Enron Corp. Overview

Enron Corp.

Kenneth Lay established the American energy, commodity, and service corporation Enron Corp. in 1985. The corporation was created as a result of the merging of InterNorth and Lay’s Houston Natural Gas. The business was a significant distributor of energy, natural gas, communications, pulp, and paper with a workforce of close to 20,600 people. Fortune rated the business America’s most inventive firm for six years in a row.

InterNorth, which was founded in Omaha, Nebraska in1930, just a few months after Black Tuesday, was one of Enron’s main precursors. Enron Corp.’s early growth, which saw a two-fold increase in size by1932, was aided by the Great Depression’s low cost of natural gas and the plentiful but inexpensive labor pool. Northern continued to grow during the ensuing 50 years as it made more energy company acquisitions. It underwent a reorganization in 1979 to become the primary subsidiary of InterNorth, a holding company that deals in a variety of energy and energy-related products. Even though the majority of the acquisitions made were profitable, some went wrong. Cooper Industries and InterNorth engaged in a fruitless battle over a hostile takeover of the electrical goods maker Crouse-Hinds Company. Several lawsuits between Cooper and InterNorth arose during the takeover and were ultimately resolved after the deal was closed. The largest pipeline corporation in North America was operated by the subsidiary Northern Natural Gas. The company InterNorth was a leader in the plastics sector and a key player in the production, transmission, and marketing of natural gas as well as natural gas liquids by the 1980s. Arthur Belfer established the exploration and production company Belco Petroleum Company, which InterNorth united with in 1983.

In order to supply gas to clients in the Houston market through the construction of gas pipes, the Houston Natural Gas (HNG) corporation was first established from the Houston Oil Co. in 1925. The corporation capitalized on the uncontrolled Texas natural gas market and the early 1970s commodity boom under the direction of CEO Robert Herring from 1967 to 1981 to become a dominant force in the energy sector. With clients switching to oil due to rising gas prices by the end of the 1970s, HNG’s luck started to run out. Additionally, the Texas market became less lucrative once the Natural Gas Policy Act of 1978 was passed; as a result, HNG’s revenues decreased. Following Herring’s passing in1981, M.D. Matthews served as CEO for just three years, initially succeeding, but ultimately being forced out due to a sharp decline in profits. Kenneth Lay succeeded Matthews in 1984 and took over the problematic conglomerate.

Enron Corp. was the target of corporate takeovers as a result of its conservative success, with Irwin Jacobs being the most notable. Sam Segnar, the CEO of the company, sought a cordial merger with HNG. The company purchased HNG for $2.3 billion in May1985, which is 40% more than the current market value. The assets of the two businesses were pooled to build the second-largest gas pipeline network in the US at the time. The east-west pipes from HNG in Florida and California and the north-south pipelines from Internorth that served Iowa and Minnesota worked well together.

Despite being legally the parent corporation, HNG/InterNorth Inc. was the original name of the business. Segnar served as CEO first, but was quickly ousted by the Board of Directors, who then appointed Lay to the position. Before Enteron was proposed, Lay relocated its corporate offices back to Houston and began the search for a new name, spending more than $100,000 on focus groups and consultants. The name was ultimately reduced to Enron and rejected due to its apparent resemblance to an intestine. (The memorable logo was one of renowned graphic designer Paul Rand’s last initiatives before his passing in 1996.) Enron had to pay Jacobs, who remained a threat, almost $350 million and restructure the firm even though it still had some unresolved issues from the merger. Any firm assets Lay felt were unnecessary for Enron’s long-term success were sold off. Under the Enron Gas Pipeline Operating Company, Lay unified all gas pipeline initiatives. It also increased its efforts in natural gas and electric power. The business expanded its portfolio by acquiring power plants and cogeneration units in 1988 and 1989. The idea to more closely tie natural gas to consumers in 1989 was conceived by Jeffrey Skilling, a consultant at McKinsey & Company at the time. This effectively turned natural gas into a commodity. The concept was taken by Enron, who dubbed it the “Gas Bank.” Skilling joined Enron as the head of the Gas Bank in 1991 as a result of the division’s success. Another significant change at Enron involved a shift to international business with a $56 million loan from the Overseas Private Investment Corporation (OPIC) in 1989 for an Argentine power facility.

A market-based price structure for natural gas is gradually created by new rules. Order 436 of the Federal Energy Regulatory Commission (FERC) from 1985 grants broad authority to pipelines that decide to operate as intrastate common carriers for the transportation of gas. The wellhead is deregulated by FERC Order 451(1986), and FERC Order 490 (April1988) permits producers, pipelines, and other parties to end gas sales or purchases without first obtaining FERC clearance. Due to these orders, the spot market now accounts for more than 75% of gas sales, and there is unparalleled market volatility.

