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Enron Corporation

Enron Corporation

1400 Smith Street
Houston, Texas 77002-7369
U.S.A.
Telephone: (713) 853-6161
Fax: (713) 853-3129
Web site: http://www.enron.com

Public Company
Incorporated:
1930 as Northern Natural Gas Company
Employees: 21,000
Sales: $101 billion (2000)
NAIC: 211111 Crude Petroleum and Natural Gas Extraction; 22121 Natural Gas Distribution; 48621 Pipeline Transportation of Natural Gas; 221122 Electric Power Distribution; 221119 Other Electric Power Generation.

Before filing for bankruptcy in 2001, Enron Corporation was one of the largest integrated natural gas and electricity companies in the world. It marketed natural gas liquids worldwide and operated one of the largest natural gas transmission systems in the world, totaling more than 36,000 miles. It was also one of the largest independent developers and producers of electricity in the world, serving both industrial and emerging markets. Enron was also a major supplier of solar and wind renewable energy worldwide, managed the largest portfolio of natural gas-related risk management contracts in the world, and was one of the worlds biggest independent oil and gas exploration companies. In North America, Enron was the largest wholesale marketer of natural gas and electricity. Enron pioneered innovative trading products, such as gas futures and weather futures, significantly modernizing the utilities industry. After a surge of growth in the early 1990s, the company ran into difficulties. The magnitude of Enrons losses was hidden from stockholders. The company folded after a failed merger deal with Dynegy Inc. in 2001 brought to light massive financial finagling. The company had ranked number seven on the Fortune 500, and its failure was the biggest bankruptcy in American history.

Company Origins

Enron began as Northern Natural Gas Company, organized in Omaha, Nebraska, in 1930 by three other companies. North American Light & Power Company and United Light & Railways Company each held a 35 percent stake in the new enterprise, while Lone Star Gas Corporation owned the remaining 30 percent. The companys founding came just a few months after the stock market crash of 1929, an inauspicious time to launch a new venture. Several aspects of the Great Depression actually worked in Northerns favor, however. Consumers initially were not enthusiastic about natural gas as a heating fuel, but its low cost led to its acceptance during tough economic times. High unemployment brought the new company a ready supply of cheap labor to build its pipeline system. In addition, the 24-inch steel pipe, which could transport six times the amount of gas carried by 12-inch cast iron pipe, had just been developed. Northern grew rapidly in the 1930s, doubling its system capacity within two years of its incorporation and bringing the first natural gas supply to the state of Minnesota.

Public Offering in the 1940s

The 1940s brought changes in Northerns regulation and ownership. The Federal Power Commission, created as a result of the Natural Gas Act of 1938, regulated the natural gas industrys rates and expansion. In 1941, United Light & Railways sold its share of Northern to the public, and in 1942 Lone Star Gas distributed its holdings to its stockholders. North American Light & Power would hold on to its stake until 1947, when it sold its shares to underwriters who then offered the stock to the public. Northern was listed on the New York Stock Exchange that year.

In 1944, Northern acquired the gas-gathering and transmission lines of Argus Natural Gas Company. The following year, the Argus properties were consolidated into Peoples Natural Gas Company, a subsidiary of Northern. In 1952, Peoples was dissolved as a subsidiary, its operations henceforth becoming a division of the parent company. Also in 1952, the company set up another subsidiary, Northern Natural Gas Producing Company, to operate its gas leases and wells. Another subsidiary, Northern Plains Natural Gas Company, was established in 1954 and eventually would bring Canadian gas reserves to the continental United States.

Through its Peoples division, the parent company acquired a natural gas system in Dubuque, Iowa, from North Central Public Service Company in 1957. In 1964, Council Bluffs Gas Company of Iowa was acquired and merged into the Peoples division. Northern created two more subsidiaries in 1960: Northern Gas Products Company (later Enron Gas Processing Company), for the purpose of building and operating a natural gas extraction plant in Bushton, Kansas; and Northern Propane Gas Company, for retail sales of propane. Northern Natural Gas Producing Company was sold to Mobil Corporation in 1964, but the parent company continued expanding on other fronts. In 1966, it formed Hydrocarbon Transportation Inc. (later Enron Liquids Pipeline Company) to own and operate a pipeline system carrying liquid fuels. Eventually, this system would bring natural gas liquids from plants in the Midwest and Rocky Mountains to upper-Midwest markets, with connections for eastern markets as well.

Growth through Acquisitions

Northern made several acquisitions in 1967: Protane Corporation, a distributor of propane gas in the eastern United States and the Caribbean; Mineral Industries Inc., a marketer of automobile antifreeze; National Poly Products Inc.; and Viking Plastics of Minnesota. Also in 1967, Northern created Northern Petrochemical Company to manufacture and market industrial and consumer chemical products. The petrochemical company acquired Monsanto Corporations polyethylene marketing business in 1969.

Northern continued expanding during the 1970s. In February 1970 it acquired Plateau Natural Gas Company, which became part of the Peoples division. In 1971, it bought Olin Corporations antifreeze production and marketing business. It set up UPG Inc. in 1973 to transport and market the fuels produced by Northern Gas Products. UPG eventually would handle oil and liquid gas products for other companies as well.

In 1976, Northern formed Northern Arctic Gas Company, a partner in the proposed Alaskan arctic gas pipeline, and Northern Liquid Fuels International Ltd., a supply and marketing company. Northern Border Pipeline Company, a partnership of four energy companies with Northern Plains Natural Gas as managing partner, began construction of the eastern segment of the Alaskan pipeline in 1980. This segment, stretching from Ventura, Iowa, to Monchy, Saskatchewan, was completed in 1982. About that time, it became apparent that transporting Alaskan gas to the lower 48 states would be prohibitively expensive. Nevertheless, the pipeline provided an important link between Canadian gas reserves and the continental United States. Northern changed its name to InterNorth, Inc. in 1980. That same year, while attempting to grow through acquisitions, InterNorth became involved in a takeover battle with Cooper Industries Inc. to acquire Crouse-Hinds Company, a manufacturer of electrical products. Cooper rescued Crouse-Hinds from InterNorths hostile bid and bought Crouse-Hinds in January 1981. The takeover fight brought a flurry of lawsuits between InterNorth and Cooper. The suits were dropped after the acquisition was finalized.

While InterNorth grew through acquisitions, it also expanded from within. In 1980, it set up Northern Overthrust Pipeline Company and Northern Trailblazer Pipeline Company to participate in the Trailblazer pipeline, which ran from southeastern Nebraska to western Wyoming. Also that year, it created two exploration and production companies, Nortex Gas & Oil Company and Consolidex Gas and Oil Limited. The latter company was a Canadian operation. In 1981, InterNorth set up Northern Engineering International Company to provide professional engineering services. In 1982, it formed Northern Intrastate Pipeline Company and Northern Coal Pipeline Company as well as InterNorth International Inc. (later Enron International) to oversee non-U.S. operations.

InterNorth significantly expanded its oil and gas exploration and production activity in 1983 with the purchase of Belco Petroleum Corporation for about $770 million. Belco quadrupled InterNorths gas reserves and added greatly to its crude oil reserves. Exploration efforts focused on the United States, Canada, and Peru.

Other acquisitions of the early 1980s included the fuel trading companies P & O Falco Inc. and P & O Falco Ltd.; their operations joined with UPGrenamed UPG Falcoin 1984 and Chemplex Company, a polyethylene and adhesive manufacturer, also acquired in 1984. InterNorth had sold Northern Propane Gas in 1983.

Key Dates:

1930:
The company is founded as Northern Natural Gas Company in Omaha, Nebraska.
1947:
The company is listed on New York Stock Exchange.
1980:
The companys name is changed to InterNorth, Inc.
1985:
A merger with Houston Natural Gas Corp. takes place.
1986:
The companys name changed to Enron; the new company is headquartered in Houston.
1991:
Enron begins overseas expansion.
1999:
Launches EnronOnline.
2001:
Files for bankruptcy after previously hidden losses come to light.

