Enron Ascending: The Forgotten Years, 1984-1996

833 Pages·21.748 MB·English

by  Bradley, Robert L

Contents
Cover
Title page
Copyright page
Dedication
Preface
Acknowledgments
Introduction: The Process of Enron
Contra-Capitalism
Chairman Lay
Earnings Issues
Corporate Masks
Government Opportunity and Dependence
Achievements (in Political Space)
Contra-Capitalist Enron
Lessons for History
Part I: From HNG to Enron: 1984–1987
Chapter 1: The New Houston Natural Gas
A New Company
Back to Gas
New Talent
Acquisitions
Divestitures
Momentum—and Debt
Into 1985
A Final Piece?
Chapter 2: HNG/InterNorth
Northern Natural Gas Company
A Marketing Pipeline
Prelude to a Merger
HNG/InterNorth
Buyer’s Remorse
A Postmerger Stumble
Getting Together
Ken Lay Takes Charge
Competitive Pipelining
Positioning for the Future
A New Name
Chapter 3: Foundations
A New Home
The New Team
Enduring 1986
Brightening 1987
Conclusion
Part II: Peril and Progress: 1987–1989
Chapter 4: Crisis at Enron Oil Corporation: 1987
Sirens and Denial (Valhalla 1)
Crisis and Cleanup (Valhalla 2)
Lesson Unlearned
Chapter 5: Recovery: 1988–1989
Managerial Depth and Change
Repositioning EOG
Recommitting to Cogeneration
Pipeline Entrepreneurship
Capturing Gas Marketing
Liquid Fuels: Profitable Incrementalism
Getting Political
Vision Accomplished
Part III: Natural Gas, Natural Politics: 1990–1993
Chapter 6: Natural Gas Majoring
A New Vision
Growing the Interstates
Going International
Enron Power
Enron Oil & Gas Company
Liquids
Corporate Culture
Conclusion
Chapter 7: Political Lay
Mr. Natural Gas
Talking Up Prices
Fighting Oil
Warring Against Coal
Getting Gas to Green
Getting Bush to Rio
From Bush to Clinton-Gore
Environmental Enron
Politicking Elsewhere
An Energy Philosopher?
Part IV: Jeff Skilling
Chapter 8: Gas Marketing: 1990–1991
Regulatory Change, New Markets
Enron Gas Marketing: 1990
Enron Gas Services Group: 1991
Mark-to-Market Accounting
Conclusion
Chapter 9: Expanding Gas Marketing: 1992–1993
Enron Gas Services: 1992
Enron Gas Services: 1993
Regulatory Issues
Competition and Pressure
Part V: Expanding Enron: 1994–1996
Chapter 10: The Steady Side
Interstate Pipeline Progress
Enron Oil & Gas Company
Enron Oil Transportation & Trading (EOTT)
Conclusion
Chapter 11: Enron Capital & Trade Resources
New Name, Organizational Change
Wholesale Electricity Marketing
International
Risk Management, Corporate Culture
Talent Evaluation and Infusions
Conclusion
Chapter 12: International Ambitions
Early Successes
Developing Problems
Unfulfilled Aspirations
Enron Global Power & Pipelines
Enron Engineering & Construction
Conclusion
Part VI: Restless Enron: 1994–1996
Chapter 13: Alternative Energies
Big Thoughts, New Bets
Solar Power
Wind Power
A Try at Fuel Cells
Enron Environmental Services
President’s Council on Sustainable Development
Conclusion
Chapter 14: Visionary Enron
New Enron Visions
New-Economy Enron (Gary Hamel)
Great Man, Great Company
Conclusion
Chapter 15: Energy Retailing
Natural Gas
Electricity
Pilot Programs
Enron Energy Services
Conclusion
Epilogue: Dangerous Ambitions
Three Eras
Circa 1996
A Changing Company
Righting Misinterpretations
Contra-Capitalist Enron
Final Thoughts
Kenneth L. Lay: A Chronology
Selected Bibliography
Illustration Credits
Name Index
Business Index
Political Economy Index
End User License Agreement
List of Illustrations
Chapter 1
Figure I.1 Enron’s nominally strong board of directors had too much allegiance to Ken
Lay, in part because of Enron’s largesse toward them. John Duncan, executive chairman
from beginning to end, was particularly smitten with Enron’s and Lay’s apparent
success.