Kenneth Lay’s Houston Natural Gas merges with InterNorth, an Omaha, Nebraska-based natural gas firm, to create an interstate and intrastate natural gas pipeline with around 37,000 miles of pipeline in 1985.

Enron made a few adjustments to its business strategy during the 1990s that significantly increased the company’s perceived profitability. First, Enron made significant investments in foreign energy-related assets. Another significant change was the progressive shift in emphasis from an energy producer to a business that operated more like an investment house and occasionally a hedge fund, profiting off the margins of the products it sold. These goods were handled through the Enron Finance Corp., formerly known as the Gas Bank idea and run by Skilling.

As a result of the Gas Bank’s success in trading natural gas, Skilling sought to broaden the scope of his company, Enron Capital & Trade. In1990, Skilling engaged Andrew Fastow to assist.

The Energy Policy Act of 1992 gave Congress the authority to allow states to deregulate their power companies, opening them up to competition, starting in 1994. California was one of these states. Enron was keen to enter the market because it saw a chance with growing prices. Enron purchased Portland General Electric in 1997. (PGE). Although it was an Oregon utility, PGE was a regulated company, therefore it had the potential to start serving the sizable California market. Beginning in1998, the newly formed Enron Energy division stepped up its marketing efforts by providing special deals to prospective consumers in California. Additionally, Enron Energy started offering consumers in Ohio natural gas and Iowa wind energy. However, Enron Corp. stopped its retail venture in 1999 after learning it was spending more than $100 million annually.

Several businesses, including Enron Corp., tried to generate money as fiber optic technology developed in the 1990s by “keeping the continuing network expenses low,” which was accomplished by controlling their own network. A 1,380-mile fiber optic network linking Portland and Las Vegas was built in 1997 by FTV Communications LLC, a limited liability business set up by Enron subsidiary FirstPoint Communications Inc., Enron Corp.built a structure in 1998 in a dilapidated section of Las Vegas next to E Sahara, directly over the “backbone” of fiber optic cables serving technology companies around the country. The facility could beam “video to the entire state of California” and transport “the complete Library of Congress anywhere in the world in minutes.” In comparison to places like Los Angeles or the East Coast, the area was also more shielded from natural calamities. Wall Street Daily reports “Enron was hiding something; it “intended to trade bandwidth the same way it traded oil, gas, power, etc. Enron’s covert plot to virtually control the internet saw the development of a massive fiber optic cable capacity project in Las Vegas.” Enron wanted all US internet service providers to rely on its Nevada plant for bandwidth, which it would then resell in a manner similar to other companies’ commodities

Kenneth Lay and Jeffrey Skilling informed analysts in January 2000 that they would begin trading for their own “high-speed fiber-optic networks that serve as the foundation for Internet traffic.” Following the announcement, investors bought Enron Corp. stock swiftly “as they did with other Internet-related activities at the time,” and the stock price increased from $40 per share in January 2000 to $70 per share in March before reaching a peak of $90 in the summer of 2000. Enron high-level workers sold $924 million worth of stock between 2000 and2001, generating windfall profits for the company’s management. Kenneth Rice, the CEO of Enron Broadband Services, sold 1 million shares personally and made around $70 million in profit. Enron Corp. bought the inactive “dark fibers,” expecting to buy them at a low cost and then make a profit as the need for more usage by internet providers increased. Enron expected to lease its acquired dark fibers in 20 year contracts to providers. As prices of existing fiber optic cables plummeted due to the vast oversupply of the system, with only 5% of the 40 million miles being active wires, Enron purchased the inactive “dark fibers.” Enron Corp.’s accounting, however, would add inflated revenue to their accounts because no transactions had yet been made and it was unknown whether the cables would ever be active, using estimates to determine how much their dark fiber would be worth when “lit” and applying those estimates to their current income. Enron Corp. tried to entice major telecommunications firms, like Verizon Communications, into its broadband scheme in an effort to establish its own new market by trading with other energy companies in the broadband sector.

Enron Broadband Services started reporting losses in the second quarter of 2001. A 20-year agreement between Enron and Blockbuster Inc. to stream movies on demand over Enron’s connections was canceled on March12,2001, and Enron shares fell from $80 per share in mid-February 2001 to under $60 the following week as a result. Enron only generated $408 million in additional revenue in 2001 from the division of the company Jeffrey Skilling “said would eventually add $40 billion to Enron’s stock value,” as the broadband division was shut down soon after the company’s disappointing second-quarter earnings report in July 2001.

