Enron logo, designed by Paul Rand |
|
| Former type | Public company |
|---|---|
| Industry | Energy |
| Fate | Bankruptcy, 2001 |
| Successor | Dynegy Prisma Energy International |
| Founded | Omaha, Nebraska (1985) |
| Founder(s) | Kenneth Lay |
| Defunct | December 2, 2001 |
| Headquarters | Enron Complex 1400 Smith Street Houston, Texas United States |
| Key people | Kenneth Lay, Founder, Chairman and CEO Jeffrey Skilling, former President, CEO and COO Andrew Fastow, former CFO Rebecca Mark-Jusbasche, former Vice Chairman, Chairman and CEO of Enron International Stephen F. Cooper, Interim CEO and CRO |
| Revenue | $101 billion (2000) |
| Employees | approx. 22,000 (2000) |
| Website | www.enron.com |
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 22,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with claimed revenues of nearly $101 billion in 2000.[1] Fortune named Enron "America's Most Innovative Company" for six consecutive years. At the end of 2001, it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud, known as the "Enron scandal". Enron has since become a popular symbol of willful corporate fraud and corruption. The scandal also brought into question the accounting practices and activities of many corporations throughout the United States and was a factor in the creation of the Sarbanes–Oxley Act of 2002. The scandal also affected the wider business world by causing the dissolution of the Arthur Andersen accounting firm.[2]
Enron filed for bankruptcy protection in the Southern District of New York in late 2001 and selected Weil, Gotshal & Manges as its bankruptcy counsel. It emerged from bankruptcy in November 2004, pursuant to a court-approved plan of reorganization, after one of the biggest and most complex bankruptcy cases in U.S. history. A new board of directors changed the name of Enron to Enron Creditors Recovery Corp., and focused on reorganizing and liquidating certain operations and assets of the pre-bankruptcy Enron.[3] On September 7, 2006, Enron sold Prisma Energy International Inc., its last remaining business, to Ashmore Energy International Ltd. (now AEI).[4]
Enron traces its roots to the Northern Natural Gas Company, which was formed in 1932, in Omaha, Nebraska. It was reorganized in 1979 as the leading subsidiary of a holding company, InterNorth which was a highly diversified energy and energy related products company. Internorth was a leader in natural gas production, transmission and marketing as well as natural gas liquids and an innovator in the plastics industry. It owned Peak Antifreeze and developed EVAL resins for food packaging. In 1985, it bought the smaller and less diversified Houston Natural Gas.[5]
The separate company initially named itself "HNG/InterNorth Inc.", even though InterNorth was the nominal survivor. It built a large and lavish headquarters complex with pink marble in Omaha (dubbed locally as the "Pink Palace"), that was later sold to Physicians Mutual. However, the departure of ex-InterNorth and first CEO of Enron Corp Samuel Segnar six months after the merger allowed former HNG CEO Kenneth Lay to become the next CEO of the newly merged company. Lay soon moved the company's headquarters to Houston after swearing to keep it in Omaha and began to thoroughly re-brand the business. Lay and his secretary, Nancy McNeil, originally selected the name "Enteron" (possibly spelled in camelcase as "EnterOn"), but, when it was pointed out that the term approximated a Greek word referring to the intestines, it was quickly shortened to "Enron". The final name was decided upon only after business cards, stationery, and other items had been printed reading Enteron. Enron's "crooked E" logo was designed in the mid-1990s by the late American graphic designer Paul Rand. Rand's original design included one of the elements of the E in yellow which disappeared when copied or faxed. This was quickly replaced by a green element. Almost immediately after the move to Houston, Enron began selling off key assets such as Northern PetroChemicals and took on silent partners in Enron CoGeneration, Northern Border Pipeline and Transwestern Pipeline and became a less diversified company. Early financial analysts said Enron was swimming in debt and the sale of key operations would not solve the problems.
In 1990, Enron Finance CEO Jeff Skilling hired Andrew Fastow, who was well acquainted with the burgeoning deregulated energy market Skilling wanted to exploit. In 1993, Fastow set to work establishing numerous limited liability special purpose entities (common business practice); however, it also allowed Enron to place liability so that it would not appear in its accounts, allowing it to maintain a robust and generally growing stock price and thus keeping its critical investment grade credit ratings.