Figure I.2 Enron’s annual reports were all business in the early years, such as 1986
and 1987. Themed reports in 1992 and 1993 fashioned Enron as a natural gas company
with global reach. Enron’s 1996 report highlighted the new logo with the company’s
plan to retail gas and electricity to homes and businesses.
Figure I.3 Enron quietly but decisively entered the coal business in 1997, first in
trading and then in asset acquisition to enhance trading. The coal unit was a welcome
new profit center on the wholesale side of ECT.
Figure I.4 Enron’s asset-light and green-energy strategies, as well as virtually all its
profit centers, were dependent on special government favor. A politically connected,
politically correct Ken Lay was the common denominator of Enron’s public-sector
activism.
Figure I.5 Enron doubled its original market valuation by the early 1990s (shown in
billions of dollars), and doubled it again in the mid-1990s. Increasing earnings,
accelerated by mark-to-market accounting, as well as Ken Lay’s stature and messaging,
made ENE a momentum stock with a high price/earnings ratio.
Figure I.6 Enron Outlook for Natural Gas, first published in 1989, and updated
periodically, portrayed the resource base as prolific and open-ended. More than
rebutting supply pessimism from other studies, the Outlook challenged electric utilities
to build gas plants in place of new coal capacity.
Figure I.7 Enron’s practice of contra-capitalism involved not only government
intervention but also habits of mind that classical-liberal thinkers long criticized and
warned against.
Chapter 1
Figure 1.1 Ken Lay’s first annual report as CEO of Houston Natural Gas announced a
return to the company’s core. The strategy, adopted from In Search of Excellence, was
about incremental improvement, not revolutionary change.
Figure 1.2 Ken Lay’s first management team at Houston Natural Gas (bottom, left to
right) was led by James Walzel (President and COO) and Mick Seidl (SVP, corporate
development). The two major divisions were run by Melvin Sweatman (President,
HNG Intrastate) and Ted Collins (President, HNG Oil Company).
Figure 1.3 Transwestern Pipeline Company, built in 1959 to connect gas supplies in
New Mexico and Texas to southern California, was acquired by HNG in 1984. The
system’s 4,434-mile mainline and 18 mainline compressor stations, moving 750
MMcf/d to California and 250 MMcf/d to Oklahoma, would prove very profitable for
its new parent in the years ahead.
Figure 1.4 Florida Gas Transmission, completed in 1959, was part of Ken Lay’s first
corporate stop after leaving the Department of Interior in 1973. Succeeding Lay as head
of FGT was William Morgan (far right), who would join HNG after the merger. Not
expanded since 1970, FGT would triple in capacity with four expansions during
Enron’s solvent life.
Figure 1.5 Houston Natural Gas returned to its core by divesting its industrial gas,
coal, and marine assets and purchasing two interstate pipelines and one small
intrastate. The makeover more than doubled the debt-to-capital ratio in Ken Lay’s first
eight months at the company with purchases outdistancing sales by almost two-to-one.
Figure 1.6 Ken Lay’s profile in the New York Times added to his reputation as an
industry visionary. As a former economics professor (as mentioned in the article), Dr.
Lay had gravitas beyond the usual business CEO.
Chapter 2
Figure 2.1 Northern Natural Gas Company began as a gas pipeline and distribution
company and later diversified into exploration and production, gas liquids, and
petrochemicals. In 1951, the company consolidated its operations at 2223 Dodge Street
in Omaha. The company’s longest-serving presidents (top to bottom) were Burt Bay
(1939–50), John Merriam (1950–60), and Bill Strauss (1960–76).