Telecommunications holdings were sold for “pennies on the dollar” after Enron filed for bankruptcy. In an auction with Roy as the only participant in2002, Rob Roy of Switch Communications bought the Nevada plant owned by Enron. Few individuals were even aware of the sale because of Enron’s “fiber aspirations, which were so covert.” Only $930,000 was paid for the building. After the purchase, Switch grew and now owns “the largest data center in the world.”

Accounting scandals

After a string of revelations about questionable accounting practices carried out by Enron and its auditor Arthur Andersen in the 1990s that bordered on fraud, Enron filed for bankruptcy in2001, becoming the largest Chapter 11 bankruptcy ever (it was later surpassed by those of Worldcom in 2002 and Lehman Brothers in2008), causing $11 billion in losses for shareholders.

Enron share prices dropped from US $90.56 in the summer of 2000 to only pennies as the controversy deepened. The discovery that a large portion of Enron’s revenue and profit came through agreements with special-purpose companies contributed to the company’s demise (limited partnerships which it controlled). Many of Enron’s obligations and losses were able to vanish from its financial statements thanks to this approach.

December2, 2001 marked the day Enron declared bankruptcy. Additionally, the scandal led to the demise of Arthur Andersen, one of the Big Five accounting firms in the world at the time. In2002, the business was found guilty of obstructing justice for shredding records pertaining to the Enron audit. Andersen was compelled to quit auditing public corporations because the SEC is not permitted to accept audits from convicts. Although the Supreme Court overturned the conviction in2005, the harm to the Andersen reputation has precluded it from rebounding or resurrecting as a viable company, even on a small scale. Additionally, the judgment offered little solace to the thousands of Andersen workers who are currently without jobs.

Enron also cancelled a naming-rights agreement with the Major League Baseball team Houston Astros for its new stadium, formerly known as Enron Field (now Minute Maid Park).

Enron covered up its dishonesty in reporting it’s financial information by using a range of dishonest and dishonest accounting procedures. To hide large liabilities from Enron’s financial statements, special-purpose organizations were formed. These organizations caused Enron to appear more profitable than it actually was, which led to a risky cycle in which corporate officers were forced to engage in increasing amounts of financial fraud each quarter to maintain the appearance of billions of dollars in profit even as the company was actually losing money. When their stock price reached new heights as a result of this approach, the executives started acting on insider information and trading Enron stock for millions of dollars. The offshore accounts at Enron that were concealing losses for the company were known to the executives and insiders, but not to the investors. At the expense of the company for which he worked and its owners, Chief Financial Officer Andrew Fastow led the group that established the off-books firms and twisted the arrangements to give himself, his family, and his friends hundreds of millions of dollars in guaranteed payments.

Initially, Enron intended to keep its three domestic pipeline companies and the majority of its foreign assets. However, Enron sold its domestic pipeline businesses to CrossCountry Energy for $2.45 billion before filing for bankruptcy[46] and later sold other assets to Vulcan Capital Management.

Enron lost all of its assets when Prisma Energy, its final company, was sold in 2006. Its name was changed to Enron Creditors Recovery Corporation in the beginning of 2007. Its aim is to pay out the last of the old Enron’s debtors and put an end to the company’s operations.

Even though Azurix, the former water utility division of the business, has no assets at the moment, Enron still owns it. It is involved in various lawsuits against the Argentine government, seeking damages for the corruption and carelessness of local officials during the operation of the Buenos Aires water concession in1999, which led to significant debt (about $620 million) and the final closure of the branch.

In November 2004, shortly after the company’s revelation of its bankruptcy, Enron’s new board of directors filed a lawsuit against 11 financial institutions for aiding Lay, Fastow, Skilling, and other individuals in concealing the company’s true financial situation. The case was known as the “megaclaims litigation.” Royal Bank of Scotland, Deutsche Bank, and Citigroup were among of the defendants. Enron has reached settlements with every institution as of2008, with the exception of Citigroup. As a result of the megaclaims litigation, Enron was able to acquire roughly $7.2 billion to distribute to its creditors. Some claim and process payments were still being given out as of December 2009.

The Simpsons episodes That ’90s Show (Homer buys Enron stocks while Marge decides to maintain her own Microsoft holdings) and Special Edna, which includes a scene of an Enron-themed amusement park ride, are two examples of popular culture references to Enron since its bankruptcy. A joke about the Enron spoof business “Honron” appeared in the 2007 movie Bee Movie (a play on the words honey and Enron). Enron’s post-bankruptcy behavior was frequently discussed in the 2003 documentary The Corporation, which referred to the business as a crooked business.