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~ Kashif Chaudry

Brief History
~ Jon Cram
~ Ellena Andoniou 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 1992
• Opened its first overseas offices in England to • Enron acquired Transportadora de Gas del
take advantage of the country's privatized Sur, Enron's first pipeline presence in South
power industry America and the start of a push to expand on
1989 the continent
• Jeffrey Skilling joined the company and 1997
Enron launches its Gas Bank • Enron Energy Services was formed to provide
energy management services to commercial
and industrial customers

1999 2000
• Enron formed its broadband services unit Energy Financial Group ranked Enron the sixth-largest energy
company in the world
• The first phase of the Dabhol project began operating • Enron and strategic investors, IBM and America Online,
• After an early rise, shares fell sharply as the year launched The New Power Co. to provide electric service in a
deregulated market
went on and the problems facing the company
2001
became apparent
• In October, Enron released third-quarter earnings, with $1.01
• Enron Online, the company's commodity trading billion in charges, including $35 million related to investment
Internet site, was formed. It quickly became the partnerships
largest e-business site in the world • The Securities and Exchange Commission launched a formal
investigation into the partnerships

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Core Business Units Whole Sale Services
Enron divides its business into three main Enron Wholesale Services- encompasses
areas: Enron's global wholesale businesses, and is
• Enron Wholesale Services divided into four business units.
• Enron Energy Services • Enron Americas
• Enron's Global Assets • Enron Europe
• Enron Global Markets
• Enron Net Works

Energy Services Global Assets


Enron Energy Services - the retail arm of
Enron, offers companies a way to develop and Enron Transportation Services
execute their energy strategies. • oversees Enron's regulated, interstate natural
gas pipelines
Portland General
International

Central America and the Caribbean South America

Dominican Republic Argentina


• Puerto Plata Power Project • Transportadora de Gas del Sur (TGS)
Guatemala • Modesto Maranzana Power Plant
Bolivia
• Puerto Quetzal Power Project
• The Bolivia-to-Brazil pipeline
Nicaragua
• TRANSREDES
• Margarita II Brazil
Panama • Cuiaba Integrated Project ("Cuiaba Project")
• Bahia Las Minas (BLM) • CEG/CEGRio:
Puerto Rico • Elektro Electricidade e Servicos S.A. - Brazil's sixth-largest
• EcoElectrica electricity distributor.

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Europe
Colombia Italy
• Centragas pipeline • Sarlux Power Project
• Promigas
Poland
Venezuela
• Vengas • Nowa Sarzyna power plant
• Compania Anonima Luz y Fuerza Electricas de Turkey
Puerto Cabello (CALIFE)
• Interruptores Especializados Lara (INESLA) • Trakya Power Project
• Accroven

Asia Pacific:
What Went Wrong?
People's Republic of China Enron’s Downfall
• 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

Enron in 2000 Partnerships


• By 2000, Enron was ranked the 22nd
largest
company in the world & 7th in the USA (Forbes) • An Enron asset, which had potential, lost money and
mounting debt cut into the companies bottom line and
• Stock worth $90.56/share hindered their credit rating
• Enron had gone global with assets across the globe • Lower credit ratings would cost more for Enron to
• Expansion globally lead to Enron accumulating borrow and minimize expansion
more debt than they could service • Enron would then would look for an investor who
would be able to buy at least 3% of that asset
• What would be done to service such a debt? • The investor received a bank loan to buy the rest
• Answer: create partnerships using complex using Enron stock as collateral which are falsely
accounting practices valued at the time

3
Partnerships (cont’d) Partnerships (cont’d)
• Limited Partnership was then formed between • October 16, 2001: Enron’s stock crashed due to a slip
in the economy which caused a limited partner to
Enron and the investor (legal) default on their bank loan
• “Partnerships” were also formed between • Bank threatened to seize Enron’s stock as collateral -
Enron’s board of directors and Enron itself $560 million worth
• However, these directors did not invest 3% • Investors began to lose faith in the company leading
to the stock falling even more
(which they had claimed) rendering an
• Partners were in need of the stock to pay off debts but
illegally formed limited partnership stock diluted (minimal worth)
• Partnerships collapsed as they are unable to pay loans

Corruption?
• As Enron’s stock fell during the recession,
several company executives began selling
shares
Oh oh!! • Kenneth Lay (founder) sold 627,000 shares in
8 months
$60 billion debt for Enron!! • Skilling unexpectedly resigned as CEO
• Investors: “Something’s wrong…”, lose
confidence in Enron

Corruption 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

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Dabhol, India- Business • Largest development project, and foreign direct investment in
India’s history
Case Study
• 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 • Enron filed for Chapter 11: Bankruptcy on December 2,
transparency, lacking economic feasibility due to high 2001
costs, potential environmental impacts and human rights
• The Indian government, GE and Bechtel are scrambling to
violations
find buyers to rescue the project and limit the millions in
losses they have already incurred
• The project, from the outset, was also mired amidst great
controversy as Enron and corrupt Indian officials rush the
project through

• 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? • 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
The project failed in part due to Enron’s bankruptcy but also because of:
• by January 2001, less than a year after the plant first
• unsavory business practices-Enron secured an agreement with supplied energy, MSEB was in arrears and Enron
the government of the Indian state of Maharashtra to build the invoked a central government guarantee to clear
plant with no competitive bidding and on terms that were outstanding bills for $17 mn and then threatened to cash
completely one-sided. another guarantee for $33 mn (this was the first time
ever that a foreign power had invoked a guarantee)

• the MSEB was obligated to buy power from the Dabhol power • eventually the MSEB terminated its contract to buy
plant at full capacity charges, which were triple the amount a power from DPC
locally owned power plant charged, the MSEB and the
government were going broke just by purchasing power from
Enron
Enron succeeded in bankrupting the state electricity board,
from whom consumers directly bought power

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Does Enron Still Exist? Restructuring Enron
• Restructuring • Enron is still located in Houston Texas
• The future of Enron
• Stephen Cooper has been brought in to rescue Enron, and
• Preventative Measures 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, • Enron sold its trading arm to Swiss
transportation, distribution, generation and production of
natural gas as well as electricity in North and South investment bank UBS Warburg, which
America bought Enron’s trading desk for $1 and a
• Enron will emerge as two independent companies with share of potential profits for the next 10
different names. The domestic company-CrossCountry years and depending on Warburg’s success
Energy Corporation will be comprised of three North
American natural gas pipelines. The second-Prisma Enron may potentially gain between $40
Energy International Incorporated will be comprised of million and $3 billion
international pipelines and power operations in South
America

The Future of Enron Preventative Measures


• Many policy makers fear that increased restrictions may be
• Uncertainty surrounding Enron and its future still looms counterproductive, however they agree that the system needs to
be repaired and have made several very general proposals:
• However, Enron’s stock will be cancelled and the two emerging
companies will have independent entities and their stock will be sold • Accounting rules need to be tightened especially for
on the New York Stock Exchange ‘special purpose entities’
• Greater auditor independence, and strengthening
• The future of CrossCountry Energy Corporation appears to be the company audits to ensure integrity
more stable and robust of the two new companies. Prisma Energy • Barring chief executives from holding chairmanships
International Incorporated is a much weaker entity and much simultaneously
uncertainty surrounding its performance exists • Buyer/investor beware

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