Investing, One Stock 
 
Broad Horizons 
 
by Jeff Schlegel 
 
December 2000, "Worth" magazine 
 
Energy giant Enron is expanding its powerful trading platform into the heart 
of the new economy. 
  
Enron (NYSE: ENE) President and Chief Operating Officer Jeffrey Skilling 
hates his office, a spacious lair on the 50th floor of the energy company's 
downtown
Houston headquarters overlooking the flat Texas terrain. To Skilling, its 
haughty vastness is a vestige of the old mind-set from the days when energy 
markets 
were highly regulated. Instead, he prefers strolling through Enron's three 
commodity-trading floors * the company's nerve centers, where it buys and 
sells products 
ranging from natural gas to electricity to communications bandwidth. The 
often casually dressed Skilling is clearly in his element talking with the 
traders. "That's 
how you find out what's going on," he says.

Skilling doesn't think like an old-line energy executive, nor does Enron act 
like an old-line energy company. With its eclectic product mix and strong 
online
 presence, Enron has become a leader of a new breed of energy company trying 
to capitalize on deregulation. The ongoing unshackling of the natural gas 
and electric power markets that began in the mid-1980s has left both 
industries in a tizzy: A dearth of new power supplies, combined with 
insatiable demand, 
has jacked up gas and electric prices and put the squeeze on suppliers and 
their customers. That suits Enron just fine.

New Economy Initiatives
The company, which 10 years ago earned some 80 percent of its profits from 
its regulated gas-pipeline business, has become the nation's largest buyer
 and seller of natural gas and electric power and has pioneered a powerful 
trading platform to make effective markets in both commodities. But what has 
really electrified Wall Street during the past year are Enron's new-economy 
initiatives. First, it launched EnronOnline, an Internet-based energy-trading 
system, in November 1999. By mid-October 2000, the new venture had executed 
more than 350,000 transactions with a gross value totaling $183 billion. 
Next it unveiled its strategy to become a dominant broadband player by both 
delivering content along its own sizable fiber-optic network and trading
 bandwidth as a commodity. The nascent broadband services group had $345 
million in revenue for the first nine months of this year.

Although energy remains Enron's main source of revenue and earnings, 
management believes the growth of the Internet will enable the company to tap
 into new markets. "In five years, we will be a substantially different 
company," says chairman and Chief Executive Kenneth Lay. "Underlying 
everything we 
do is the ability to make markets more efficient." Along with bandwidth, 
Enron has added such mundane commodities as steel, and pulp and paper to its 
trading platform, which will soon include such esoteric fare as DRAM chips 
and data storage. "Trading is the ultimate scalable concept," adds Skilling. 
"We're
 using the same computer systems, processes, controls and people. The 
potential to expand into new markets is almost unlimited."

Investors have bought into Enron's vision and sent its shares soaring, which 
at a recent price of $80 were up 85 percent since the beginning of 2000. The 
big
 question, of course, is how much of that euphoria is already built into 
Enron's stock price and what happens if the company's broadband strategy 
doesn't 
unfold as quickly * or become as huge * as the company anticipates.

"We are a unique company with a unique set of skills that are perfectly 
suited for the changing economy."
* Jeff Skilling, President and COO, Enron

Company Culture
Enron is a company that firmly believes in itself and its mission. From 
management down, employees have little doubt that they're creating 
revolutionary
 new businesses. This strong sense of purpose is evident everywhere at 
Enron's headquarters, where throughout the day workers eagerly stop by a 
ticker-tape kiosk in the main lobby to check on Enron's stock price.

Management
Ken Lay, 57, assumed the top job at Enron in February 1986, not long after 
the company was formed by the merger of Internorth and Houston Natural Gas, 
where he had been chairman and CEO. The two pipeline companies had joined 
forces to compete better as the wholesale natural gas market was being
deregulated. In the past, government authorities set the price that utilities 
could charge for gas, and customers were bound by rigid, long-term contracts. 
But 
with deregulation, the market determines energy prices, and both suppliers 
and consumers have more flexibility in how they buy and deliver goods. The
 new Enron moved swiftly to cash in on these changing dynamics by creating a 
trading platform to bring together buyers and sellers. Enron repeated the 
process with electricity when the government began deregulating that market 
in the 1990s.