Enron was originally involved in transmitting and distributing electricity and natural gas throughout the United States. The company developed, built, and operated power plants and pipelines while dealing with rules of law and other infrastructures worldwide. Enron owned a large network of natural gas pipelines, which stretched ocean to ocean and border to border including Northern Natural Gas, Florida Gas Transmission, Transwestern Pipeline company and a partnership in Northern Border Pipeline from Canada. The states of California, New Hampshire and Rhode Island had already passed power deregulation laws by July 1996, the time of Enron's proposal to acquire Portland General Electric.[6] In 1998, Enron moved into the water sector, creating the Azurix Corporation, which it part-floated on the New York Stock Exchange in June 1999. Azurix failed to break into the water utility market, and one of its major concessions, in Buenos Aires, was a large-scale money-loser. After the move to Houston, many analysts criticized the Enron management as swimming in debt. The Enron management pursued aggressive retribution against its critics, setting the pattern for dealing with accountants, lawyers, and the financial media.
Enron grew wealthy due largely to marketing, promoting power, and its high stock price. Enron was named "America's Most Innovative Company" by Fortune for six consecutive years, from 1996 to 2001. It was on the Fortune's "100 Best Companies to Work for in America" list in 2000, and had offices that were stunning in their opulence. Enron was hailed by many, including labor and the workforce, as an overall great company, praised for its large long-term pensions, benefits for its workers and extremely effective management until its exposure in corporate fraud. The first analyst to publicly disclose Enron's financial flaws was Daniel Scotto, who in August 2001 issued a report entitled "All Stressed-up… And No Place To Go", which encouraged investors to sell Enron stocks and bonds at any and all costs.
As was later discovered, many of Enron's recorded assets and profits were inflated or even wholly fraudulent and nonexistent. One example of fraudulent records was in 1999 when Enron promised to payback Merrill Lynch & Co investment with interest in order to show profit on its books. Debts and losses were put into entities formed "offshore" that were not included in the firm's financial statements, and other sophisticated and arcane financial transactions between Enron and related companies were used to take unprofitable entities off the company's books.
Its most valuable asset and the largest source of honest income, the 1930s-era Northern Natural Gas, was eventually purchased back by a group of Omaha investors, who moved its headquarters back to Omaha, and is now a unit of Warren Buffett's MidAmerican Energy Holdings Corp. NNG was put up as collateral for a $2.5 billion capital infusion by Dynegy Corporation when Dynegy was planning to buy Enron. When Dynegy looked closely at Enron's books, they backed out of the deal and fired their CEO, Chuck Watson. The new chairman and head CEO, the late Daniel Dienstbier, had been president of NNG and an Enron executive at one time and was forced out of Enron by Ken Lay. Dienstbier was an acquaintance of Warren Buffett. NNG continues to be profitable today.
Enron traded in more than 30 different products, including the following:
It was also an extensive futures trader, including sugar, coffee, grains, hog, and other meat futures. At the time of its bankruptcy filing in December 2001, Enron structured into seven distinct business units.
Enron manufactured gas valves, circuit breakers, thermostats, and electrical equipment in Venezuela through INSELA SA, a 50–50 joint venture with General Electric. Enron owned three paper and pulp products companies: Garden State Paper, a newsprint mill; as well as Papiers Stadacona and St. Aurelie Timberlands. Enron held a controlling stake in the Louisiana-based petroleum exploration and production company Mariner Energy.
Enron International (EI) was Enron's wholesale asset development and asset management business. Its primary focus was developing and building natural gas power plants outside North America. Enron Engineering and Construction Company (EECC) was a wholly owned subsidiary of Enron International, and built almost all of Enron International's power plants. Unlike other business units of Enron, Enron International had a strong cash flow on bankruptcy filing. Enron International consisted of all of Enron's foreign power projects, including ones in Europe.
Rebecca Mark was the CEO of Enron International until she moved over to lead Enron's newly acquired water business, Azurix, in 1997. Mark played a major role in the development of the Dabhol project in India, Enron's largest international endeavor.