InterNorth made an acquisition of enormous proportions in 1985, when it bid to purchase Houston Natural Gas Corporation for about $2.26 billion. The offer was received enthusiastically, and the merger created the largest gas pipeline system in the United Statesabout 37,000 miles at the time. Houston Natural Gas brought pipelines from the Southeast and Southwest to join with InterNorths substantial system in the Great Plains area. Valero Energy Corporation of San Antonio, Texas, sued to block the merger. InterNorth had entered into joint ventures with Valero early in 1985 to transport and sell gas to industrial users in Texas and Louisiana. Because these ventures competed with Houston Natural Gas, InterNorth withdrew from them when it agreed to the merger. Valero alleged that InterNorth had breached its fiduciary obligations, but the Valero lawsuit failed to stop the acquisition.

Although still officially named InterNorth, the merged company initially was known as HNG/InterNorth, with dual headquarters in Omaha, Nebraska, and Houston, Texas. In 1986, the companys name was changed to Enron Corp., and headquarters were consolidated in Houston. After some shuffling in top management, Kenneth L. Lay, HNGs chairman, emerged as chairman of the combined company. HNG/InterNorth began divesting itself of businesses that did not fit in with its long-term goals. The $400 million in assets sold off in 1985 included the Peoples division, which sold for $250 million. Also in 1985, Perus government nationalized Enrons assets there, and Enron began negotiating for payment, taking a $218 million charge against earnings in the meantime. In 1986, Enrons chemical subsidiary was sold for $603 million. Also in 1986, Enron sold 50 percent of its interest in Citrus Corporation to Sonat Inc. for $360 million but continued to operate Citruss pipeline system, Florida Gas Transmission Company. Citrus originally was part of Houston Natural Gas.

In 1987, Enron centralized its gas pipeline operations under Enron Gas Pipeline Operating Company. Also that year, Enron Oil & Gas Company, with responsibility for exploration and production, was formed out of previous InterNorth and HNG operations, including Nortex Oil & Gas, Belco Petroleum, HNG Oil Company, and Florida Petroleum Company. In 1989, Enron Corp. sold 16 percent of Enron Oil & Gass common stock to the public for about $200 million. That year Enron received $162 million from its insurers for the Peruvian operations, and it continued to negotiate with the government for additional compensation.

Enron made significant moves into electrical power, in both independent production and cogeneration facilities, in the late 1980s. Cogeneration plants produce electricity and thermal energy from one source. It added major cogeneration units in Texas and New Jersey in 1988; in 1989, it signed a 15-year contract to supply natural gas to a cogeneration plant on Long Island. Also in 1989, Enron reached an agreement with Coastal Corporation that allowed the company to increase the natural gas production from its Big Piney field in Wyoming. Under the accord, Coastal agreed to extend a pipeline to the field, since the line already going to it could not handle increased volume. The same year, Enron and El Paso Natural Gas Company received regulatory approval for a joint venture, Mojave Pipeline Company. The pipeline transports natural gas for use in oil drilling.

New Markets in the Early 1990s

In the early 1990s, Enron appeared to be reaping the benefits of the InterNorth-Houston Natural Gas merger. Its revenues, at $16.3 billion in 1985, fell to less than $10 billion in each of the next four years but recovered to $13.1 billion in 1990. Low natural gas prices had been a major cause of the decline. Enron, however, had been able to increase its market share, from 14 percent in 1985 to 18 percent in 1990, with help from efficiencies that resulted from the integration of the two predecessor companies operations. Enron also showed significant growth in its liquid fuels business as well as in oil and gas exploration.

Beginning with the 1990s, Enrons stated philosophy was to get in early, push to open markets, position ourselves to compete, compete hard when the opening comes. This philosophy was translated into two major sectors: international markets and the newly deregulated gas and electricity markets in the United States.

Beginning in 1991, Enron built its first overseas power plant in Teesside, England, which became the largest gas-fired cogeneration plant in the world with 1,875 megawatts. Subsequently, Enron built power plants in industrial and developing nations all over the world: Italy, Turkey, Argentina, China, India, Brazil, Guatemala, Bolivia, Colombia, the Dominican Republic, the Philippines, and others. By 1996, earnings from these projects accounted for 25 percent of total company earnings before interest and taxes.

In the United States, states were given the power to deregulate gas and electric utilities in 1994, which meant that residential customers could choose utilities in the same way that they chose their phone carriers. This looked like an enormous opportunity for Enron. CEO Lay was fervently in favor of deregulation, believing it would solve problems for consumers and utilities alike. The company moved into the residential electricity market in 1996, when Enron agreed to acquire Portland General, an Oregon utility whose transmission lines would give the company access to Californias $20-billion market, as well as access to 650,000 customers in Oregon. In 1997, Enron Energy Services began to supply natural gas to residential customers in Toledo, Ohio, and contracted to sell wind power to Iowa residents. Through a subsidiary, Zond Corporation, the company contracted with MidAmerican Energy Company of Houston to supply 112.5 megawatts of wind-generated electricity to about 50,000 homes, the largest single purchase contract in the history of wind energy. Zond was to build the facility in northwestern Iowa, using about 150 of its Z-750 kilowatt series wind turbines, the biggest made in the United States.

A Shaky Structure Collapses

In 1995, Enron CEO Kenneth Lay promised investors that Enrons profits would rise by 15 percent a year over the next five years. Yet the pace of growth was not uniformly smooth for Enron. By 1997, only seven states were moving ahead with deregulation of their electricity markets. Enrons profit from a national deregulated electricity market was potentially huge, and the company spent millions on advertising and lobbying for the cause. It also hired hundreds of top business school graduates to help the company define new markets. The company seemed a potential gold mine if it could successfully open up the electricity market. Meanwhile, some of its earlier projects were going badly. Its huge deal to build a power plant in India, worth $2.8 billion, was held up by embittered local politicians. Other overseas projects also faltered. Earnings had grown annually in the early 1990s by between 16 and 20 percent. The figure shrank to 11 percent for 1995, then to only 1 percent in 1996. In the second quarter of 1997, the company took a $550 million charge, representing losses on the Indian project and others.

The company continued to spend heavily to advertise and lobby for deregulation. Enron advanced into the newly deregulated California electricity market in 1998, offering consumers discounts for signing up with the company. Enrons president, Jeffrey Skilling, predicted a revolution in electricity marketing once deregulation took hold, while admitting that California residents initially would not save much money by switching to Enron. The company was bringing in $4 billion a year from electricity sales in 1998, while predicting it would have ten percent of the $300 billion domestic gas and electric retail market within ten years. Yet in 1999 the company halted its efforts to expand into California and admitted it had been losing $100 million a year in its retail push. But Enron had many other ideas for turning a profit. In 1999, it launched an Internet-based commodities trading service, EnronOnline. Enron traded gas and electricity as well as more exotic futures such as weather. This gave companies whose business was affected by weather, such as home heating companies or golf courses, a hedge against the risk of unfavorable weather. Enron also launched Enron Broadband Services, a unit that traded capacity in telecommunications bandwidth. The company invested some $1.3 billion to build a fiber optic network so that more players would be able to buy and sell bandwidth capacity. The company investigated other e-commerce markets as well, such as trading in airport landing rights. The company had made natural gas into a tradeable commodity in the 1980s, and it was looking to pull off the same trick again in these various other commodities. Wall Street began to take notice, and Enrons stock, which had languished, began to climb again. It rose 55 percent in 1999, and leapt another 87 percent over 2000.

