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 __BODY__ 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 __BODY__; 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 __BODY__ 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 __BODY__.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 __BODY__ 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