Brief History. ~ Kashif Chaudry ~ Jon Cram ~ Ellena Andoniou

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1 ~ Kashif Chaudry ~ Jon Cram ~ Ellena Andoniou Brief History 1985 Houston Natural Gas merges with InterNorth based in Omaha, Nebraska 1987 Oil traders in New York overextended the company's accounts by almost $1 billion. This lead to the development of a myriad of services 1988 Opened its first overseas offices in England to take advantage of the country's privatized power industry 1989 Jeffrey Skilling joined the company and Enron launches its Gas Bank 1992 Enron acquired Transportadora de Gas del Sur, Enron's first pipeline presence in South America and the start of a push to expand on the continent 1997 Enron Energy Services was formed to provide energy management services to commercial and industrial customers 1999 Enron formed its broadband services unit The first phase of the Dabhol project began operating After an early rise, shares fell sharply as the year went on and the problems facing the company became apparent Enron Online, the company's commodity trading Internet site, was formed. It quickly became the largest e-business site in the world 2000 Energy Financial Group ranked Enron the sixth-largest energy company in the world Enron and strategic investors, IBM and America Online, launched The New Power Co. to provide electric service in a deregulated market 2001 In October, Enron released third-quarter earnings, with $1.01 billion in charges, including $35 million related to investment partnerships The Securities and Exchange Commission launched a formal investigation into the partnerships 1

2 Core Business Units Enron divides its business into three main areas: Enron Wholesale Services Enron Energy Services Enron's Global Assets Whole Sale Services Enron Wholesale Services- encompasses Enron's global wholesale businesses, and is divided into four business units. Enron Americas Enron Europe Enron Global Markets Enron Net Works Energy Services Enron Energy Services - the retail arm of Enron, offers companies a way to develop and execute their energy strategies. Global Assets Enron Transportation Services oversees Enron's regulated, interstate natural gas pipelines Portland General International Central America and the Caribbean South America Dominican Republic Puerto Plata Power Project Guatemala Puerto Quetzal Power Project Nicaragua Margarita II Panama Bahia Las Minas (BLM) Puerto Rico EcoElectrica Argentina Transportadora de Gas del Sur (TGS) Modesto Maranzana Power Plant Bolivia The Bolivia-to-Brazil pipeline TRANSREDES Brazil Cuiaba Integrated Project ("Cuiaba Project") CEG/CEGRio: Elektro Electricidade e Servicos S.A. - Brazil's sixth-largest electricity distributor. 2

3 Colombia Centragas pipeline Promigas Venezuela Vengas Compania Anonima Luz y Fuerza Electricas de Puerto Cabello (CALIFE) Interruptores Especializados Lara (INESLA) Accroven Europe Italy Sarlux Power Project Poland Nowa Sarzyna power plant Turkey Trakya Power Project Asia Pacific: People's Republic of China Chengdu Cogen Project Guam Northern Marianas Power Project India The Dabhol Power Project Philippines Batangas Power Project South Korea Gas Distribution and Liquefied Petroleum Gas (LPG) Marketing What Went Wrong? Enron s Downfall Enron in 2000 By 2000, Enron was ranked the 22 nd largest company in the world & 7 th in the USA (Forbes) Stock worth $90.56/share Enron had gone global with assets across the globe Expansion globally lead to Enron accumulating more debt than they could service What would be done to service such a debt? Answer: create partnerships using complex accounting practices Partnerships An Enron asset, which had potential, lost money and mounting debt cut into the companies bottom line and hindered their credit rating Lower credit ratings would cost more for Enron to borrow and minimize expansion Enron would then would look for an investor who would be able to buy at least 3% of that asset The investor received a bank loan to buy the rest using Enron stock as collateral which are falsely valued at the time 3

4 Partnerships (cont d) Limited Partnership was then formed between Enron and the investor (legal) Partnerships were also formed between Enron s board of directors and Enron itself However, these directors did not invest 3% (which they had claimed) rendering an illegally formed limited partnership Partnerships (cont d) October 16, 2001: Enron s stock crashed due to a slip in the economy which caused a limited partner to default on their bank loan Bank threatened to seize Enron s stock as collateral - $560 million worth Investors began to lose faith in the company leading to the stock falling even more Partners were in need of the stock to pay off debts but stock diluted (minimal worth) Partnerships collapsed as they are unable to pay loans Corruption? Oh oh!! $60 billion debt for Enron!! As Enron s stock fell during the recession, several company executives began selling shares Kenneth Lay (founder) sold 627,000 shares in 8 months Skilling unexpectedly resigned as CEO Investors: Something s wrong, lose confidence in Enron Corruption During late October, Enron s worth drops $1.7 billion in a matter of days On October 17, Enron freezes their employee s stock heavy 401k plans: a savings/retirement plan in which employees were encouraged to invest in and buy Enron stock Result: workers lost up to hundreds of thousands of dollars and basically all of their savings The day before Enron declared bankruptcy, bonus checks over $55 million were written to company executives on top of another $50 million bonuses written a few weeks earlier Corruption 4