What apparently drew investors to Enron was its aura of getting in on the ground floor of various related industries. It seemed to be a new kind of company, not a blundering old regulation-bound utility but a savvy energy trader. Though new ventures such as broadband trading were not expected to be immediately profitable, Enron supposedly had a sound core business as a gas and electricity wholesaler. In fact, Enrons core business was floundering. Newsweek (January 21, 2002) estimated that in the late 1990s Enron had lost about $2 billion on Telecom capacity, $2 billion in water investments, $2 billion in a Brazilian utility, and $1 billion on a controversial electricity plant in India. An unnamed Enron insider quoted in Business Week (December 17, 2001) put it this way: You make enough billion-dollar mistakes, and they add up. Yet investors were not aware of Enrons troubles. Losses were disguised in elaborate partnerships and joint ventures, keeping them off Enrons books. Enrons duplicitous bookkeeping kept the stock price high, even as Enrons top executives began selling off their own holdings. Enrons president Jeffrey Skilling abruptly resigned in August 2001, citing only personal reasons. The slowdown in technology and Internet stocks brought Enrons stock down too, and it had fallen almost by half by the third quarter of 2001. At that point the company announced a loss of $618 million. Shortly thereafter, the company announced that actually it had been misstating its earnings since 1997. While the Securities and Exchange Commission began investigating irregularities at the company, Enron tried to sell out to another Houston energy company, Dynegy. That deal collapsed when the extent of Enrons losses became clear. In December 2001, Enron filed for bankruptcy, the largest ever by an American company. Enrons collapse stirred tremendous fallout. Its executives had made millions selling off their Enron shares, while many of its employees lost their retirement savings as the stock hit rock bottom. The accounting firm Arthur Andersen, which had certified Enrons bookkeeping, was disgraced, especially as revelations surfaced that it had destroyed potentially incriminating documents. The scandal reached into the upper echelons of government as well, as Enron had given liberally to many politicians, including President George W. Bush and Attorney General John Ashcroft. CEO Kenneth Lay resigned in January 2002, while the company faced multiple congressional, criminal, and SEC investigations. The company faced liquidation, with its only valuable asset the network of natural gas pipelines it had started out with in the mid-1980s.

Principal Subsidiaries

Enron Engineering and Construction; Enron International Inc.; Enron Renewable Energy Corp.; Enron Ventures Corp.; EOG Resources Inc.; EOTT Energy Partners LP; Florida Gas Transmission Co.; Houston Pipeline Co.; Transwestern Pipeline Co.; Enron Wind Corp.; Louisiana Resources Co.; Northern Border Pipeline Co.; Northern Plains Natural Gas Co.; Northern Transportation & Storage; Line Corp.; Azurix Corp.; Enron Capital & Trade Resource; Enron Corp.

Further Reading

Banerjee, Neela, Trying to Salvage What Can Be Salvaged While the Creditors Line Up, New York Times, January 25, 2002, p. C7.

Davies, Erin, Enron: The Powers Back On, Fortune, April 13,1998, p. 24.

Eichenwald, Kurt, and Brick, Michael, Deals that Helped Doomed Enron Began to Form in the Early 90s, New York Times, January 18, 2001, pp. A1, C7.

Enron Chief Criticises U.S. Congress and World Bank, International Trade Finance, October 11, 1996, p. 8.

Enron Joins West Coast Team, ENR, February 17, 1997, p. 12.

Fineman, Howard, and Isikoff, Michael, Lights Out: Enrons Failed Power Play, Newsweek, January 21, 2002, pp. 1624.

Fisher, Daniel, Lynn Cook, and Rob Wherry, Shell Game, Forbes, January 7, 2002, p. 52.

Kemezis, Paul, Why Enron Paid a Premium for Portland General, Electrical World, September 1996, pp. 578.

McWilliams, Gary, The Quiet Man Whos Jolting Utilities, Business Week, June 9, 1997, p. 84.

Oppel, Richard A., Jr., and Jonathan D. Glater, Enrons Chief Sold Shares After Receiving Warning Letter, New York Times, January 18, 2002, pp. C1, C7.

OReilly, Brian, The Secrets of Americas Most Admired Corporations, Fortune, March 3, 1997, pp. 604.

Palmeri, Christopher, At the Heart of a Revolution, Forbes, January 12, 1998, p. 48.

, The Watt Hustlers, Forbes, September 20, 1999, p. 78.

Pechter, Kerry, Watts In a Name? The Future of Enrons Energy Business, Advertising Age, October 1997, p. 114.

Power Players, Fortune, August 5, 1996, p. 94.

Share, Jeff, Massive Pipeline to Carry Bolivian Gas into Brazil, Pipeline & Gas Journal, August 1997, p. 34.

Wherry, Rob, Separated at Birth, Forbes, December 24, 2001, p. 54.

Zellner, Wendy, Enron Electrified, Business Week, July 24, 2000, p. EB54.

Zellner, Wendy, Stephanie Anderson Forrest, and others, The Fall of Enron, Business Week, December 17, 2001, p. 30.

Trudy Ring
updates: Dorothy Kroll and A. Woodward

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Enron Corporation

Enron Corporation

1400 Smith Street
Houston, Texas 77002-7369
U.S.A.
(713) 853-6161
Fax: (713) 853-6790
Web site: http://www.enron.com

Public Company
Incorporated:
1930 as Northern Natural Gas Company
Employees: 6,700
Sales: $13.28 billion (1996)
Stock Exchanges: New York Boston Chicago Pacific Cincinnati Philadelphia
SICs: 4922 Pipelines, Natural Gas; 5172 Gases; 1311 Natural Gas Production; 1321 Crude Petroleum Products; 2911 Natural Gas Liquids; 4613 Petroleum Refining

Enron Corporation is one of the largest integrated natural gas and electricity companies in the world. It markets natural gas liquids worldwide and operates one of the largest natural gas transmission systems in the world, totaling more than 36,000 miles. It is also one of the largest independent developers and producers of electricity in the world, serving both industrial and emerging markets. Enron is also a major supplier of solar and wind renewable energy worldwide, manages the largest portfolio of natural gas-related risk management contracts in the world, and is one of the worlds biggest independent oil and gas exploration companies. In North America, Enron is the second biggest buyer and seller of natural gas and the largest nonregulated marketer of electricity. Enrons stated goals are to become the largest retailer of electricity and natural gas in the United States and the largest provider of both in Europe.

Company Origins

Enron began as Northern Natural Gas Company, organized in Omaha, Nebraska, in 1930 by three other companies. North American Light & Power Company and United Light & Rail-ways Company each held a 35 percent stake in the new enterprise, while Lone Star Gas Corporation owned the remaining 30 percent. The companys founding came just a few months after the stock market crash of 1929, an inauspicious time to launch a new venture. Several aspects of the Great Depression actually worked in Northerns favor, however. Consumers initially were not enthusiastic about natural gas as a heating fuel, but its low cost led to its acceptance during tough economic times. High unemployment brought the new company a ready supply of cheap labor to build its pipeline system. In addition, the 24-inch steel pipe, which could transport six times the amount of gas carried by 12-inch cast iron pipe, had just been developed. Northern grew rapidly in the 1930s, doubling its system capacity within two years of its incorporation and bringing the first natural gas supply to the state of Minnesota.

Public Offering in the 1940s

In the 1940s there were changes in Northerns regulation and ownership. The Federal Power Commission, created as a result of the Natural Gas Act of 1938, regulated the natural gas industrys rates and expansion. In 1941 United Light & Rail-ways sold its share of Northern to the public, and in 1942 Lone Star Gas distributed its holdings to its stockholders. North American Light & Power would hold on to its stake until 1947, when it sold its shares to underwriters who then offered the stock to the public. Northern was listed on the New York Stock Exchange that year.

In 1944 Northern acquired the gas-gathering and transmission lines of Argus Natural Gas Company. The following year, the Argus properties were consolidated into Peoples Natural Gas Company, a subsidiary of Northern. In 1952 Peoples was dissolved as a subsidiary, its operations henceforth becoming a division of the parent company. Also in 1952, the company set up another subsidiary, Northern Natural Gas Producing Company, to operate its gas leases and wells. Another subsidiary, Northern Plains Natural Gas Company, was established in 1954 and eventually would bring Canadian gas reserves to the continental United States.

Through its Peoples division, the parent company acquired a natural gas system in Dubuque, Iowa, from North Central Public Service Company in 1957. In 1964 Council Bluffs Gas Company of Iowa was acquired and merged into the Peoples division. Northern created two more subsidiaries in 1960: Northern Gas Products Company, now Enron Gas Processing Company, for the purpose of building and operating a natural gas extraction plant in Bushton, Kansas; and Northern Propane Gas Company, for retail sales of propane. Northern Natural Gas Producing Company was sold to Mobil Corporation in 1964, but the parent company continued expanding on other fronts. In 1966 it formed Hydrocarbon Transportation Inc., now Enron Liquids Pipeline Company, to own and operate a pipeline system carrying liquid fuels. Eventually, this system would bring natural gas liquids from plants in the Midwest and Rocky Mountains to upper-Midwest markets, with connections for eastern markets as well.

