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July 26, 2004

What Happened at Enron?

The tragic consequences of the related-party transactions and accounting errors were the result
of failures at many levels and by many people: a flawed idea, self-enrichment by employees,
inadequately designed controls, poor implementation, inattentive oversight, simple (and not so
simple) accounting mistakes, and overreaching in a culture that appears to have encouraged
pushing the limits. Our review indicates that many of these consequences could and should have
been avoided.
“Report of Investigation: Special Investigative Committee of the Board of Directors of
Enron Corporation,” Board of Directors, Enron, February 1, 2002, pp. 27-28.

What I can tell you straight up front is that life hasn’t been the same ever since the collapse.
Working at Enron was like dope. You couldn’t get enough of it. You’re surrounded by talent,
money is good, lavish expense accounts, and you’re all on a race against a snowball called
MTM—aka, the accounting magic called mark-to-market! Pretty exciting, huh? Well, not if
you were one of the thousands who ‘doubled or nothing’ their 401Ks on Enron... how’s that for
starters? I see the corporate world and life under a whole different light now. Unfortunately, I
see Enrons everywhere. They are just not as good, and are probably still around because they are
not as greedy as Skilling, Fastow and Lay.
Former Enron Employee

I do feel sadness and a sense of responsibility for the shareholders, but equity is called “equity” for
a reason.
Rebecca Mark-Jusbasche, Fast Company, September 2003, p. 78.

On December 2, 2001, Enron Corporation filed for bankruptcy protection under Chapter 11. One of
the most highly publicized business debacles in history, settlements, criminal charges, civil charges, and
workouts will continue for years. But outside of the courts and sensational press, what really happened?
What caused the collapse of what at one time was the sixth largest company in the United States? In the
following pages we explore the Enron story—its business and business model, its leadership and leader-
ship values, and its culture—in an attempt to not only answer the question of what happened, but what
may be learned from this failure.

Ken Lay and Enron Corporation

Although a cast of characters were involved in the Enron passion play, one person stands out as the
thread which binds all others together throughout Enron’s rise and fall—Kenneth L. Lay. A small-town
Missouri boy who wanted out, Lay earned his BA and MA in economics at the University of Missouri.
After short spells at Humble Oil in Houston and in the U.S. Navy, where he found his way to the
Pentagon, Lay returned to Houston where he earned his PhD in economics at night at the University of
Houston. He then returned to government service, first at the Federal Energy Regulatory Commission
(FERC), then the Department of the Interior. Throughout his time in Washington, Lay focused on
what he believed to be the inevitable movement towards deregulation of the U.S. energy sector. And he
believed vociferously in its correctness.

Copyright © 2004 Thunderbird, The Garvin School of International Management. All rights reserved. This case was
prepared by Professor Michael H. Moffett for the purpose of classroom discussion only, and not to indicate either effective
or ineffective management.
 After only 18 months in Washington, however, Lay joined Florida Gas in 1973 as Vice President
for Corporate Planning, rising to President of the pipeline division in 1976, and finally to the Presi-
dency itself in 1979. Two years later, Ken Lay moved to Transco Energy in Houston, and from there to
Houston Natural Gas. There, at the age of 42, Ken Lay became the Chief Executive Officer in June
1984. At Houston Natural Gas, Lay began executing the strategy which he would pursue above all
others for the next 17 years—get big fast.

Enron was created in 1985 when InterNorth of Omaha acquired Houston Natural Gas.1 The
combination created the single largest operator of gas pipelines in the United States. Kenneth J. Lay was
named CEO of the combination in February 1986. The combined company was named Enron.2 Ken
Lay instantly became the fifth highest paid CEO in the United States. Working closely with his Chief
Operating Officer (COO), Rich Kinder, Ken Lay undertook a rapid growth strategy for the newly
created and named company.

Three events in Enron’s early years provide some insight into the emerging nature of the organiza-
tion. The three events were: (1) the organization’s response to an ethical crisis; (2) the interest in new
business development ideas sourced from outside consultants; and (3) the readiness of the organization
to use new financial reporting techniques as part of their commercial strategy. Each would have a lasting
impact.

Ethical Dilemma. One of the early tests for corporate leadership occurred in 1987 in Enron’s crude oil
trading operations located in Valhalla, New York.3 After it was discovered that several of the traders were
booking and settling falsified trades, Ken Lay reorganized the unit and altered its reporting structure.
Rich Kinder wanted it shut down, but Lay did not. Within months, the traders were once again out of
control, and losses were approaching $150 million. Two were eventually found guilty of fraud, and
Enron was able to manage the loss back to a mere $80 million.

