Enron

» see enron.com as it lived, on the wayback machine

~ the obit ~

Enron was assembled on 16 July 1985 out of two ordinary pipeline companies, Houston Natural Gas and InterNorth of Omaha, with Kenneth Lay running the combined firm. For its first few years it moved natural gas through steel tubes, which is a dull and capital-heavy business. Then deregulation opened the gas market, Lay hired a McKinsey consultant named Jeff Skilling in 1990, and Skilling proposed that the company should stop thinking of itself as a pipeline operator and start thinking of itself as a bank that happened to trade gas.

The Gas Bank worked. Enron would sign a long contract with a producer and a matching contract with a buyer, then keep the spread while managing the risk in between. From there it extended the same idea to electricity, then to weather derivatives and broadband capacity. EnronOnline launched in November 1999 and was clearing billions of dollars a day in trades. By 2000 the company was reporting revenue near $101 billion, a figure that worked only because a trading house books the gross value of everything passing through it, so the number describes throughput rather than a business.

The unwinding took four months. Skilling became chief executive in February 2001 and resigned on 14 August with no convincing explanation. In October the company announced a $618 million quarterly loss alongside a $1.2 billion reduction in shareholder equity. The SEC made its inquiry formal on 31 October, and the restatement that followed wiped out reported earnings going back to 1997. Dynegy agreed to buy the wreckage and then withdrew on 28 November. The Chapter 11 petition went in on 2 December 2001, listing $63.4 billion in assets, the largest corporate bankruptcy in the country's history at the time. The stock had been $90 in August 2000 and closed at 26 cents.

~ the rap sheet ~

~ mark to market ~

Two accounting choices carried the whole thing. The first was mark-to-market treatment, which the SEC allowed Enron to use for its energy contracts from 1992. Sign a twenty year supply deal and you could book the estimated lifetime profit of that deal immediately, using your own model for what gas would cost in 2012. The estimate was the earnings. If the deal later performed worse than the model, the gap had to be filled by a bigger deal, which is a treadmill with a fixed direction.

The second was the special purpose entity. Andrew Fastow, chief financial officer from 1998, built a series of partnerships with names like LJM and Chewco that Enron could sell underperforming assets to, moving debt off the balance sheet while keeping the upside. The accounting rule of the day let an entity stay off the books if an outside party held three percent of the equity, and the outside parties turned out in several cases to be Fastow or people close to him, funded in part by Enron itself. Fastow personally cleared tens of millions from arrangements he negotiated on both sides.

~ marmara ereğlisi ~

Enron did business in Turkey, which is a fact the Houston coverage never bothers with. In the mid-1990s it won a build-operate-transfer contract for a gas-fired combined cycle plant at Marmara Ereğlisi in Tekirdağ province, a 478 megawatt station on the Sea of Marmara coast. Construction started in September 1996, the financing ran to a few hundred million dollars with US export credit behind it, and the arrangement included a twenty year power purchase agreement with the ministry that guaranteed both the electricity offtake and the gas supply. It came online for commercial operation in 1999.

Those guaranteed-offtake contracts were controversial in Turkey at the time and the argument about them has never entirely stopped. The state committed to buying power at a set price for two decades, in hard currency, from a foreign developer who carried very little of the market risk. That is a reasonable way to get generating capacity built in a country short of it, and it is also a transfer from the treasury to whoever signed first.

When Houston collapsed in December 2001, the plant kept running. The Turkish partner took full ownership, and in 2012 the station was sold to InterRAO of Russia for around $400 million. The build-operate-transfer clock ran out on 5 June 2019 and the plant passed to the Turkish state, seventeen and a half years after the company that developed it stopped existing. It still generates.

~ what it left in the law ~

Arthur Andersen, one of the five remaining large audit firms, was convicted in 2002 of obstruction for shredding Enron documents and lost its license to audit public companies. The conviction was overturned by the Supreme Court in 2005 and by then the firm was gone anyway, with 28,000 American jobs attached to it. Congress passed the Sarbanes-Oxley Act in July 2002, which is why a chief executive now signs a personal certification of the accounts. Lay was convicted in May 2006 and died that July before sentencing. Skilling served twelve years of his term, and Fastow, who cooperated with the prosecution, served about five.

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