Growth through Acquisitions

Northern made several acquisitions in 1967: Protane Corporation, a distributor of propane gas in the eastern United States and the Caribbean; Mineral Industries Inc., a marketer of automobile antifreeze; National Poly Products Inc.; and Viking Plastics of Minnesota. Also in 1967, Northern created Northern Petrochemical Company to manufacture and market industrial and consumer chemical products. The petrochemical company acquired Mon-santo Corporations polyethylene marketing business in 1969.

Northern continued expanding during the 1970s. In February 1970 it acquired Plateau Natural Gas Company, which became part of the Peoples division. In 1971 it bought Olin Corporations antifreeze production and marketing business. It set up UPG Inc., now Enron Oil Trading & Transportation, in 1973 to transport and market the fuels produced by Northern Gas Products. UPG eventually would handle oil and liquid gas products for other companies as well.

In 1976 Northern formed Northern Arctic Gas Company, a partner in the proposed Alaskan arctic gas pipeline, and Northern Liquid Fuels International Ltd., a supply and marketing company. Northern Border Pipeline Company, a partnership of four energy companies with Northern Plains Natural Gas as managing partner, began construction of the eastern segment of the Alaskan pipeline in 1980. This segment, stretching from Ventura, Iowa, to Monchy, Saskatchewan, was completed in 1982. About that time, it became apparent that transporting Alaskan gas to the lower 48 states would be prohibitively expensive. Nevertheless, the pipeline provided an important link between Canadian gas reserves and the continental United States. Northern changed its name to InterNorth, Inc. in 1980. That same year, while attempting to grow through acquisitions, InterNorth became involved in a takeover battle with Cooper Industries Inc. to acquire Crouse-Hinds Company, an electrical-products manufacturer. Cooper rescued Crouse-Hinds from InterNorths hostile bid and bought Crouse-Hinds in January 1981. The takeover fight brought a flurry of lawsuits between InterNorth and Cooper. The suits were dropped after the acquisition was finalized.

While InterNorth grew through acquisitions, it also expanded from within. In 1980 it set up Northern Overthrust Pipeline Company and Northern Trailblazer Pipeline Company to participate in the Trailblazer pipeline, which runs from southeastern Nebraska to western Wyoming. Also that year, it created two exploration and production companies, Nortex Gas & Oil Company and Consolidex Gas and Oil Limited. The latter company was a Canadian operation. In 1981 InterNorth set up Northern Engineering International Company to provide professional engineering services. In 1982 it formed Northern Intrastate Pipeline Company and Northern Coal Pipeline Company as well as InterNorth International Inc., now Enron Inter-national, to oversee non-U.S. operations.

InterNorth significantly expanded its oil and gas exploration and production activity in 1983 with the purchase of Belco Petroleum Corporation for about $770 million. Belco quadrupled InterNorths gas reserves and added greatly to its crude oil reserves. Exploration efforts focused on the United States, Canada, and Peru.

Other acquisitions of the early 1980s included the fuel trading companies P & O Falco Inc. and P & O Falco Ltd.; their operations joined with UPGrenamed UPG Falcoin 1984; and Chemplex Company, a polyethylene and adhesive manufacturer, also acquired in 1984. InterNorth had sold Northern Propane Gas in 1983.

InterNorth made an acquisition of enormous proportions in 1985, when it bid to purchase Houston Natural Gas Corporation for about $2.26 billion. The offer was received enthusiastically, and the merger created the largest gas pipeline system in the United Statesabout 37,000 miles at the time. Houston Natural Gas brought pipelines from the Southeast and Southwest to join with InterNorths substantial system in the Great Plains area. Valero Energy Corporation of San Antonio, Texas, sued to block the merger. InterNorth had entered into joint ventures with Valero early in 1985 to transport and sell gas to industrial users in Texas and Louisiana. Because these ventures competed with Houston Natural Gas, InterNorth withdrew from them when it agreed to the merger. Valero alleged that InterNorth had breached its fiduciary obligations, but the Valero lawsuit failed to stop the acquisition.

Company Perspectives:

Enrons mission is to become the most innovative integrated natural gas company in North America. After recognizing early on that the natural gas pipeline business was the back-bone of the corporation, we concentrated on growing our existing businesses our exploration and production, gas liquids and cogeneration operations which best complemented and are complemented by our pipeline activities.

Although still officially named InterNorth, the merged company initially was known as HNG/InterNorth, with dual headquarters in Omaha, Nebraska, and Houston, Texas. In 1986 the companys name was changed to Enron Corp., and headquarters were consolidated in Houston. After some shuffling in top management, Kenneth L. Lay, HNGs chairman, emerged as chairman of the combined company. HNG/InterNorth began divesting itself of businesses that did not fit in with its long-term goals. The $400 million in assets sold off in 1985 included the Peoples division, which sold for $250 million. Also in 1985, Perus government nationalized Enrons assets there, and Enron began negotiating for payment, taking a $218 million charge against earnings in the meantime. In 1986 Enrons chemical subsidiary was sold for $603 million. Also in 1986, Enron sold 50 percent of its interest in Citrus Corporation to Sonat Inc. for $360 million but continued to operate Citruss pipeline system, Florida Gas Transmission Company. Citrus originally was part of Houston Natural Gas.

In 1987 Enron centralized its gas pipeline operations under Enron Gas Pipeline Operating Company. Also that year, Enron Oil & Gas Company, with responsibility for exploration and production, was formed out of previous InterNorth and HNG operations, including Nortex Oil & Gas, Belco Petroleum, HNG Oil Company, and Florida Petroleum Company. In 1989 Enron Corp. sold 16 percent of Enron Oil & Gass common stock to the public for about $200 million. That year Enron received $162 million from its insurers for the Peruvian operations, and it continued to negotiate with the government for additional compensation.

Enron made significant moves into electrical power, in both independent production and cogeneration facilities, in the late 1980s. Cogeneration plants produce electricity and thermal energy from one source. It added major cogeneration units in Texas and New Jersey in 1988; in 1989 it signed a 15-year contract to supply natural gas to a cogeneration plant on Long Island. Also in 1989, Enron reached an agreement with Coastal Corporation that allowed Enron to increase the natural gas production from its Big Piney field in Wyoming; under the accord, Coastal agreed to extend a pipeline to the field, since the line already going to it could not handle increased volume. The same year, Enron and El Paso Natural Gas Company received regulatory approval for a joint venture, Mojave Pipeline Company. The pipeline transports natural gas for use in oil drilling.

The 1990s and Beyond

In the early 1990s, Enron appeared to be reaping the benefits of the InterNorth-Houston Natural Gas merger. Its revenues, at $16.3 billion in 1985, fell to less than $10 billion in each of the next four years but recovered to $13.1 billion in 1990. Low natural gas prices had been a major cause of the decline. Enron, however, had been able to increase its market share, from 14 percent in 1985 to 18 percent in 1990, with help from efficiencies that resulted from the integration of the two predecessor companies operations. Enron also showed significant growth in its liquid fuels business as well as in oil and gas exploration.

Beginning with the 1990s, Enrons stated philosophy was to, get in early, push to open markets, position ourselves to compete, compete hard when the opening comes. This philosophy was translated into two major sectors: international markets and the newly deregulated gas and electricity markets in the United States.

Beginning in 1991, Enron built its first overseas power plant in Teesside, England, which became the largest gas-fired cogeneration plant in the world with 1,875 megawatts. Subsequently, Enron built power plants in industrial and developing nations all over the world: in Italy, Turkey, Argentina, China, India, Brazil, Guatemala, Bolivia, Colombia, the Dominican Republic, the Philippines, and others. By 1996, earnings from these projects accounted for 25 percent of total company earnings before interest and taxes.

Enron expects that further overseas growth will come from the privatization of government-owned companies in the fields of energy, transportation, and telecommunications. In 1997, Enron became the first company to develop a privately-owned independent power plant in Poland when a subsidiary, Elektrocieplownia Nowa Sarzyna Sp., signed a 20-year power purchase contract with the Polish Power Grid Company. The contract called for Enron to build a 116 megawatt, natural gas-fired combined heat and power plant in Nowa Sarzyna.

In North America, the states were given the power to deregulate gas and electric utilities in 1994, which meant that residential customers could choose utilities in the same way that they chose their phone carriers. In 1996, Enron agreed to acquire the utility, Portland General, whose transmission lines would give the company access to Californias $20-billion market, as well as access to 650,000 customers in Oregon.