Outside Influence. Ken Lay engaged McKinsey Consulting immediately following Enron’s formation
to evaluate the company’s strategy. The head of the McKinsey team was Jeffrey Skilling, a graduate of
Southern Methodist University’s School of Engineering and Harvard Business School (MBA ’79), and
by all opinions before and after—the smartest man in the room. McKinsey Consulting was widely con-
sidered the best and the brightest of the time, and among its many talents, Skilling stood out. Few
people had ever moved up faster at McKinsey, where Skilling made partner in five years and Director in
ten.4 By 1989, Jeff Skilling directed McKinsey’s global energy practices, and was in need of a new
challenge.

As early as 1985, Jeff Skilling had been amazed by what he considered the backwardness of the
natural gas industry. One of his earliest proposals to Enron had been to apply principles of market
making, commonly used in the financial sector, to natural gas. Although Enron’s Board had thought the
idea idiotic in 1985, Skilling was given the opportunity to realize his dream in 1989 by joining Enron
and creating a gas bank, a natural gas trading business. Skilling saw the company’s pipeline, which
connected producers and buyers, as a potential market maker. By being between the suppliers and
demanders, the firm was uniquely positioned to understand what gas was available from what sources at
which points in time. Enron could then use that information for trading purposes in understanding the
needs of buyers of natural gas. The company essentially created and operated its own futures market in
1
This case draws heavily on a multitude of books, articles, and reports, including The Smartest Guys in the
Room, by Bethany McLean and Peter Elkind, Portfolio/Penguin, 2003; Power Failure, by Mimi Swartz and
Sherron Watkins, Doubleday, 2003; Enron: The Rise and Fall, by Loren Fox, Wiley & Sons, 2003; Pipe
Dreams, by Robert Bryce, Public Affairs, 2002; “Report of Investigation: Special Investigative Committee of
the Board of Directors of Enron Corporation,” Board of Directors, Enron, February 1, 2002.
2
Enron was chosen after a failed first attempt to name the company Enteron, which was found at the last
minute to mean “alimentary canal; intestines.”
3
Power Failure, pp. 31–32.
4
One who did move as fast as Skilling at McKinsey was Lou Gerstner, who eventually took the reins of IBM.

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natural gas. In a natural gas market suffering a painful transition following deregulation as Ken Lay had
foreseen, Enron quickly expanded sales and profits by offering both buyers and sellers longer-term fixed
prices with little new investment in assets. This asset-light strategy became a centerpiece of Skilling’s
approach to expanding the business.

To be a player in this business, you just needed to understand the price of natural gas and the
concept of risk. In the coming years, Wall Street firms piled into the business, but Enron always
had a huge advantage. Its immense network of physical assets, its ability to tie all the moving
pieces together and provide physical delivery of the gas itself, and its long history in the gas
business gave it insights its Wall Street competitors could never match. These, alas, were lessons
Enron would one day forget.5

Financial Reporting. The third event which would create ripples within Enron for years to come was
Jeff Skilling’s insistence on the use of an accounting technique common to financial services, but un-
heard of in the energy industry—mark-to-market accounting (MTM). MTM would allow Enron to
recognize the sales and earnings on deals today, although most of the actual sales and profits and cash
flows would not actually occur until way into the future. Skilling had, in fact, told Ken Lay that he
would not join Enron unless he could employ MTM. Skilling successfully convinced both Ken Lay and
Rich Kinder, then COO of Enron, that MTM made sense if they were to build a trading business. After
some delay and deliberation, the Securities and Exchange Commission (SEC) approved the request in
January 1992.

Enron Capital and Trade Resources

Skilling began building his business and extending his influence immediately upon joining Enron in
1990. Originally termed Enron Finance, the unit was combined one year later with Enron Gas Market-
ing. This was a major development, as it provided an established and steady earnings base to buoy his
struggling unit. The following year, the business unit base was extended once again, this time with the
addition of the intrastate Houston pipeline business. The new combined unit was named Enron Capi-
tal and Trade Resources (ECT).

ECT occupied the 39th floor of the Enron building, and immediately became a subculture all its
own. Whereas the majority of Enron’s traditional employees were from the various engineering and
science fields related to natural gas and pipeline operations, ECT recruited primarily MBAs, who were
selected on the basis of their intellect and ambition. Skilling encouraged out-of-the-box thinking and
behavior, with the culture of the 39th floor often characterized as the “anti-Enron Enron.”