Figure 2.2 InterNorth was a rock-solid, mid-America company centered on natural gas
transmission. In 1984–85, CEO Sam Segnar (upper right) instructed Rocky LoChiano
(lower right) to find a merger partner before Irwin Jacobs (left) could gain control and
break up the company.
Figure 2.3 The dual corporate communications and public affairs departments went
into high gear to meld two corporate cultures and improve morale. The tag line
America’s Premier Energy Company would soon be forgotten with what was to come
for the balance of 1985 and in 1986.
Figure 2.4 A mid-1985 meeting of top gas executives from HNG and InterNorth formed
an opening strategy for the new company’s intrastate and interstate grid, including the
formation of a national marketing company.
Figure 2.5 Ideas have consequences. The advent of MOA for interstate natural gas
pipelines was championed by a young FERC Commissioner, Oliver “Rick” Richard,
who credits the 1984 book shown above for his inspiration and direction. Richard
would go on to become CEO of Enron’s Northern Natural Gas in 1988.
Figure 2.6 In just under 10 months, HNG/InterNorth president and COO Ken Lay
became chairman, president, and CEO. “The present business climate provides no
margin for error,” Lay sternly stated on the opening page of the 1985 Annual Report,
but his penchant for overspending and going first class belied his prudent words.
Chapter 3
Figure 3.1 The Enron Building (upper right) was a big step up from the HNG Building
and a world apart from Ken Lay’s childhood in Rush Hill, Missouri. The challenges of
1986 brought out some criticism of Ken Lay, including an article in Business Week
(upper left).
Figure 3.2 The Houston Chronicle documented the management changes at
HNG/InterNorth compared to the year before. Only 1 of 5 senior executives and 6 of 17
board directors had come from InterNorth. Meanwhile, HNG’s senior management
prior to Ken Lay’s arrival had all but departed.
Figure 3.3 More than $1.3 billion in asset sales in 18 months after the HNG and
InterNorth merger left Enron’s debt-to-capital ratio little changed, given other
developments. Not until 1992 did this ratio fall below 50 percent, still above where the
two companies were on a consolidated basis at year-end 1984.
Figure 3.4 Attempts by Mick Seidl and Ken Lay (lower left) to integrate Enron’s four
pipelines into one synergistic system were limited by federal regulation. Enron’s senior
natural gas management included (top right, left to right) Jim Rogers (interstate
pipelines); Gerald Bennett (intrastate operations); and Ron Burns, John Esslinger, and
Claude Mullendore (national marketing).
Figure 3.5 HNG Interstate, composed of Transwestern Pipeline and Florida Gas
Transmission, expertly navigated a changing regulatory landscape. Stan Horton and
Rod HaysIett came with the Florida Gas purchase; the other five joined HNG after Ken
Lay took over in mid-1984.
Figure 3.6 Enron Oil & Gas received new leadership in 1987 with Forrest Hoglund,
Ken Lay’s most rewarding hire. Hoglund is shown in 1977 upon joining Texas Oil &
Gas and in 1989 with the top Enron brass at the New York Stock Exchange when EOG
went public.
Figure 3.7 FERC’s open-access regulation led interstate pipelines, including Enron’s,
to leave the bundled sales and transportation function. Independent marketers assumed
the buy/sell commodity function, leaving the interstates as pure transporters. This
created two profit centers for Enron where there had been only one before.
Chapter 4
Figure 4.1 Head of Enron Liquid Fuels, Mike Muckleroy (upper left) futilely blew the
whistle on Enron Oil Company’s Lou Borget (lower left). Muckleroy cleaned up
Borget’s mess, a fiasco that was not fully appreciated until after Enron’s bankruptcy in
late 2001.
Figure 4.2 The PURPA-driven cogeneration work of John Wing (center) was a much-
needed profit generator for Enron in the in the mid-to-late 1980s. Enron’s other two top
cogen developers were Wing lieutenant Robert Kelly (upper right) and, from the
InterNorth side, Howard Hawks (upper left), who would leave Enron in 1987 to found
his own company, Tenaska.
