Enron

Enron Corp. was an American energy, commodities, and services company based in Houston, Texas. It had gone in less than a year from being considered one of the most innovative companies of the late 20th century to a byword for corruption and mismanagement.

Rise of the company
Enron was formed in July 1985 when Texas-based Houston Natural Gas merged with InterNorth, a Nebraska-based natural gas company. In its first few years, the new company was simply a natural gas provider, but by 1989 it had begun trading natural gas commodities, and in 1994 it began trading electricity.

Kenneth Lay, chief executive of Enron, wanted to revolutionize the global energy business. For years the industry had been dominated by huge utility companies that both physically provided the energy - pumped the gas and generated the electricity - and sold it on to consumers. Lay’s big idea, supplied by McKinsey consultant Jeffrey K. Skilling, was to create a kind of Energy Bank, which would act as the intermediary between suppliers and consumers.

The company introduced a number of revolutionary changes to energy trading, abetted by the changing nature of the energy markets, which were being deregulated in the 1990s and thus opening the door for new power traders and suppliers. Enron tailored electricity and natural gas contracts to reflect the cost of delivery to a specific destination—creating in essence, for the first time, a nationwide (and ultimately global) energy-trading network. In 1999 the company launched Enron Online, an Internet-based system, and by 2001 it was executing on-line trades worth about $2.5 billion a day.

By century’s end Enron had become one of the most successful companies in the world, having posted a 57% increase in sales between 1996 and 2000. At its peak the company controlled more than 25% of the “over the counter” energy-trading market—that is, trades conducted party-to-party rather than over an exchange, such as the New York Mercantile Exchange. Enron shares hit a 52-week high of $84.87 per share in the last week of 2000.

By the end of 2000, Enron was America’s fourth-largest company, employing around 21,000 people. It controlled a quarter of the US natural gas business. Riding a global wave of energy sector privatization, the company snapped up assets all over the world. In Latin America alone the company had interests in Colombia, Ecuador, Peru and Bolivia, from where Enron laid its pipeline across the continent to Brazil. In Argentina, following the intervention of Lay’s personal friend George W. Bush, Enron bought a controlling stake in the largest natural gas pipeline network in the world.

In the three years after 1997, Enron’s stock price increased by a factor of nearly five, from less than $20 a share to more than $90. For Enron executives, who were generously ‘incentivized’ with share options, the rewards were greater still. In the final year of its existence Enron paid its top 140 executives an average of $5.3 million each. Luxury car sales went through the roof. So did properties in River Oaks, Houston’s most exclusive neighbourhood.

Downfall
The only problem was that the Enron ‘System’ was an elaborate fraud, based on market manipulation and cooked books. In tapes that became public in 2004, Enron traders could be heard asking the El Paso Electric Company to shut down production in order to maintain prices. Another exchange concerned ‘all the money you guys stole from those poor grand-mothers of California’. The results of such machinations were not only the higher prices Enron wanted, but also blackouts for consumers. In the space of just six months after the deregulation law came into effect, California experienced no fewer than thirty-eight rolling blackouts.

Even with such market-rigging, the company’s stated assets and profits were vastly inflated, while its debts and losses were concealed in so-called special-purpose entities (SPEs) which were not included in the company’s consolidated statements. Each quarter the company’s executives had to use more smoke and more mirrors to make actual losses look like bumper profits. Skilling had risen to the top by exploiting new financial techniques like mark-to-market accounting and debt securitization. Enron’s international business, in particular, was haemorrhaging money by the mid 1990s, most spectacularly after the cancellation of a major power generation project in the Indian state of Maharashtra. In Houston, the euphoria was fading; the insiders were feeling the first symptoms of distress.

Investors had been assured that Enron’s stock price would soon hit $100. When (for ‘personal reasons’) Skilling unexpectedly announced his resignation on 14 August 2001, however, the price tumbled to below $40. That same month, Sherron Watkins wrote to Lay to express her fear that Enron would ‘implode in a wave of accounting scandals’. This was precisely what happened. On 16 October Enron reported a $618 million third-quarter loss and a $1.2 billion reduction in shareholder equity. Eight days later, with a Securities and Exchange Commission inquiry pending, Fastow stepped down as CFO. On 8 November the company was obliged to revise its profits for the preceding five years; the overstatement was revealed to be $567 million. When Enron filed for bankruptcy on 2 December, it was revealed that the audited balance sheet had understated the company’s long-term debt by $25 billion: it was in fact not $13 billion but $38 billion. By now, distress had turned to revulsion; and panic was hard on its heels. By the end of 2001 Enron shares were worth just 30 cents.

In May 2006 Lay was found guilty of all ten of the charges against him, including conspiracy, false statements, securities fraud and bank fraud. Skilling was found guilty on 18 out of 27 counts. Lay died before sentencing while on holiday in Aspen, Colorado. Skilling was sentenced to 24 years and 4 months in prison and ordered to repay $26 million to the Enron pension fund. All told, sixteen people pled guilty to Enron-related charges and five others (so far) have been found guilty at trial. The firm’s auditors, Arthur Andersen, were destroyed by the scandal.

Links

 * Enron: Death by Free Market (pdf) by Andrew Chamberlain, March 2002
 * Enron: Death by Free Market (pdf) by Andrew Chamberlain, March 2002
 * Enron: Death by Free Market (pdf) by Andrew Chamberlain, March 2002
 * Enron: Death by Free Market (pdf) by Andrew Chamberlain, March 2002
 * Enron: Death by Free Market (pdf) by Andrew Chamberlain, March 2002
 * Enron: Death by Free Market (pdf) by Andrew Chamberlain, March 2002
 * Enron: Death by Free Market (pdf) by Andrew Chamberlain, March 2002
 * Enron: Death by Free Market (pdf) by Andrew Chamberlain, March 2002