Enron has a Texas-size helping of attitude. The Houston energy and trading giant believes it can trade any commodity, any time, and make money doing it. And given Enrons leap to the top of this years Interactive 500, its hard to refute the companys swagger. At least, it was hard to refute it before third-quarter earnings came out last month.
Since launching EnronOnline in November 1999, the company — which used to focus primarily on natural gas — has remade itself into an e-commerce dreadnought that handles more than 5,500 transactions, worth about $2.7 billion, every day. Enron now garners an estimated $97.47 billion from its Web operations — three times more online revenue than IBM, its closest competitor in the Interactive 500. The Web provides the “afterburner” for the companys trading business, one Enron official says.
Greg Piper, president and CEO of Enron Net Works, the parent company of EnronOnline, says Enron is continually looking for new services to offer and commodities to trade. “From a system or IT perspective, we have no limits, really,” Piper says.
Enron now trades 30 different commodities — including weather derivatives, coal, steel and natural gas — and each commodity has various forms and delivery dates. That means that at any given time, Enron is selling about 2,000 different products.
Unlike other exchanges that match buyers with sellers, Enrons marketplace is principal-based. Enron acts as the conduit between the buyer and the seller in every transaction: It takes title to the commodity from the seller, adds in a bit of profit for itself, then sells it to the buyer. That means that sellers of say, electricity, can always find a home for their product at Enrons posted price. Plus, participants in the exchange can buy risk management products such as futures contracts and options to hedge their financial exposure.
Perhaps most important, Enron has streamlined and simplified the myriad of contracts and terms that used to accompany each negotiated sale of plastics, coal and other commodities. When companies sign up to trade on EnronOnline, they agree to a basic set of contracts that bind all participants to the same standards, a fact that makes it far easier for companies to trade.
To keep its revenue growing, Enron has begun widening its e-commerce offerings. Last summer, the company launched Clickpaper.com, an online exchange for paper and forest products, in an effort to create a spot market for those products. In August, Enron got into the application service provider business by launching CommodityLogic, an online clearinghouse for trade confirmation, invoicing and commodity scheduling. The service allows traders that use EnronOnline to go to a single site to confirm their trades, resolve any discrepancies, make sure they are being paid — or billed — for the proper amount, resolve pipeline scheduling issues and schedule payments. Piper says that CommodityLogic has already signed up “dozens” of customers, and he hopes that the site will become an industry standard for trade confirmation and settlement.
Despite its blast into e-commerce hyperdrive, all is not cheery at Enron. In the third quarter, the company took a $1 billion charge against earnings to write down investments in broadband, water marketing and other ventures. And in October, the Securities and Exchange Commission launched an investigation into a series of partnership deals between the company and Enron Chief Financial Officer Andrew S. Fastow. Enron chairman and CEO Ken Lay says the company welcomes the SEC investigation and looks forward to “the opportunity to put any concern about these transactions to rest.” Yet, one day after the company gave its quarterly earnings report and subsequently watched its stock take a dive in a show of investors loss of confidence in the company, it announced a replacement for Fastow.
In addition, the company faces a host of competitive challenges. It must stave off a horde of hungry competitors — including Aquila, Duke Energy, Dynegy and The Williams Cos. — that want a share of the commodity trading market. And some analysts are concerned about Enrons profit margins.
“Enrons margins are shrinking. Last year, they were making 3 [percent] to 4 percent on every trade,” says Rob Plaza, a Morningstar stock analyst who believes Enrons fair market value is about $43 per share. “This year, they are under 2 percent.” As Enrons profit margins erode, the company “will have to offer more services if they are going to stay in the leadership,” he says.
Yet, the creation of the Web site is indicative of Enrons attitude toward innovation — an attitude that is reflected in the companys revenue history. In 1995, Enron had just $9.2 billion in revenue for the entire year; these days, it produces that much revenue in less than three weeks.
The fuel for much of that growth has been e-commerce. “Its been a tremendous success for us, and changed the whole company,” Piper says. The problem now, given all of Enrons challenges, is making that success last.