Enron International constructed power plants and pipelines across the globe. Some today are still up and running, including the massive Teeside plant in England. Others, like a barge mounted plant off Puerto Plata in the Dominican Republic, cost Enron money through law suits and investment losses. Puerto Plata was a barge mounted power plant next to the hotel Hotelero del Atlantico. When the plant was fired up, winds blew soot from the plant onto the hotel guests' meals, blackening their food. The winds also blew garbage from nearby slums into the plant's water-intake system. For some time the only solution was to hire men who would row out and push the garbage away with their paddles. Through mid-2000 the company collected a paltry $3.5 million from a $95 million investment. Enron also had other investment projects in Europe, South America, Argentina, Brazil, Bolivia, Colombia, Mexico, Jamaica, Venezuela, and across the Caribbean.
Around 1992 India came to the United States to find energy investors to help with India's energy shortage problems. In December 1993, Enron inked a 20-year power-purchase contract with the Maharashtra State Electricity Board. The contract allowed Enron to construct a massive 2,015 megawatt power plant. Construction would be completed in two phases, and Enron would form the Dabhol Power Company to help manage the plant. The power project was the first step in a $20 billion scheme to help rebuild and stabilize India's power grid. Enron, GE (who was selling turbines to the project), and Bechtel (who was actually constructing the plant), each put up 10% equity.
In 1996, when India's Congress Party was no longer in power, the Indian government assessed the project as being excessively expensive and refused to pay for the plant and stopped construction. The Maharashtra State Electricity Board (MSEB), the local state run utility, was required by contract to continue to pay Enron plant maintenance charges, even if no power was purchased from the plant. The MSEB determined that it could not afford to purchase the power (at Rs. 8 per unit kWh) charged by Enron. The plant operator was unable to find alternate customers for Dabhol power due to the absence of an open free market in the regulated structure of utilities in India. From 1996 until Enron's bankruptcy in 2001 the company tried to revive the project and spark interest in India's need for the power plant without success.
During the summer of 2001, Enron made an attempt to sell a number of Enron International's assets, many of which were not sold. It is still unclear why Enron wanted to sell these assets. Most suspect it was because Enron was in need of cash.
In November 1999, Enron launched EnronOnline. Conceptualized by the company's European Gas Trading team under John Siepierski, it was the first web-based transaction system that allowed buyers and sellers to buy, sell, and trade commodity products globally. It allowed users to do business only with Enron. At its peak, over $6bn worth of commodities were transacted through EnronOnline every day.
EnronOnline went live on November 29, 1999. The site allowed Enron to transact with participants in the global energy markets. The main commodities offered on EnronOnline were natural gas and electricity, although there were 500 other products including credit derivatives, bankruptcy swaps, pulp, gas, plastics, paper, steel, metals, freight, and TV commercial time.
EnronOnline was sold to UBS as part of the sale of the North American Natural Gas and Power trading group to UBS AG.
At the time of bankruptcy, Enron owned interests in the following major assets:
Enron owned or operated 38 electric power plants worldwide:
In the mid-1990s, Enron established an endowment for the Enron Prize for Distinguished Public Service, awarded by Rice University's Baker Institute to "recognize outstanding individuals for their contributions to public service". Recipients were:
Greenspan, because of his position as the Fed chairman, was not at liberty to accept the $10,000 honorarium, the $15,000 sculpture, nor the crystal trophy, but only accepted the "honor" of being named an Enron Prize recipient.[11] The situation was further complicated because a few days earlier, Enron had filed paperwork admitting it had "fudged financial statements for five years".[12] Greenspan did not mention Enron a single time during his speech.[13] At the ceremony, Ken Lay indicated his beliefs about the future of the award when he stated, "I'm looking forward to our first woman recipient."[14] The next morning, it was reported in The Houston Chronicle that no decision had been made on whether the name of the prize would be changed.[15] 19 days after the prize was awarded to Greenspan, Enron declared bankruptcy.[16]
In 2001, after a series of revelations involving irregular accounting procedures bordering on fraud perpetrated throughout the 1990s involving Enron and its accounting firm Arthur Andersen, Enron suffered the largest Chapter 11 bankruptcy in history (since surpassed by those of Worldcom in 2002 and Lehman Brothers in 2008).