In 1997, Enron Energy Services began to supply natural gas to residential customers in Toledo, Ohio, and contracted to sell wind power to Iowa residents. Through a subsidiary, Zond Corporation, the company contracted with MidAmerican Energy Company of Houston to supply 112.5 megawatts of wind-generated electricity to about 50,000 homes, the largest single purchase contract in the history of wind energy. Zond was to build the facility in northwestern Iowa, using about 150 of its Z-750 kilowatt series wind turbines, the biggest made in the United States.

Interest in industrial customers also continued, and in 1997, Enron Capital & Trade Resources contracted with Amtrak to buy electric energy at reduced rates. Amtrak functions as a wholesale purchaser of electric power, using it for its own system and reselling it to commuter lines. Amtrak planned to use the electric energy to run nearly 600 of its own trains daily in the Northeast Corridor and another 100 commuter trains on the Keystone line between Philadelphia and Harrisburg. Savings to the electric-powered trains were estimated to be as much as $40 million per year.

Principal Subsidiaries

Enron Gas Pipeline Group; Enron Capital & Trade Resources; Enron International; Enron Oil & Gas Company; Enron Renewable Energy Corp.

Principal Operating Units

Enron Ventures Corp.; Enron Energy Services; Enron Oil and Gas India.

Further Reading

Enron Chief Criticises U.S. Congress and World Bank, International Trade Finance, October 11, 1996, p. 8.

Enron Joins West Coast Team, ENR, February 17, 1997, p. 12.

Kemezis, Paul, Why Enron Paid a Premium for Portland General, Electrical World, September 1996, pp. 5758.

OReilly, Brian, The Secrets of Americas Most Admired Corporations, Fortune, March 3, 1997, pp. 6064.

Power Players, Fortune, August 5, 1996, p. 94.

Trudy Ring

updated by Dorothy Kroll

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Enron Corp.

Enron Corp.

1400 Smith Street
Houston, Texas 77002
U.S.A.
(713) 853-6161
Fax: (713) 853-6790

Public Company
Incorporated: 1930 as Northern Natural Gas Company
Employees: 7,000
Sales: $13.17 billion
Stock Exchanges: New York Pacific Midwest London Frankfurt

Enron Corp. is the largest integrated natural gas company in the United States. It operates a 38,000-mile pipeline network that supplies nearly 18% of U.S. natural gas consumption. In addition to natural gas transmission and marketing, it is involved in oil and gas exploration and production, liquid fuels processing and marketing, electricity development and production, and nonregulated purchasing and marketing of long-term natural gas commitments.

Enron began as Northern Natural Gas Company, organized in Omaha, Nebraska, in 1930 by three other companies. North American Light & Power Company and United Light & Railways Company each held a 35% stake in the new enterprise, while Lone Star Gas Corporation owned the remaining 30%. The companys founding came just a few months after the stock market crash of 1929, an inauspicious time to launch a new company. Several aspects of the Great Depression actually worked in Northerns favor, however. Consumers initially were not enthused about natural gas as a heating fuel, but its low cost led to its acceptance during tough economic times. High unemployment brought the new company a ready supply of cheap labor to build its pipeline system. In addition, the 24-inch steel pipe, which could transport six times the amount of gas carried by 12-inch cast iron pipe, had just been developed. Northern grew rapidly in the 1930s, doubling its system capacity within two years of its incorporation and bringing the first natural gas supply to the state of Minnesota.

In the 1940s there were changes in Northerns regulation and ownership. The Federal Power Commission, created as a result of the Natural Gas Act of 1938, regulated the natural gas industrys rates and expansion. In 1941 United Light & Railways sold its share of Northern to the public, and in 1942 Lone Star Gas distributed its holdings to its stockholders. North American Light & Power would hold on to its stake until 1947, when it sold its shares to underwriters who then offered the stock to the public. Northern was listed on the New York Stock Exchange that year.

In 1944 Northern acquired the gas-gathering and transmission lines of Argus Natural Gas Company. The following year, the Argus properties were consolidated into Peoples Natural Gas Company, a subsidiary of Northern. In 1952 Peoples was dissolved as a subsidiary, its operations henceforth becoming a division of the parent company. Also in 1952, the company set up another subsidiary, Northern Natural Gas Producing Company, to operate its gas leases and wells. Another subsidiary, Northern Plains Natural Gas Company, was established in 1954 and eventually would bring Canadian gas reserves to the continental United States.

Through its Peoples division, the parent company acquired a natural gas system in Dubuque, Iowa, from North Central Public Service Company in 1957. In 1964 Council Bluffs Gas Company of Iowa was acquired and merged into the Peoples division.

Northern created two more subsidiaries in 1960: Northern Gas Products Company, now Enron Gas Processing Company, for the purpose of building and operating a natural gas extraction plant in Bushton, Kansas; and Northern Propane Gas Company, for retail sales of propane. Northern Natural Gas Producing Company was sold to Mobil Corporation in 1964, but the parent company continued expanding on other fronts. In 1966 it formed Hydrocarbon Transportation Inc., now Enron Liquids Pipeline Company, to own and operate a pipeline system carrying liquid fuels. Eventually, this system would bring natural gas liquids from plants in the Midwest and Rocky Mountains to upper-midwest markets, with connections for eastern markets as well.

Northern made several acquisitions in 1967: Protane Corporation, a distributor of propane gas in the eastern United States and the Caribbean; Mineral Industries Inc., a marketer of automobile antifreeze; National Poly Products Inc.; and Viking Plastics of Minnesota. Also in 1967, Northern created Northern Petrochemical Company to manufacture and market industrial and consumer chemical products. The petrochemical company acquired Monsanto Corporations polyethylene marketing business in 1969.

Northern continued expanding during the 1970s. In February 1970 it acquired Plateau Natural Gas Company, which became part of the Peoples division. In 1971 it bought Olin Corporations antifreeze production and marketing business. It set up UPG Inc., now Enron Oil Trading & Transportation, in 1973 to transport and market the fuels produced by Northern Gas Products. UPG eventually would handle oil and liquid gas products for other companies as well.

In 1976 Northern formed Northern Arctic Gas Company, a partner in the proposed Alaskan arctic gas pipeline, and Northern Liquid Fuels International Ltd., a supply and marketing company. Northern Border Pipeline Company, a partnership of four energy companies with Northern Plains Natural Gas as managing partner, began construction of the eastern segment of the Alaskan pipeline in 1980. This segment, stretching from Ventura, Iowa, to Monchy, Saskatchewan, was completed in 1982. About that time, it became apparent that transporting Alaskan gas to the lower 48 U.S. states would be prohibitively expensive. Nevertheless, the pipeline provided an important link between Canadian gas reserves and the continental United States.

Northern changed its name to InterNorth, Inc. in 1980. That same year, while attempting to grow through acquisitions, InterNorth became involved in a takeover battle with Cooper Industries Inc. to acquire Crouse-Hinds Company, an electricalproducts manufacturer. Cooper rescued Crouse-Hinds from InterNorths hostile bid and bought Crouse-Hinds in January 1981. The takeover fight brought a flurry of lawsuits between InterNorth and Cooper. The suits were dropped after the acquisition was finalized.

While InterNorth grew through acquisitions, it also expanded from within. In 1980 it set up Northern Overthrust Pipeline Company and Northern Trailblazer Pipeline Company to participate in the Trailblazer pipeline, which runs from southeastern Nebraska to western Wyoming. Also that year, it created two exploration and production companies, Nortex Gas & Oil Company and Consolidex Gas and Oil Limited. The latter company was a Canadian operation. In 1981 InterNorth set up Northern Engineering International Company to provide professional engineering services. In 1982 it formed Northern Intrastate Pipeline Company and Northern Coal Pipeline Company as well as InterNorth International Inc., now Enron International, to oversee non-U.S. operations.

InterNorth significantly expanded its oil and gas exploration and production activity in 1983 with the purchase of Belco Petroleum Corporation for about $770 million. Belco quadrupled InterNorths gas reserves and added greatly to its crude oil reserves. Exploration efforts focused on the United States, Canada, and Peru.

