Zeev, the market may begin to discount a lot of things..
like this...
THE 2002 FORTUNE 500
The Revenue Games People (Like Enron) Play
Got energy trading contracts?
FORTUNE
Monday, April 15, 2002
By Carol J. Loomis
Of all the accounting weirdness around--could anyone ever have dreamed that accounting would vie with pedophilia as front-page news?--the aspect that has most fundamentally affected the FORTUNE 500 is the handling of what are called "energy trading contracts."
These things, almost single-handedly, made Enron one of the largest companies on our list--No. 7 in 2000 and No. 5 this year. These contracts have also caused many other energy and utility companies to show big to enormous increases in revenues from what they originally reported for 2000. A company many of our readers have most likely never heard of, Idacorp (formerly known as Idaho Power), leaped onto the list thanks to a 454% revenue increase; at American Electric Power revenues rose 347%; Calpine's jumped 233%. Another company, Mirant, which was spun out of Southern Co., is popping up on the list for the first time with an astonishing $31.5 billion in revenues--more, for example, than Dell or Motorola. All these figures were blessed by the authorities that FORTUNE has always relied on: companies' outside auditors and their watchdog, the Securities and Exchange Commission.
We will explain these wacky revenue leaps. But first, an explanation as to why the Greatest Leaper of them all, Enron, is fifth on our 2001 list. To begin with, Enron, going by the restated financials it issued for the first nine months of last year, inarguably was a huge company. In fact, its $139 billion in revenues for nine months exceeded General Electric's full-year revenues of $125 billion.
Then, on Dec. 2, Enron went into bankruptcy (a fact that doesn't disqualify it from the 500 list), and it has yet to report fourth-quarter results. The missing quarter, in which we knew revenues had fallen dramatically, gave us a problem. So we took a stab at estimating full-year revenues and concluded they might reach a maximum of $160 billion. But rather than create a precedent of using revenue estimates on the FORTUNE 500 list, we decided to rank Enron based on its nine-months revenues of $139 billion--and that figure is what makes it fifth on our list, behind Wal-Mart, Exxon Mobil, GM, and Ford. (Had we used the $160 billion estimate, Enron would still have trailed Ford.) Given the questions that hang over Enron's profits, assets, and stockholders' equity, we didn't think we could report plausible figures for those categories.
So how valid are Enron's mountainous revenues? To answer that you need to understand a bit about energy trading contracts. These are commodity contracts, mainly for natural gas, oil, and electricity, and they are entered into by traders hoping to earn a profit on future shifts in market prices. The traders are not only energy companies but also--and this is a fact that's important to our revenue tale--Wall Street firms such as UBS Warburg, Salomon Smith Barney, J.P. Morgan Chase, and Morgan Stanley.
So let's imagine a contract for $1 million of natural gas (we'll skip the btu details), to be delivered six months from now. If a Wall Street firm sold this contract, nothing called "revenues" would ever be created. Instead, the firm would periodically mark the contract to market--that is, measure the profit or loss earned on the contract--and, when time came to report, put that dollar result into an income statement item called "trading gains and losses" (which is considered revenue on the FORTUNE 500). In accounting parlance, this is known as reporting "net."
But in the 1990s many energy and utility companies, with Enron apparently acting as Pied Piper, began to report a lot of contracts "gross," meaning that in our example they put the $1 million value of that contract directly into revenues. They concurrently offset those revenues with a roughly equal cost for the gas, and thereafter measure profit and loss just like the Wall Street firms. All other things being equal, they end up with an identical profit to what the Wall Street firm makes. But there's obviously a monster difference in reported revenues--zero dollars in the Wall Street case, $1 million in the energy case. |