Lay has long been hailed as Enron's visionary, but COO Skilling is no slouch. 
"Jeff is one of the brightest and most creative people I've ever known," says 
Lay, 
who began working with him in the mid-1980s when Skilling was a McKinsey 
consultant helping Enron develop its gas-trading system. "I've made it clear 
for
 some time that he's my successor." The 46-year-old Skilling, who officially 
joined Enron in 1990, likes to toss around words like awesome and cool when
 describing the company's business. Lay's language is slightly less colorful 
but no less enthusiastic when the CEO is talking about Enron's future.

Lay and Skilling both agree that the best ideas often come up from the 
bottom. "We've flattened the organization, made it more entrepreneurial, and 
developed a culture to take risks and try new ideas," Lay says. Take Michael 
Moulton, 30, who is working in Enron's pulp-and-paper trading unit. Moulton 
came up with the notion to make markets in DRAM chips, and when the new unit 
begins its operations later this year, he will run it.

Wholesale Energy
Despite its broad range of businesses and expansive aspirations, Enron is 
still at its core an energy company. During the first nine months of this 
year, 
nearly $56 billion of its $60 billion in revenue came from its wholesale 
energy operation, which centers around making markets in and creating 
risk-management 
products for natural gas and electricity. Some of what Enron sells comes from 
its own gas production and electric-power generation, but the bulk of it is 
bought 
from other energy producers with excess capacity.

The company's trading capacity has gotten a tremendous boost from 
EnronOnline, which now handles about 60 percent of its transaction volume. 
Margins
 are razor-thin * maybe a penny per million BTUs of gas or per megawatt of 
electricity (standard contract measures). But Enron isn't doing trades just 
to 
make money; it does them to create liquid spot markets that in turn enable it 
to package together risk-management products, such as futures and swap 
contracts, that companies can use to hedge their energy costs. Enron is a 
principal in every trade, taking full responsibility for actual delivery of 
the product, 
be it gas, electricity, or even pulp and paper. Overall margins in the 
wholesale energy business average one to three percent.

Trading is a risky business, of course, but few companies manage risk better 
than Enron, which has armies of people working to stay on top of sudden price 
moves. "Enron seems to make all the right calls because it has the best 
modeling systems, hires the brightest people, and has trading experience 
throughout 
the country," says Gregory Phelps, a portfolio manager at John Hancock Funds 
who closely follows the utilities sector. Enron employs a dozen 
meteorologists 
on its gas-trading floor to monitor any weather changes * from an oncoming 
cold snap in Chicago to a potential hurricane in the Gulf of Mexico * that 
could affect 
supply and demand.

Now Enron has turned its sights on Europe, which is in the early stages of 
deregulation. Enron established a presence in the U.K., Germany and 
Scandinavia 
in the early to mid-1990s. It currently has 18 offices in 16 countries, 
making markets and hedging risks in a region where state-owned utilities 
still loom large and 
national differences present formidable hurdles. "We're the only company with 
pan-European operations," says Mark Frevert, who heads the wholesale energy
 unit. "There's a lot of complexity, but we like markets where it's 
difficult."

Broadband Operations
The roots of Enron's bandwidth trading go back to 1997, when the company 
bought Portland General Electric to gain a foothold in the West Coast energy
 market. At the time, the utility was laying fiber-optic cable alongside its 
gas pipeline that ran between Portland and Salt Lake City, and as it was 
being deployed, 
"the Enron mind-set of 'Can we trade this stuff?' kicked in," says Kenneth 
Rice, CEO of Enron Broadband Services. "Bandwidth lends itself well to being 
traded like 
a commodity."

Today Enron buys excess bandwidth from Internet service providers and from 
carriers such as AT&T (NYSE: T), Global Crossing (NYSE: GX) and Qwest
 (NYSE: Q). As it does with energy, Enron bundles together bandwidth, then 
sells and delivers it on an as-needed basis to content providers, network 
carriers,
 and other end-users. Enron promises to deliver capacity at a set time and 
for a specified period over a fiber-optic network that stretches nearly 
15,000 miles
 and connects some 30 major cities in the United States, Europe,and Japan.

