Enron


Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was led by Kenneth Lay and developed in 1985 via a merger between Houston Natural Gas and InterNorth, both relatively small regional companies at the time of the merger. Before its bankruptcy on December 2, 2001, Enron employed approximately 20,600 staff and was a major electricity, natural gas, communications, and pulp and paper company, with claimed revenues of nearly $101 billion during 2000. Fortune named Enron "America's Most Innovative Company" for six consecutive years.
At the end of 2001, it was revealed that Enron's reported financial condition was sustained by an institutionalized, systematic, and creatively planned accounting fraud, known since as the Enron scandal. Enron became synonymous with willful, institutional fraud and systemic corruption. The scandal brought into question the accounting practices and activities of many corporations in the United States and was a factor in the enactment of the Sarbanes–Oxley Act of 2002. It affected the greater business world by causing, together with the even larger fraudulent bankruptcy of WorldCom, the dissolution of the Arthur Andersen accounting firm, which had been Enron and WorldCom's main auditor, and coconspirator in the fraud for years.
Enron filed for bankruptcy in the United States District Court for the Southern District of New York in late 2001 and selected Weil, Gotshal & Manges as its bankruptcy counsel. Enron emerged from bankruptcy in November 2004, under a court-approved plan of reorganization. A new board of directors changed its name to Enron Creditors Recovery Corp., and emphasized reorganizing and liquidating certain operations and assets of the pre-bankruptcy Enron. On September 7, 2006, Enron sold its last remaining subsidiary, Prisma Energy International, to Ashmore Energy International Ltd.. It is the largest bankruptcy due specifically to fraud in United States history.

History

Pre-merger origins (1925–1985)

InterNorth

One of Enron's primary predecessors was InterNorth, which was formed in 1930, in Omaha, Nebraska, just a few months after Black Tuesday. The low cost of natural gas and the cheap supply of labor during the Great Depression helped to fuel the company's early beginnings, doubling in size by 1932. Over the next 50 years, Northern expanded even more as it acquired many energy companies. It was reorganized in 1979 as the main subsidiary of a holding company, InterNorth, a diversified energy and energy-related products firm. Although most of the acquisitions conducted were successful, some ended poorly. InterNorth competed with Cooper Industries unsuccessfully over a hostile takeover of Crouse-Hinds Company, an electrical products manufacturer. Cooper and InterNorth feuded in numerous suits during the takeover that were eventually settled after the transaction was completed. The subsidiary Northern Natural Gas operated the largest pipeline company in North America. By the 1980s, InterNorth became a major force for natural gas production, transmission, and marketing as well as for natural gas liquids, and was an innovator in the plastics industry. In 1983, InterNorth merged with the Belco Petroleum Company, a Fortune 500 oil exploration and development company founded by Arthur Belfer.

Houston Natural Gas

The Houston Natural Gas corporation was initially formed from the Houston Oil Co. in 1925 to provide gas to customers in the Houston market through the building of gas pipelines. Under the leadership of CEO Robert Herring from 1967 to 1981, the company took advantage of the unregulated Texas natural gas market and the commodity surge in the early 1970s to become a dominant force in the energy industry. Toward the end of the 1970s, HNG's luck began to run out with rising gas prices forcing clients to switch to oil. In addition, with the passing of the Natural Gas Policy Act of 1978, the Texas market was less profitable and as a result, HNG's profits fell. After Herring died in 1981, M.D. Matthews briefly took over as CEO in a 3-year stint with initial success, but ultimately, a big dip in earnings led to his exit. In 1984, Kenneth Lay succeeded Matthews and inherited the troubled conglomerate.

Merger

With its conservative success, InterNorth became a target of corporate takeovers, the most prominent originating with Irwin Jacobs. InterNorth CEO Sam Segnar sought a friendly merger with HNG. In May 1985, Internorth acquired HNG for $2.3 billion, 40% higher than the current market price, and on July 16, 1985, the two entities voted to merge. The combined assets of the two companies created the second largest gas pipeline system in the US at that time. Internorth's north–south pipelines that served Iowa and Minnesota complemented HNG's Florida and California east-west pipelines well.

