the third quarter today, a cool 33% higher than the year-earlier period. Net earnings per diluted share increased 13% to $0.27, up from $0.24 a year ago and in line with analyst estimates.

The Houston-based company attributed its strong performance to the size and scope of its energy wholesale business, growing energy outsourcing agreements, and worldwide deregulation of the utilities industry. Third quarter revenue reached $12 billion.

Since Enron is a diverse company pushing into new service areas, it's not an easy car for investors to steer. Couple this with worldwide operations and you've got a twisty road at high speed. Nevertheless, it's probably worth getting up to speed because Enron isn't the first energy company looking to leverage its private network in order to enter the communications business.

First, the basics. Enron is a natural gas, electricity, and communications company that operates through a family of subsidiaries and affiliates. Its traditional businesses include the exploration and production of natural gas and crude oil, the operation of natural gas pipelines and electric utility operations, finance services, and other energy-related lines of business.

Enron, for example, runs the Portland General Electric Utility Co., which provides electricity for about 714,000 retail customers. In 1998 it formed a water company called Azurix (NYSE: AZX), which provides water and waste water services, and develops and manages water resources. Enron has operations in North America, South America, Europe, India, and Asia.

As the utility industry deregulates both worldwide and in the United States, Enron has positioned itself to take advantage of revenue opportunities. Just in North America, for example, the nonregulated electricity market is expected to grow about 35% annually. This is driving growth. Enron is the largest supplier of electricity and natural gas in North America.

Its most recent effort, however, is broadband communications. Enron is building a fiber optic network in the U.S. that will serve as an Internet backbone. The network, which enhances the company's existing network (used to provide private communications across its enormous geographic range of operations), will be used to offer corporate customers high-speed data applications and streaming media services. So far Enron has built out 10,000 miles of its network. It will be 17,000 miles long when completed at the end of 2000.

The communications push is an interesting play, and not as far afield from energy services as investors might think. There is a precedent for utility companies leveraging their private communications networks to launch new businesses, and the breadth of Enron's operations gives them a shot at becoming a formidable player. For more on power companies morphing into communications providers, check out Bill Mann's recent article on Montana Power (NYSE: MTP).

Through its communications business, Enron's management believes it can cash in on the corporate world's desperate need for high-quality, high-speed communications over an IP (Internet protocol) network.

The fiber optic network is actually just a small part of this strategy. The central puzzle piece is the Enron Intelligent Network, a software platform aimed at facilitating e-commerce services over the network. The company's goal is to get broadband services to corporate desktops, and EIN, introduced early this year, is the way it's going to do it.

So far, Enron has several major customers testing the platform. Customers and revenue, presumably, are down the road. To help deliver its communications services, Enron has signed a range of partners, including GTE Internetworking, Verio (Nasdaq: VRIO), and NorthPoint Communications (Nasdaq: NPNT). It's unclear what kind of revenue the company hopes to generate from its communications division.

As such, investors should be eager to hear more about Enron's plan. Until then, it would probably be smart to wait on the sidelines until the company starts announcing customers and fleshing out the plan in its financial releases.

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