As the scandal unraveled, Enron shares dropped from over US$90.00 in the summer of 2000 to just pennies. Enron had been considered a blue chip stock, so this was an unprecedented event in the financial world. Enron's plunge occurred after the revelation that much of its profits and revenue were the result of deals with special purpose entities (limited partnerships which it controlled). This meant that many of Enron's debts and the losses that it suffered were not reported in its financial statements.
A white knight rescue attempt by a similar, smaller energy company, Dynegy, collapsed in late November due to concerns over an unexpected restatement of earnings. Enron filed for bankruptcy on December 2, 2001. In addition, the scandal caused the dissolution of Arthur Andersen, which at the time was one of the world's top accounting firms. The firm was found guilty of obstruction of justice in 2002 for destroying documents related to the Enron audit. Since the SEC is not allowed to accept audits from convicted felons, Andersen was forced to stop auditing public companies. Although the conviction was thrown out in 2005 by the Supreme Court, the damage to the Andersen name has prevented it from returning as a viable business even on a limited scale.
Enron also withdrew a naming rights deal with the Houston Astros Major League Baseball club to have its name associated with their new stadium, which was formerly known as Enron Field (now Minute Maid Park).
Enron created offshore entities (units which may be used for planning and avoidance of taxes, raising the profitability of a business). This provided ownership and management with full freedom of currency movement and the anonymity that allowed the company to hide losses. These entities made Enron look more profitable than it actually was, and created a dangerous spiral, in which each quarter, corporate officers would have to perform more and more financial deception to create the illusion of billions in profits while the company was actually losing money.[17] This practice drove up their stock price to new levels, at which point the executives began to work on insider information and trade millions of dollars worth of Enron stock. The executives and insiders at Enron knew about the offshore accounts that were hiding losses for the company; however, the investors knew nothing of this. Chief Financial Officer Andrew Fastow led the team which created the off-books companies, and manipulated the deals to provide himself, his family, and his friends with hundreds of millions of dollars in guaranteed revenue, at the expense of the corporation for which he worked and its stockholders.
In 1999, Enron launched EnronOnline, an Internet-based trading operation, which was used by virtually every energy company in the United States. Enron president and chief operating officer Jeffrey Skilling began advocating a novel idea: the company didn't really need any "assets." By pushing the company's aggressive investment strategy, he helped make Enron the biggest wholesaler of gas and electricity, trading over $27 billion per quarter. The firm's figures, however, had to be accepted at face value. Under Skilling, Enron adopted mark to market accounting, in which anticipated future profits from any deal were tabulated as if real today. Thus, Enron could record gains from what over time might turn out to be losses, as the company's fiscal health became secondary to manipulating its stock price on Wall Street during the Tech boom. But when a company's success is measured by agreeable financial statements emerging from a black box, a term Skilling himself admitted, actual balance sheets prove inconvenient. Indeed, Enron's unscrupulous actions were often gambles to keep the deception going and so push up the stock price. An advancing number meant a continued infusion of investor capital on which debt-ridden Enron in large part subsisted. Under pressure to maintain the illusion, Skilling verbally attacked Wall Street Analyst Richard Grubman,[18] who questioned Enron's unusual accounting practice during a recorded conference call. When Grubman complained that Enron was the only company that could not release a balance sheet along with its earnings statements, Skilling replied "Well, thank you very much, we appreciate that . . . asshole." Though the comment was met with dismay and astonishment by press and public, it became an inside joke among many Enron employees, mocking Grubman for his perceived meddling rather than Skilling's lack of tact. When asked during his trial, Skilling wholeheartedly admitted that industrial dominance and abuse was a global problem: "Oh yes, yes sure, it is."[19]
In August 2000, Enron's stock price hit its highest value of $90.[20] At this point Enron executives, who possessed the inside information on the hidden losses, began to sell their stock. At the same time, the general public and Enron's investors were told to buy the stock. Executives told the investors that the stock would continue to climb until it reached possibly the $130 to $140 range, while secretly unloading their shares.
As executives sold their shares, the price began to drop. Investors were told to continue buying stock or hold steady if they already owned Enron because the stock price would rebound in the near future. Kenneth Lay's strategy for responding to Enron's continuing problems was in his demeanor. As he did many times, Lay would issue a statement or make an appearance to calm investors and assure them that Enron was headed in the right direction.
