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Revenues at the Houston-based firm, a NOW 50 Index company, jumped 72% to $13.1 billion in the first quarter, from $7.6 billion a year ago. Enron's wholesale energy operations and services business fueled most of that growth, turning in Q1 revenues of $12 billion, up from $6.6 billion a year ago.
If you don't understand what Enron does or how it makes money, don't despair. You aren't alone. The company, which got its start as a gas pipeline operator, is a tough nut to crack. If you're at all interested, however, it's worth a closer look since Enron is the world's largest marketer of natural gas and electricity.
First, what the heck is a marketer of energy commodities and how did Enron grow Q1 revenues 72% in this area? Enron's wholesale division has two arms: EnronOnline and commercial contracts.
EnronOnline is a marketplace where companies can buy and sell more than 600 energy products in 11 currencies. In that sense, it offers a business-to-business platform, providing a market for buyers and sellers of energy. Note to readers: Electricity and gas are commodities that can be bought, sold, and traded just like oil, paper, and pork bellies. Enron provides a twist on the B2B model, however, in that it actually makes the market by posting a bid price and an offer price for the commodities it trades.
In this environment, Enron generates strong sales by providing spreads that are very hard to beat. For example, it will offer to buy electricity at x price and sell it at y, offering maybe a $0.10 spread. Since buyers and sellers can see how tight the spread is, they have a powerful incentive to do business with Enron.
The trick for Enron is making sure it can deliver the commodity in the right place at the right time. That's where its 32,000-mile gas pipeline and ability to produce more than 14,350 megawatts of electricity worldwide come in handy. Firms that don't have serious scale are at a disadvantage.
Obviously, the margins aren't great in that business. Net income in Q1 increased 34% to $338 million, and net margins (excluding one-time items) held firm at 3%. This is very solid growth but clearly not in the 72% range.
As Fool Matt Richey talked about in last night's Fool on the Hill column, investors have to know how a company makes money. For Enron, making a market is the first step toward offering customers layers of higher-margin services, including credit services, portfolio management, and various services to optimize production and delivery efficiencies.
Investors should keep an eye on the company's income to see that margins hold and the company succeeds in selling its customers additional services.
The second part of Enron's revenue story this quarter is the increase in sales of its power and gas contracts. Enron reported $3.7 billion of new energy contracts this quarter, more than twice as high as last year's levels. Deregulation is spurring the growth, especially in Europe where the company landed almost $500 million in new deals.
Growth in the U.S. is robust as well -- a region you would think is mature. Enron is finding growth opportunities as deregulation continues, the company enters new markets, and its distribution and information system provides access to so much pricing information. Enron has consistently reported 30% to 35% revenue gains in the domestic market.
Clearly, this is just a quick look at the company's fast-growing topline and much more research is needed. Investors, for example, should pay close attention to progress the company is making trading bandwidth on its fiber optic network, a business that landed contracts worth $31 million in the first quarter and reached breakeven. But for investors looking for a lead steer in a growth industry, Enron fits the bill.
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