Enron is certainly ambitious. It wants to change the way bandwidth is sold, 
which up until now has been in fixed-rate monthly contracts that lock buyers 
into 
paying for capacity they don't always need. Enron provides bandwidth on 
demand that users can purchase and procure on short notice for short periods 
of 
time * for instance, if a company wants to broadcast a streaming video of its 
CEO to its offices around the globe.

The company made its first bandwidth trade last December when it sold a 
monthly contract for DS-3 bandwidth between New York City and Los Angeles on 
a Global Crossing network. (DS-3 is an industry standard for moving data at a 
speed of 45 megabits per second, fast enough for streaming video.) Enron
 delivered 1,399 months' worth of DS-3 broadband capacity in the third 
quarter alone and is on target to meet its year-end goal of 5,000 DS-3 
months. Both
 Lay and Skilling think bandwidth trading will contribute $1 billion in 
annual operating profits in five years, or nearly as much as wholesale energy 
contributed 
in 1999. Meanwhile, the company expects to pour another $650 million into 
broadband services during each of the next two years, offset by the pending 
$2 
billion sale of Portland General to Sierra Pacific Resources (NYSE: SRP).

The other major piece of Enron's broadband strategy centers on delivering 
streaming video. Using Sun Microsystems (Nasdaq: SUNW) servers and switches
 made by Lucent Technologies (NYSE: LU) and Cisco Systems (Nasdaq: CSCO) , 
along with its own internally developed software, Enron's broadband system
 is built to whisk data around Internet traffic jams. Content customers range 
from corporations doing video conferencing to retail chain Blockbuster (NYSE: 
BBI), 
which this summer inked a 20-year deal to distribute video-on-demand over 
Enron's network. "Video will be the king application," Skilling says. "That's 
where 
it's all going to happen."

Other Growth Drivers
Some people may have questioned Enron's decision to plunk down $100 million 
for the 30-year naming rights to Enron Field, the Houston Astros' new 
retractable-dome baseball stadium. But the deal also helped Enron seal a 
30-year, $200 million agreement to outsource the energy management of the 
stadium. So Enron not only boosted its corporate profile but also made $100 
million in the process.

Energy outsourcing is a potentially immense market, considering that U.S. 
businesses spend more than $240 billion on heat and electricity to run their 
operations every year. Enter Enron Energy Services, which does everything 
from analyzing a company's energy supply chain to pinpointing its 
energy-guzzling equipment to financing the cost of buying more-efficient 
gear. The group spent nearly a year under the hood at Simon Property Group
 (NYSE: SPG) before making recommendations that landed it a 10-year, $1.5 
billion contract to buy and manage the energy for Simon's 253 real-estate 
properties. "The complexity of this business is so enormous that if you're 
going to be the leader, you've got to know every detail," says Marty Sunde,
head of the group's North American unit.

Energy savings can be significant. Enron guarantees eight to 13 percent, but 
sometimes the savings can be even greater. The business, which began 
in 1997, recently started turning a profit and is expected to have earnings 
before interest and taxes, or EBIT, of $80 million this year. Enron is on 
target to 
land $16 billion in customer contracts in 2000, double last year's total. 
"There's no reason this business can't roughly double in each of the next few 
years," 
Lay says.

"Enron is very, very confident. Their tone borders on excessive confidence, 
but their track record warrants that."
* Erik Gustafson, Senior Portfolio Manager, Stein Roe & Farnham

The Competition
Some of Enron's trading partners are also its biggest rivals in reshaping the 
deregulated energy markets and forging ahead in telecommunications.
 Dynegy (NYSE: DYN), located just a few blocks away from Enron in Houston and 
called "Enron Jr." by at least one analyst, has its own gas- and 
electricity-trading operations and is looking into bandwidth trading. The 
same goes for Williams Companies (NYSE: WMB), whose fiber-optic network is
 much larger than Enron's. A consortium of six energy companies, including 
Aquila Energy, a leading power marketer, just launched an online 
energy-trading 
system to rival EnronOnline.