5 Dabhol, India- Business Case Study Largest development project, and foreign direct investment in India s history Project begun in 1992, in Maharashtra state, and was scheduled to open in 1997, supplying one fifth of new energy needed by India The plant was to be the largest electricity generating plant in the world, and was estimated to cost $3 billion The plant was a joint venture of three U.S. companies: Enron Corporation, General Electric, and the Bechtel Corporation Enron was responsible for developing and operating the plant, Bechtel was to design and construct it; GE was to supply the equipment From the outset the project was criticized for lacking transparency, lacking economic feasibility due to high costs, potential environmental impacts and human rights violations The project, from the outset, was also mired amidst great controversy as Enron and corrupt Indian officials rush the project through Enron filed for Chapter 11: Bankruptcy on December 2, 2001 The Indian government, GE and Bechtel are scrambling to find buyers to rescue the project and limit the millions in losses they have already incurred Phase I of the two part project started operating May 1999 despite international, national and local concerns, tensions flare In June of 2001, the project about 90 percent complete came to a grinding halt, because of poor business practices and environmental as well as human rights concerns. Dabhol has turned into a rusting ghost town Why Did the Project Fail? The project failed in part due to Enron s bankruptcy but also because of: unsavory business practices-enron secured an agreement with the government of the Indian state of Maharashtra to build the plant with no competitive bidding and on terms that were completely one-sided. the MSEB was obligated to buy power from the Dabhol power plant at full capacity charges, which were triple the amount a locally owned power plant charged, the MSEB and the government were going broke just by purchasing power from Enron by the end of June 2000, MSEB owed DPC $50 mn, and debt was increasing as the price for a unit of electricity soared to 7.80 Rs by January 2001, less than a year after the plant first supplied energy, MSEB was in arrears and Enron invoked a central government guarantee to clear outstanding bills for $17 mn and then threatened to cash another guarantee for $33 mn (this was the first time ever that a foreign power had invoked a guarantee) eventually the MSEB terminated its contract to buy power from DPC Enron succeeded in bankrupting the state electricity board, from whom consumers directly bought power 5

6 Does Enron Still Exist? Restructuring The future of Enron Preventative Measures Restructuring Enron Enron is still located in Houston Texas Stephen Cooper has been brought in to rescue Enron, and reorganize the companies holdings, making it a smaller, but much stronger company Cooper plans to bring the company out of bankruptcy by selling $ 11 bn in pipelines, returning to old fashion business principles, and focusing on supplying energy to the public Cooper also plans to pay most creditors about one-fifth of about $66.4 billion they are owed in cash and stock Chapter 11 Bankruptcy has permitted Enron to restructure itself while it is enjoys protection from creditors Part of their new strategy involves selling off its global assets The company intends to focus on energy infrastructure, transportation, distribution, generation and production of natural gas as well as electricity in North and South America Enron will emerge as two independent companies with different names. The domestic company-crosscountry Energy Corporation will be comprised of three North American natural gas pipelines. The second-prisma Energy International Incorporated will be comprised of international pipelines and power operations in South America Enron sold its trading arm to Swiss investment bank UBS Warburg, which bought Enron s trading desk for $1 and a share of potential profits for the next 10 years and depending on Warburg s success Enron may potentially gain between $40 million and $3 billion The Future of Enron Uncertainty surrounding Enron and its future still looms However, Enron s stock will be cancelled and the two emerging companies will have independent entities and their stock will be sold on the New York Stock Exchange The future of CrossCountry Energy Corporation appears to be the more stable and robust of the two new companies. Prisma Energy International Incorporated is a much weaker entity and much uncertainty surrounding its performance exists Preventative Measures Many policy makers fear that increased restrictions may be counterproductive, however they agree that the system needs to be repaired and have made several very general proposals: Accounting rules need to be tightened especially for special purpose entities Greater auditor independence, and strengthening company audits to ensure integrity Barring chief executives from holding chairmanships simultaneously Buyer/investor beware 6

7 Bar auditor conflicts auditors should not be permitted to act as internal and external auditors Increase disclosure the public should be entitled to information regarding financial relationships of executives and board members particularly of publicly traded companies Tighten Ethics Rules companies should tighten ethics rules by keeping some information confidential Set New Standards methods to protect independent and small investors create a fund which reimburses shareholders who fall victim to corporate dishonesty increased regulation of the energy futures trading business Conclusion Enron was a corporation that had much potential. It was a truly global company, extending beyond national boundaries, but due to unethical business practices and a shortsighted management team, Enron quickly became one of the largest bankruptcy cases in the world. Enron attempted to become too much too fast 7