By August 15, 2001, Enron's stock price had fallen to $42. Many of the investors still trusted Lay and believed that Enron would rule the market. They continued to buy or hold their stock and lost more money every day. As October closed, the stock had fallen to $15. Many saw this as a great opportunity to buy Enron stock because of what Lay had been telling them in the media.
Lay was accused of selling over $70 million worth of stock at this time, which he used to repay cash advances on lines of credit. He sold another $20 million worth of stock in the open market. Also, Lay's wife, Linda, was accused of selling 500,000 shares of Enron stock totaling $1.2 million on November 28, 2001. The money earned from this sale did not go to the family but rather to charitable organizations, which already received pledges of contributions from the foundation. Records show that Mrs. Lay placed the sale order sometime between 10:00 and 10:20 am. News of Enron's problems, including the millions of dollars in losses they hid went public about 10:30 that morning, and the stock price soon fell to below one dollar.
Former Enron executive Paula Rieker was charged with criminal insider trading. Rieker obtained 18,380 Enron shares for $15.51 a share. She sold that stock for $49.77 a share in July 2001, a week before the public was told what she already knew about the $102 million loss.
Enron initially planned to retain its three domestic pipeline companies as well as most of its overseas assets. However, before emerging from bankruptcy, Enron spun off its domestic pipeline companies as CrossCountry Energy.
Enron sold its last business, Prisma Energy, in 2006, leaving it as an asset-less shell. In early 2007, it changed its name to Enron Creditors Recovery Corporation. Its goal is to pay off the old Enron's remaining creditors and wind down Enron's affairs.
Azurix, the former water utility branch of the company, remains under Enron ownership, although it remains asset-less. It is involved in several litigations against the government of Argentina claiming compensation relating to the negligence and corruption of the local governance during its management of the Buenos Aires water concession in 1999, which led to substantial amounts of debt (approx. $620 million) and the eventual collapse of the branch.
Shortly after emerging from bankruptcy in November 2004, Enron's new board of directors sued 11 financial institutions for helping Lay, Fastow, Skilling and others hide Enron's true financial condition. The proceedings were dubbed the "megaclaims litigation." Among the defendants were Royal Bank of Scotland, Deutsche Bank and Citigroup. As of 2008[update], Enron has settled with all of the institutions, ending with Citigroup. Enron was able to obtain nearly $20 billion dollars to distribute to its creditors as a result of the megaclaims litigation. As of December 2009, some claim and process payments are still being distributed.
In October 2000, Daniel Scotto, the top ranked utility analyst on Wall Street, suspended his ratings on all energy companies conducting business in California because of the possibility that the companies would not receive full and adequate compensation for the deferred energy accounts used as the cornerstone for the California Deregulation Plan enacted in the late 1990s. Five months later, Pacific Gas & Electric (PG&E) was forced into bankruptcy. Senator Phil Gramm, the second largest recipient of campaign contributions from Enron, succeeded in legislating California's energy commodity trading deregulation. Despite warnings from prominent consumer groups which stated that this law would give energy traders too much influence over energy commodity prices, the legislation was passed in December 2000.
As Public Citizen reported, "Because of Enron’s new, unregulated power auction, the company’s 'Wholesale Services' revenues quadrupled—from $12 billion in the first quarter of 2000 to $48.4 billion in the first quarter of 2001."[21]
Before passage of the deregulation law, there had been only one Stage 3 rolling blackout declared. Following passage, California had a total of 38 blackouts defined as Stage 3 rolling blackouts, until federal regulators intervened in June 2001. These blackouts occurred mainly as a result of a poorly designed market system that was manipulated by traders and marketers. Enron traders were revealed as intentionally encouraging the removal of power from the market during California's energy crisis by encouraging suppliers to shut down plants to perform unnecessary maintenance, as documented in recordings made at the time.[22][23] These acts contributed to the need for rolling blackouts, which adversely affected many businesses dependent upon a reliable supply of electricity, and inconvenienced a large number of retail consumers. This scattered supply raised the price exponentially, and Enron traders were thus able to sell power at premium prices, sometimes up to a factor of 20x its normal peak value.