Chapter 5
Figure 5.1 Financing with high-yield bonds (junk bonds) proved crucial for Ken Lay
from the time of the HNG/InterNorth merger in 1985 through project financings in
1989, when Michael Milken was indicted for securities violations. Drexel Burnham
Lambert filed for bankruptcy protection in 1990.
Figure 5.2 Enron Oil & Gas, advertised as “America’s Pure Natural Gas Play,”
launched an October 1989 public offering that valued the company at $1.6 billion.
Forrest Hoglund, chairman and chief executive officer, was off to a very fast start in a
low-price environment.
Figure 5.3 Bayonne Cogeneration Plant in New Jersey was the inaugural project of
Robert McNair’s Cogen Technologies. A decade later, Bayonne and two neighboring
CTI plants would be sold to Enron for $1.1 billion and debt assumption, enabling
McNair to found an NFL franchise, the Houston Texans.
Figure 5.4 After much turmoil, Ken Lay had a top team in place by 1989 to manage
Enron’s North American gas assets. Under himself and Rich Kinder (the new vice
chairman and soon president) were (lower, left to right) Ron Burns, who oversaw
interstate pipelines and marketing; Forrest Hoglund, for exploration and production;
Mike Muckleroy, running liquids; and John Wing, handling cogeneration.
Chapter 6
Figure 6.1 Enron’s 41,000-mile, 7.8 Bcf/d gas-pipeline systems were (as of 1996)
limited synergistically under federal open-access regulation. Northern Natural’s
capacity exceeded the combined size of Enron’s (wholly owned) Transwestern
Pipeline, (half-owned) Florida Gas Transmission, and (35 percent owned) Northern
Border Pipeline.
Figure 6.2 Ken Lay put Enron at the forefront of the 16th Economic Summit of
Industrialized Nations, held in Houston, Texas, in mid-1990.
Figure 6.3 It was all smiles with the completion of the world’s largest cogeneration
plant in Teesside, on April 1, 1993. Ken Lay and Tom White (center) join together with
other principals of the UK project.
Figure 6.4 Transportadora de Gas del Sur (TGS) was a second major international
step toward Ken Lay’s vision of Enron’s becoming the world’s first natural gas major.
George Wasaff, in particular, brought best practices from Enron’s US interstates to
Argentina between 1993 and 1998.
Figure 6.5 A 1993 issue of Enron Business was full of photo-ops on Enron’s early
agreements with Russian and Chinese officials, but little activity would follow these
heady beginnings.
Figure 6.6 The Dabhol, India, project of Rebecca Mark was a bold attempt to replicate
Teesside in an undeveloped country. Contracts were completed and construction
commenced in 1993, but political problems would soon engulf the project to leave
Enron and its partners with a nonperforming, in-construction project.
Figure 6.7 New technology was necessary to increase natural-gas production in a low-
price environment. Technologies such as 2-D and 3-D seismic and forays into
fractionation and horizontal drilling were used at EOG in the early 1990s.
Figure 6.8 Enron’s big bet to enter into the reformulated-gasoline market concerned the
natural gas–derived oxygenate, MTBE. This foray went south quickly, when the
demand expected to emanate from new federal environmental standards pursuant to the
Clean Air Act of 1990 failed to materialize.
Figure 6.9 Ken Lay liked to celebrate Enron’s success, such as awarding each full-time
employee a $50 bill and when paying off the ESOP bank loan to allow stock dividends
to go straight to employee ENE holders.
Chapter 7
Figure 7.1 Enron continually educated energy constituencies about the environmental
advantages of natural gas under current technology. This summary from a company
brochure (circa 1995) showed the emission reductions of a similarly sized gas plant
versus coal plant in six relevant categories.
Figure 7.2 With strong arguments developed in part by fellow PhD economist Bruce
Stram (pictured), Ken Lay challenged electric generators to choose natural gas instead
of coal for new capacity. Less rent-seeking than moral suasion, Enron’s Natural Gas