Other acquisitions of the early 1980s included the fuel trading companies P & O Falco Inc. and P & O Falco Ltd.; their operations joined with UPGrenamed UPC Falcoin 1984; and Chemplex Company, a polyethylene and adhesive manufacturer, also acquired in 1984. InterNorth had sold Northern Propane Gas in 1983.

InterNorth made an acquisition of enormous proportions in 1985, when it bid to purchase Houston Natural Gas Corporation for about $2.26 billion. The offer was received enthusiastically, and the merger created the largest gas pipeline system in the United Statesabout 37,000 miles at the time. Houston Natural Gas brought pipelines from the Southeast and Southwest to join with InterNorths substantial system in the Great Plains area. Valero Energy Corporation of San Antonio, Texas, sued to block the merger. InterNorth had entered into joint ventures with Valero early in 1985 to transport and sell gas to industrial users in Texas and Louisiana. Because these ventures competed with Houston Natural Gas, InterNorth withdrew from them when it agreed to the merger. Valero alleged that InterNorth had breached its fiduciary obligations, but the Valero lawsuit failed to stop the acquisition.

Although still officially named InterNorth, the merged company initially was known as HNG/InterNorth, with dual headquarters in Omaha, Nebraska, and Houston, Texas. In 1986 the companys name was changed to Enron Corp., and headquarters were consolidated in Houston.

After some shuffling in top management, Kenneth L. Lay, HNGs chairman, emerged as chairman of the combined company. HNG/InterNorth began divesting itself of businesses that did not fit in with its long-term goals. The $400 million in assets sold off in 1985 included the Peoples division, which sold for $250 million. Also in 1985, Perus government nationalized Enrons assets there, and Enron began negotiating for payment, taking a $218 million charge against earnings in the meantime. In 1986 Enrons chemical subsidiary was sold for $603 million. Also in 1986, Enron sold 50% of its interest in Citrus Corporation to Sonat Inc. for $360 million, but continued to operate Citruss pipeline system, Florida Gas Transmission Company. Citrus originally was part of Houston Natural Gas.

In 1987 Enron centralized its gas pipeline operations under Enron Gas Pipeline Operating Company. Also that year, Enron Oil & Gas Company, with responsibility for exploration and production, was formed out of previous InterNorth and HNG operations, including Nortex Oil & Gas, Belco Petroleum, HNG Oil Company, and Florida Petroleum Company. In 1989 Enron Corp. sold 16% of Enron Oil & Gass common stock to the public for about $200 million. That year Enron received $162 million from its insurers for the Peruvian operations, and it continued to negotiate with the government for additional compensation.

Enron made significant moves into electrical power, in both independent production and cogeneration facilities, in the late 1980s. Cogeneration plants produce electricity and thermal energy from one source. It added major cogeneration units in Texas and New Jersey in 1988; in 1989 it signed a 15-year contract to supply natural gas to a cogeneration plant on Long Island. Also in 1989, Enron reached an agreement with Coastal Corporation that allowed Enron to increase the natural gas production from its Big Piney field in Wyoming; under the accord, Coastal agreed to extend a pipeline to the field, since the line already going to it could not handle increased volume. The same year, Enron and El Paso Natural Gas company received regulatory approval for a joint venture, Mojave Pipeline Company. The pipeline transports natural gas for use in oil drilling. In 1990 Enron made significant progress on its plans for a gas-fired electrical power plant in Teesside, England, as well as one in Milford, Massachusetts.

In the early 1990s, Enron appeared to be reaping the benefits of the InterNorth-Houston Natural Gas merger. Its revenues, at $16.3 billion in 1985, fell to less than $10 billion in each of the next four years, but recovered to $13.1 billion in 1990. Low natural gas prices had been a major cause of the decline. Enron, however, had been able to increase its market share, from 14% in 1985 to 18% in 1990, with help from efficiencies that resulted from the integration of the two predecessor companies operations. Enron also showed significant growth in its liquid fuels business as well as in oil and gas exploration.

Principal Subsidiaries

Florida Gas Transmission Company (50%); Houston Pipe Line Company; Northern Border Pipeline Company (35%); Northern Natural Gas Company; Trans western Pipeline Company; Enron Finance Corp.; Enron Gas Marketing Inc.; Enron Power Corp.; Enron Europe Ltd.; Enron Oil & Gas Company (84%); Enron Exploration Company; Enron Oil Canada Ltd.; Enron Gas Processing Company; Enron Gas Liquids Inc.; Enron Liquids Pipeline Company; Enron Oil Trading & Transportation Company; Enron Americas, Inc.

Trudy Ring

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Enron Corporation

Enron Corporation, U.S. company that in 2001 became the largest bankruptcy and stock collapse in U.S. history up to that time. The company was formed in 1985 when InterNorth purchased Houston Natural Gas to create the country's longest natural-gas pipeline network. Renamed Enron in 1986, the company transformed itself in the 1990s from a gas-pipeline business into a natural-gas and electricity trading giant. By 2000 it was the seventh largest U.S. corporation.

Enron employed shoddy and deceptive accounting practices to hide its financial losses (and occasionally its gains). The techniques of structured finance—complex financial transactions designed to hedge the risks involved in business activities—were used to enrich some of Enron's corporate officers and hide the firm's financial losses. Independent partnerships to which Enron sold assets were created, enabling Enron to convert loans and assets burdened with debt obligations into income, but the contracts with the partnerships contained guarantees and risky buy-back conditions that had potentially disastrous consequences for Enron. Enron also booked projected long-term income from trading contracts when those contracts were signed, but the income projections were often overly optimistic and inflated. In 2001, when one partnership deal was properly accounted for by Enron's outside auditor, Arthur Andersen, large quarterly losses resulted. Those losses and subsequent profit and debt restatements caused Enron's stock price to drop, triggering the unraveling of the partnership and resulting in a sudden and dramatic financial collapse that led to bankruptcy in Dec., 2001. The pensions of some 20,000 Enron employees were devastated in varying degrees as well; 62% of the company pension plan was in now worthless Enron stock.

Enron was also accused of manipulating the electricity markets during the California energy crisis of 2000–2001. There is evidence that its subsidiaries engaged in sham trading among themselves to drive up the price of electricity, and Enron traders arranged power supply deals with California that gave the appearance of creating power congestion, generating fraudulent fees when Enron then appeared to take steps relieve the nonexistent congestion. The large profits made during the crisis were partially hidden by manipulating Enron's financial reserves.

More than 30 people were charged with various crimes arising from Enron's business practices. More than 20 people, including its chairman, president, and chief financial officer, were ultimately convicted of or pleaded guilty to fraud, conspiracy, and other crimes, although the chairman, Kenneth L. Lay, had his conviction extinguished when he died in 2006 before being sentenced. The collapse also destroyed Arthur Andersen, Enron's accounting firm, which found itself accused of obstructing justice when it destroyed documents relating to the case in late 2001 after the Securities and Exchange Commission had begun investigating Enron. Arthur Andersen, which had been one of the top five accounting firms, quickly lost clients and partners when it came under SEC investigation for its role in Enron's collapse, and its federal criminal conviction for obstruction of justice in 2001 sealed the firm's fate. (The conviction was overturned in 2005 by the U.S. Supreme Court because of faulty instructions given by the judge to the jury.)

A number of financial institutions, including Citigroup and J. P. Morgan, paid hundreds of millions in fines and penalties for the roles they played in financing and setting up the independent partnerships that contributed to Enron's collapse. The firms also paid more than $7 billion to be used to repay creditors and investors, but Enron's creditors were owed more than $70 billion when the company collapsed.

See study by B. McLeon and P. Elkind (2003).

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Enron Scandal

ENRON SCANDAL

ENRON SCANDAL. Enron is an energy company that quickly grew to become one of the world's largest corporations before its financial practices caused its bankruptcy. Formed in 1985 by the merger of two gas pipeline companies, Houston Natural Gas and InterNorth, the company diversified under its manager, Kenneth Lay, into an energy trading company offering various services, including a massive e-commerce. It bought the name of the Houston Astros' ballpark and was named most innovative company of the year for five consecutive years by Fortune magazine. It peaked in the year 2000, with revenues of $100 billion and a share price of $90, its rapid growth attracting many investors.