Several existing bandwidth traders, including Arbinet-thexchange,RateXchange 
(AMEX: RTX) and Band-X, essentially provide Web-based bulletin boards
 for companies to find trading partners. They don't actually deliver the 
product, which Enron feels gives it an advantage. In the energy-services 
business, 
Enron competes with a whole host of players, including consultants, regional 
utilities and energy outsourcers, but none have Enron's geographic scope.

"It's a challenge to value Enron's stock, because it's such a hybrid. It 
always seems expensive, but it continues to outperform expectations."
* Zach Wagner, Analyst, Edward D. Jones & Co.

What It's Worth
Analysts and Enron management alike prefer to break down the company along 
its four reported business lines using a sum-of-the-parts model. They 
also typically value the company's businesses in terms of EBIT, judging that 
to be a more consistent way to evaluate Enron's income because its businesses
 are so capital intensive. Using those metrics and a recent stock price of 
$80, Enron's pipeline transportation and distribution business is roughly 
valued at $5,
wholesale energy at $40, energy services at $20 and broadband services at 
$15. Skilling believes the multiple of 30 times EBIT assigned to wholesale 
energy 
is too low considering that business is expected to grow 35 percent this 
year, to $1.8 billion, some 70 percent of Enron's projected total EBIT. And 
wholesale 
energy's EBIT growth is likely to exceed 30 percent annually for at least the 
next five years on the strength of further deregulation of global energy 
markets. 
Combine that with similar expected growth rates in both energy services and 
broadband, 
not to mention the potential for new commodity-trading markets, and, Skilling 
argues, Enron's stock is easily worth $130.

Analysts are more cautious. Most agree that wholesale energy deserves a 
higher premium than the market is currently willing to pay, but bandwidth is 
still 
a couple of years away from profitability. In the meantime, Salomon Smith 
Barney analyst Ray Niles suggests that investors focus on the market 
potential 
of bandwidth trading, and that the quick acceptance of this product in the 
market could mirror the steady early growth of electricity trading in the 
mid-1990s.
 Niles thinks Enron's overall energy operations alone are worth more than 
Enron's current share price. If that's true, tacking on the $15 EBIT value 
for bandwidth
 would make Enron a $100 stock.

Ultimately, many investors will look at plain old earnings per share. If 
Enron meets analysts' consensus earnings forecast of $1.65 a share next year 
* and
 maintains its current multiple of 56 times earnings * it would be worth $92.

Social Responsibility
Enron has won awards each of the past three years for its efforts to reduce 
methane emissions and has been applauded for its wind-power division. But 
certain Enron projects, such as the construction of its Dabhol power plant in 
India, have been mired in controversy. The state police there squelched 
protests 
against the plant in 1996 and 1997 with beatings and jailings, and Human 
Rights Watch asserted that Enron was complicit because it benefited from the 
suppression of dissent and didn't speak out against human rights violations. 
Enron has since built a 50-bed hospital in the area and committed $500,000
 to improve the community's water and sanitation infrastructures.

The Upside
With less than half of the residential power market in the U.S. open to 
competition, electricity deregulation is far from over. Some analysts believe 
the entire 
market will be deregulated within five years. This would enable Enron to 
expand its leading energy-trading business. On the retail side, Enron could 
get a 
boost from the New Power Company, a partnership it formed with AOL (NYSE: 
AOL) and IBM (NYSE: IBM) aimed at selling electricity to homeowners via
 the Internet. Enron's attempt to sell residential electricity in California 
ended in failure in 1998, and the company readily admits this isn't one of 
its strengths. 
So it's relying on IBM's back-office expertise to handle the paperwork and 
AOL's Internet service to penetrate homes while Enron procures the power.

The Downside
The much-ballyhooed broadband revolution has failed to meet expectations. 
Currently, only five percent of U.S. households have broadband access, and
 Forrester Research analyst Maribel Dolinov says the rollout of so-called 
last-mile connections, which take broadband signals into homes, is moving 
very 
slowly. She doesn't expect wide-scale availability of video-on-demand before 
2004.

Who Needs It?
Enron's mix of the old and new economies should appeal to all but the most 
conservative investors. Its energy trading and pipeline businesses give it a 
stable source of cash flow, while its new Internet-based ventures give it the 
great growth potential of a tech stock.