Post-merger rise (1985–1991)

The company was initially named HNG/InterNorth Inc., even though InterNorth was technically the parent. At the outset, Segnar was CEO but was soon fired by the board of directors to name Lay to the post. Lay moved its headquarters back to Houston and set out to find a new name, spending more than $100,000 in focus groups and consultants in the process. Lippincott & Margulies, the advertising firm responsible for the InterNorth identity five years prior, suggested "Enteron". During a meeting with employees on February 14, 1986, Lay announced his interest in this name change, which would be held to a stockholder vote on April 10. Less than a month from this meeting, on March 7, 1986, a spokesman for HNG/InterNorth rescinded the planned Enteron proposal, as since its announcement the name had come under scrutiny for being the same as a medical term for the intestines. This same press release saw the introduction of the Enron name, which would be the new name voted on come April.
Enron still had some lingering problems left over from its merger, however, the company had to pay Jacobs, who was still a threat, over $350 million and reorganize the company. Lay sold off any parts of the company that he believed didn't belong in the long-term future of Enron. Lay consolidated all the gas pipeline efforts under the Enron Gas Pipeline Operating Company. In addition, it ramped up its electric power and natural gas efforts. In 1988 and 1989, the company added power plants and cogeneration units to its portfolio. In 1989, Jeffrey Skilling, then a consultant at McKinsey & Company, came up with the idea to link natural gas to consumers in more ways, effectively turning natural gas into a commodity. Enron adopted the idea and called it the "Gas Bank". The division's success prompted Skilling to join Enron as the head of the Gas Bank in 1991. Another major development inside Enron was a pivot to overseas operations with a $56 million loan in 1989 from the Overseas Private Investment Corporation for a power plant in Argentina.

Timeline (1985–1992)

1980s
  • New regulations gradually create a market-pricing system for natural gas. Federal Energy Regulatory Commission Order 436 provides blanket approval for pipelines that choose to become common carriers transporting gas intrastate. FERC Order 451 deregulates the wellhead, and FERC Order 490 authorizes producers, pipelines, and others to terminate gas sales or purchases without seeking prior FERC approval. As a result of these orders, more than 75% of gas sales are conducted through the spot market, and unprecedented market volatility exists.
    July 1985
  • Houston Natural Gas, run by Kenneth Lay merges with InterNorth, a natural gas company in Omaha, Nebraska, to form an interstate and intrastate natural gas pipeline with approximately of pipeline.
    November 1985
  • Lay is appointed chairman and chief executive of the combined company. The company chooses the name Enron.
    1986
  • Company moves headquarters to Houston, where Ken Lay lives. Enron is both a natural gas and oil company.
  • Enron's vision: To become the premier natural gas pipeline in America.
    1987
  • Enron Oil, Enron's petroleum marketing operation, reports a loss of $85 million in 8-K filings. True loss of $142–190 million is concealed until 1993. Two top Enron Oil executives in Valhalla, New York, plead guilty to charges of fraud and filing false tax returns. One serves time in prison.
    1988
  • The company's major strategy shift – to pursue unregulated markets in addition to its regulated pipeline business – is decided in a gathering that became known as the Come to Jesus meeting.
  • Enron enters the UK energy market following the privatization of the electricity industry there. It becomes the first U.S. company to construct a power plant, Teesside Power Station, in Great Britain.
    1989
  • Enron launches Gas Bank, later run by CEO Jeff Skilling in 1990, which allows gas producers and wholesale buyers to purchase gas supplies and hedge the price risk at the same time.
  • Enron begins offering financing to oil and gas producers.
  • Transwestern Pipeline Company, owned by Enron at that time, is the first merchant pipeline in the US to stop selling gas and become a transportation-only pipeline.
    1990
  • Enron launches plan to expand US natural gas business abroad.
  • Enron becomes a natural gas market maker. Begins trading futures and options on the New York Mercantile Exchange and over-the-counter market using financial instruments such as swaps and options.
  • Ken Lay and Rich Kinder hire Jeff Skilling from McKinsey & Company to become CEO of Enron Gas Services, Enron's "Gas Bank". Enron Gas Services eventually morphs into Enron Capital and Trade Resources.
  • Jeff Skilling hires Andrew Fastow from the banking industry; he starts as account director and quickly rises within the ranks of ECT.