In 2001, however, Enron's success appeared to be phony. The company had assigned billions of dollars of debt and risk to subsidiary companies, which then kept them off their books. Share prices began to fall precipitously. Enron's accounting firm, Arthur Anderson, was caught destroying Enron-related documents. On 2 December 2001, Enron filed for bankruptcy, along with sixty subsidiary companies. In 2002, its shares were traded at 11 cents. The company's collapse destroyed thousands of investors' savings. In July 2002, Arthur Andersen, Enron's accounting firm, was convicted of destroying evidence, although an appeal was pending at the time of this writing. Enron's officials were then undergoing further congressional hearings and criminal investigations, and numerous agencies were investigating other corporations for similar accounting and finance methods.

BIBLIOGRAPHY

Fox, Loren. Enron: The Rise and Fall. New York: Wiley, 2002.

Barreveld, Dirk J. The ENRON Collapse. New York: Universe, 2002.

SteveSheppard

See alsoBusiness, Big ; Corporations ; Scandals .

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Enron Corp.

Enron Corp.

founded: 1930


Contact Information:

headquarters: po box 1188, suite 4712
houston, tx 77251-1188 phone: (713)853-6161 fax: (713)853-3129 url: http://www.enron.com

OVERVIEW

Enron Corp.'s foundational business is in the production, transportation, and distribution of electricity and natural gas resources. When the U.S. government deregulated the sale of natural gas and electricity during the 1990s, Enron built an empire within the energy industry, at one point holding one-fourth of all U.S. natural gas business, and recorded impressive financial gains by trading in energy futures. When questions arose regarding Enron's accounting methods, the company suffered a stunning and rapid demise amid allegations of criminal and ethical misconduct. Enron filed for bankruptcy on December 3, 2001. More than 90 lawsuits have been filed against Enron, and the company continues to work through the complicated process of bankruptcy proceedings. Federal investigations into the conduct of both Enron and its outside accounting firm, Arthur Andersen, are ongoing and may be open for years. Criminal charges were filed against Arthur Andersen for obstruction of justice caused by the destruction of documents. It is unclear whether Enron or any of its executives will eventually be indicted on criminal charges.


COMPANY FINANCES

According to Enron's 2000 annual report, the last to be filed prior to filing for bankruptcy, the company posted a net income of $979 million on revenues of $100.8 billion. However, on November 8, 2001, in the midst of a scandal making daily headlines, Enron made the unusual move to restate its profits for years 1997 through 2000, in effect acknowledging that its previous numbers were inappropriately inflated due to accounting procedures that moved assets and debts on and off Enron's books. The restated figures reported net income as $880 million rather than the previously stated $979 million. Other changes included a revised accounting of debt and equity, which reflected an increase in debt of $628 million and a decrease in equity of $754 million.

At the core of Enron's downfall was the use of complicated accounting methods to hide losses and inflate income. To keep stock prices high, the company raised investment against its own assets and maintained an appearance of a highly successful company. Enron removed losses from its books by placing certain money-losing assets with so-called independent partnerships. Conversely, Enron posted as profits money that it received from these partnerships, even if those profits reflected projects or assets that did not actually exist.

Using such complex accounting tools that were beyond the comprehension of the average investor, Enron convinced Wall Street it was riding high. In actuality, by the end of 2000 Enron was becoming increasing dependent on smoke-and-mirrors accounting to show its impressive profits. For the purposes of accountability, legitimate partnerships must necessarily be independent from Enron. However, Enron was doing hundreds of millions of dollars worth of business with "special purpose entities," which were funded by Enron stocks and under the direct control of Enron executives, who personally made millions of dollars through these transactions, yet resulted in little benefit to shareholders.

After investing heavily in broadband trading and making several unprofitable major international deals, Enron's ability to cover its losses with profits from its partnerships became problematic. Stock prices began to decline through the first three quarters of 2001. In August of 2001, Enron's chief financial officer abruptly resigned, citing personal reasons, but the move was enough to spook Wall Street, and investors, including numerous high-level Enron executives, began unloading stock. Amidst ongoing discoveries regarding Enron's accounting practices through Andersen, Enron essentially collapsed. On November 28, 2001, after being given junk-bond status by major credit raters, meaning investment was considered to be a massive risk, Enron stocks dropped below $1 per share. On December 2, 2001, Enron filed for bankruptcy, the then-largest filing in the history of the United States.


ANALYSTS' OPINIONS

In retrospect, analysts acknowledge that a close look at Enron's books left provided more questions than answers. Enron successfully bluffed most of Wall Street into thinking that the books made sense, and considering its positive growth, which was benefiting traders as well as investors, Wall Street had little reason to question Enron's accounting. Not only was Enron's collapse the largest ever, it was also unbelievably rapid. In just over three months, the company went from being a multibil-lion-dollar corporation to bankruptcy. The fact that analysts failed to recognize or turned a blind eye to the discrepancies in Enron's numbers has been the topic of considerable conversation.


HISTORY

Enron has its origins in the Northern Natural Gas Company, established in Omaha, Nebraska, in 1930 by North American Light & Power Company, United Light & Railways Company, and Lone Star Gas Corporation. Forming just months after the stock market crash in 1929, Northern actually found the ensuing Depression beneficial. First, the low cost of natural gas provided the new company with an instant customer base. Second, widespread unemployment drove down wages; thus, Northern had access to inexpensive labor to build its pipeline. As a result, Northern had doubled its system capacity by 1932.

FAST FACTS: About Enron Corp.


Ownership: Enron is a publicly owned company that trades on the Over-the-Counter Bulletin Board.

Ticker Symbol: ENRNQ

Officers: Stephen Cooper, Interim CEO and Chief Restructuring Officer; Mark Frevert, 46, VChmn.; Raymond Bowen, Jr., 41, CFO and EVP

Employees: 20,600

Principal Subsidiary Companies: Enron has retained some of its business units, but as it undergoes restructuring or liquidation due to its bankruptcy filing, its corporate structure remains uncertain.

Chief Competitors: Duke Energy has emerged as the leader of the energy industry in wake of Enron's absence. Having scaled down in size dramatically, Enron also now competes with smaller utility providers, including Dynergy and Reliant Energy.


The Natural Gas Act of 1938 created the Federal Power Commission, which began regulating the natural gas industry. In 1941 United Light & Railways sold its 35 percent share of Northern to the public, the following year Lone Star Gas distributed its 30 percent holding among its stockholders, and in 1947 North American Light & Power sold its shares to underwriters who then sold the stock to the public. In the same year Northern was listed on the New York Stock Exchange.

During the next four decades, Northern made numerous acquisitions, expanding its network of operations in the generation, transportation, and distribution of natural gas, electricity, and other energy-related products. In 1980 it changed its name to InterNorth Inc. In 1985 InterNorth made it largest acquisition in a $2.26-billion bid purchase Houston Natural Gas Corporation. The merger between the two companies created the largest natural gas pipeline system in the United States. In 1986 HNG/InterNorth took on the name Enron Corp. with its headquarters in Houston. Kenneth Lay, previously chairman of HNG, was named as chairman of Enron. Under Lay's leadership, Enron sold off non-vital business assets that were deemed incongruent with Enron's goal of becoming a prime player in the energy industry.

Enron posted revenues of $16.3 billion in 1985, but a decline in natural gas prices led to a corresponding decline in revenues over the next four years. Nonetheless, Enron continued to expand both its domestic and international operations, and by 1990 held a market share of 18 percent, putting the company in a prime position to benefit from the deregulation of the natural gas and electricity in 1994. Prior to deregulation, utility companies generated and supplied power to customers who had no choice in provider or say in price. After deregulation, utility companies were allowed to sell energy to outside sources that then sold it to customers, who could choose their provider. Deregulation increased competition but also caused significant fluctuations in price. Enron cashed in on the fear of price fluctuations by trading in energy futures, that is, by buying tomorrow's electricity and natural gas at a fixed price today.

By 2001 the company had expanded its commodities trading internationally to include paper and pulp, credit, shipping, steel, crude oil, coal, plastics, metals, emissions allowances, bandwidth, and weather derivatives. For example, Enron would sell a future supply of natural gas to an industrial user who would rather pay a fixed price than worry about upward fluxes in price due to exceptionally cold weather. At the same time, Enron would also ensure a fixed price for the supplier, who would be harmed by low demand caused by unseason-ably warm weather. Basically, Enron earned money by taking on the risk of price fluctuations.

When the strategy proved successful, Enron began shifting more of its attention to trading rather than its physical asset. Eventually some 90 percent of Enron's revenues were being generated through trading. One of the first to trade over the Internet, the value of products bought and sold online totaled an incredible $880 billion in just two years. Stock prices reached an all-time high of $90 during the summer with annual revenues for the year totaling $100 billion. Murmurs of concern within both Enron and Arthur Andersen went largely unnoticed or ignored.

CHRONOLOGY: Key Dates for Enron Corp.


1985:

InterNorth purchases Houston Natural Gas Company, creating Enron Corp.

1994:

Federal government approves the deregulation of natural gas and electricity

2000:

Enron reports revenues in excess of $100 billion; stock prices reach all-time high of $90

2001:

Stock prices fall to $50 in March; CFO Jeffrey Skilling resigns in August; Sherron Watkins sends memo to CEO Kenneth Lay warning of serious accounting problems; in October, Enron's accounting firm, Arthur Andersen, shreds documents related to Enron; Enron reports first quarter loss of $618 million; stock price plummets; the Securities and Exchange Commission opens investigation; in November, Enron admits inflating profits and restates figures for 2000; stock prices fall below $1; Enron files for bankruptcy in December

2002:

Numerous congressional and federal investigations ensue; more than 90 lawsuits are lodged against Enron; the Arthur Andersen firm is charged with criminal behavior for destroying documents


During the early months of 2001 Enron's stock showed the first signs of trouble under pressure from the demise of the dot-com industry and instability in energy costs. When questions over accounting procedures surfaced in the fall of 2001, Enron's empire came crashing down. By the end of the year, both Enron and its accounting firm Arthur Andersen were under investigation by the federal government, and stock prices had fall to less than $1 per share. On December 2, 2001, Enron filed for bankruptcy. In the aftermath of the company's collapse and allegations that Andersen purposefully destroyed documents, Enron has been attempting to restructure. It has sold off many of its interests around the world, including its energy trading unit, to refocus on its core business of energy production, transportation, and distribution.


STRATEGY

Since filing for bankruptcy on December 2, 2001, Enron has been working to reorganize itself into a viable, albeit smaller, new company by refocusing on its core business of supplying, generating, transporting, and selling energy. With all top executive leadership replaced and an entirely new board of directors, Enron has devised a strategy to restructure itself into a profitable entity. In May 2002 Enron filed a proposed business plan for life-after-bankruptcy for the company. Enron has suggested the formation of a new entity, OpCo Energy Company, which would retain a specific asset-based portfolio separate from the items considered under the bankruptcy filing. OpCo would build on Enron's energy infrastructure of businesses focused on the transportation, distribution, generation and production of natural gas and electricity with an expected income before interest and taxes of $1.3 billion.

Enron's rationale is that its collapse had very little to do with its physical assets, namely its power generation and supply units, and was almost solely a result of its commodity trading business. If the company's positive assets remain lumped in with its debt obligations, it will severely hamper these business units' attempt to compete in the open market and value will decrease. To avoid the deterioration of value, Enron argues, these assets should be removed from the equation and allowed to form a viable new entity, namely OpCo. Enron agrees that all other assets held by the company should be liquidated to satisfy creditors, although predict creditor recovery has been estimated as low as 20 percent. Such a plan would remove a majority of risk from the new entity and maximize its value.

Enron does not want to reorganize as the old Enron under the chapter 11 bankruptcy filing because to do so reduces value and allows for long on-going litigation and claims reconciliation that would be contested for years to come. Also, under the cloud of bankruptcy status, Enron would not have access to the capital investments necessary to sustain business in a competitive marketplace. Enron has also argued against liquidation of all assets because the nature of such sales results in bids lower than actual value, thereby reducing recovery totals to creditors.

Under Enron's proposed plan, OpCo's organizational structure would include: transportation services, power distribution, generation and production, finance and administration, and corporate communications. By separating its reputation from Enron and achieving an investment credit rating, Enron proposes that OpCo's formation would prove most beneficial to investors and creditors alike. Despite its plans for the future, creditors wishing to cut their losses may likely push for the liquidation of all Enron's assets.


CURRENT TRENDS

In the fallout out after Enron's scandalous demise, new federal regulations are likely to be enacted to ensure full disclosure and tightened accountability in financial reporting. The situation has also focused acute attention on corporate accountability across the board, including the board of directors, outside auditors, corporate executives, bankers, regulators, and Wall Street analysts.

WHISTLEBLOWER

Sherron Watkins, a former vice-president of corporate development at Enron, testified before the House Energy and Commerce Committee that she had sent a seven-page memo to Enron's chief executive officer (CEO), Kenneth Lay, expressing deep concern over Enron's use of Special Purpose Entities and the company's improprieties in accounting. Watkins pointed the finger of blame at the company's former president and one-time CEO Jeffrey Skilling and former chief financial officer Andrew Fastow. Although testifying that she believed Lay had been "duped" by Skilling and Fastow, Watkins was critical of Lay's failure to respond aggressively after she warned him that the company was in serious trouble and that Skilling's sudden resignation would trigger inquiries that would scandalize the company. In the memo, subsequently released to the press, Watkins wrote: "I am incredibly nervous that we will implode in a wave of accounting scandals." Skilling has denied his involvement in any misconduct. Lay, who exercised his fifth amendment right not to incriminate himself, refused to answer the Congress committee's questions.


PRODUCTS

Enron continues to operate a number of businesses, including natural-gas pipelines and utilities. It has divested itself from numerous assets and plans to reemerge as a much smaller company.

GLOBAL PRESENCE

Enron built its first overseas power plant in Teesside, England, in 1991. During the 1990s Enron aggressive pursued international investments, eventually building power plants all over the globe, including such places as Italy, Turkey, Argentina, China, India, Brazil, Guatemala, Bolivia, Columbia, the Dominican Republic, Poland, and the Philippines. By 1997 international projects were generating one fourth of all revenues. Enron made a major commitment to the construction of a massive power plant in India, the largest foreign investment in the country, but when its only customer in the venture pulled in 2001, Enron took a significant loss from the project.


EMPLOYMENT

During its restructuring, Enron is not accepting applications. Due to its bankruptcy status, thousands of employees, particularly those located in the Houston home office, have lost their jobs. A class action suit is being brought against Enron by employees whose pensions were rendered worthless when Enron went under. In particular, at issue is Enron's decision in October 2001 to prohibit its employees from selling their stock shares in an attempt to avert share price collapse. Because a majority of employee pension funds were tied up in Enron stocks, a large number of long-time employees lost significant amounts of money. On the other hand Enron's top executives were selling in mass quantities when the stock was at its peak, cashing in more than $1 billion.


SOURCES OF INFORMATION

Bibliography

berger, eric, mary flood, laura goldberg, julie mason, and patty reinert. "the fall of enron." houston chronicle, 24 february 2002.

byrne, john a., louis lavelle, nanette byrnes, marcia vickers, and amy borrus. "how to fix corporate governance." business week, 6 may 2002.

"complete enron coverage." forbes. available at http://www.forbes.com.

dobbs, lou. "the impact of money." money, may 2002.

elkind, peter, and bethany mclean. "is there anything enron didn't do?" fortune, 29 april 2002.

"enron and the mule." power engineering, may 2002.

"enron files voluntary petitions for chapter 11 reorganization." enron corp. press release, 2 december 2001. available at http://www.enron.com.

"enron investigation." british broadcasting corp., 9 june 2002. available at http://www.news.bbc.co.

"enron presents process to creditors' committee for separating power, pipeline company from bankruptcy." enron corp. press release, 3 may 2002. available at http://www.enron.com.

"enron probe." the washington post. available at http://www.washingtonpost.com.

mclean, bethany. "why enron went bust." fortune, 24 december 2001.

meyer, dick. "enron: too serious for a scandal." cbs news, 17 january 2002. available at http://www.cbsnews.com.


For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. enron's primary sics are:

1311 crude petroleum and natural gas

4932 gas and other services combined

6719 holding companies, not elsewhere classified

also investigate companies by their north american industry classification system codes, also known as naics codes. enron's primary naics codes are:

211111 crude petroleum and natural gas extraction

221210 natural gas distribution

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