Interestingly, Skilling supported the development of a very loose culture, one which encouraged
risk-taking and deal-making, but simultaneously did not expect loyalty—only performance. Star trad-
ers like Lou Pai, famous for temperamental outbursts and a multitude of indiscretions such as taking
groups of employees during the workday to strip clubs, were rarely scolded but highly compensated.
Ken Lay and Jeff Skilling both became known as pushovers to prima donna traders or deal-makers who
demanded promotions, bonuses, and perks. Even the occasional disgruntled employee who did walk
was welcomed back to the firm, typically with promotions and bonuses.6

From the very beginning, however, Enron recruited the best and the brightest. The company
quickly gained a reputation as supporting and rewarding entrepreneurial thinking. In the words of a
former employee, “If you could show that something new and different could make money, you could

5
The Smartest Guys in the Room, p. 38.
6
Cliff Baxter was one of the very high-maintenance merger and acquisition prima donnas who was welcomed
back. Having quit and rejoined the firm a half-dozen times, Baxter left Enron for Koch Industries in 1995.
Baxter, after only weeks on the job with Koch, called Skilling asking to return. Once accepted back, Baxter
left Koch with no notice.

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do it.” The company’s loose culture translated into a distaste for bureaucracy and a corporate belief in
free markets.

Enron International
Although Rebecca Mark is typically associated with Enron International, it was John Wing who was
largely responsible for its early growth. Wing was the driving force behind the development of the
Teeside gas-fired cogeneration power plant in the United Kingdom which eventually went online in
1993. The Teeside project was the source of considerable profit in its early years, but eventually became
the source of significant losses. Enron had entered into a long-term take-or-pay contract for North Sea
gas from a newly developed “J-Block” in order to provide adequate feedstock for the cogen plant.
Unfortunately, Enron entered into a long-term price which was locked in when prices were at historical
highs. Finally, in 1997, Enron was able to negotiate a $450 million settlement payment to end its long-
term commitment to take-or-pay at astronomical rates the gas originating from J-Block.

Some of the post-Enron press has simplistically categorized Rebecca Mark’s and Jeff Skilling’s
approaches to business as being asset heavy and asset light, respectively. Both Mark and Skilling were
pursuing booked earnings—accounting earnings, because that was the criteria for success at Enron.
Although they achieved these ends differently (Mark via power projects and pipelines, Skilling by way
of trading activities and power sales), both were pursuing short-term recognition of financial results on
business lines which often required years of delivery and execution to actually create value.

Rebecca Pulliam, like Ken Lay, grew up on a Missouri farm. After graduating from Baylor Univer-
sity with a degree in psychology, she took an internship in juvenile counseling, but quickly found the
work did not fit her natural optimism. After finishing a Master’s degree in international management,
again at Baylor, she took a position with First City National Bank in Houston (ironically, where Jeff
Skilling spent several formative early years of his career). At First City, she met and married an Arthur
Andersen employee, Thomas Mark. In 1982, Rebecca Mark joined the Treasury group at Continental
Resources, a gas company in Houston, which was in turn acquired by Houston Natural Gas just prior
to its becoming a part of the newly created Enron. Within Enron, Mark went to work for John Wing.

As John Wing’s protégée, Rebecca Mark learned the business inside out. While under Wing’s
tutelage, Mark returned to school, earning her Harvard MBA while still working full time for Enron on
Teeside and related deals. Contrary to her expectations, however, when John Wing left Enron in 1991,
Ken Lay broke up Enron International into geographic regions, giving Mark control over only the
emerging markets segment (Enron Development). Not to be thwarted, Mark embarked on a whirlwind
jet tour of empire building. In 1992, Enron Development purchased 17.5% of Transportadora del Sur,
an Argentine natural gas pipeline. In 1993 and 1994, power plant projects were sold in the Philippines,
Guatemala, and Guam; pipeline projects were under way in China and Colombia, and, eventually, the
ill-fated Dabhol, India, power project. Whereas others tried to sell themselves as the companies and
agents of technology and low-cost efficiency, Mark combined her personal style and positivism with a
sales strategy of accomplishing the impossible.

Ironically, Rebecca Mark still found herself competing against John Wing in these early years.
Even though Wing had left Enron in 1991, he continued to work as a freelance originator of interna-
tional projects on behalf of Ken Lay. The competition came to a head in a hotel lobby in Shanghai,
China, in 1994 when both Wing’s and Mark’s teams came face to face. Mark demanded that Lay resolve
the conflict, but he took no action. Rich Kinder did, and soon after negotiated an exit agreement for
Wing.

Enron International, under first John Wing and later Rebecca Mark, signed and sealed new power
and pipeline projects at a breakneck pace. The difference was that by the time Enron International grew
to size and influence in the mid-1990s under Rebecca Mark, projects recognized earnings up front
using the same mark-to-market accounting as employed in the trading businesses. These projects com-

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mitted Enron’s capital resources for years to come, and, in many cases, locked in cash-flow shortfalls for
as many years as well. In the rush to sign and deliver deals, inadequate due diligence became common,
overly aggressive bidding promised unprofitable margins, and a growing disdain for the costs and com-
plexity of project execution characterized deals. Deals were done at the expense of delivery.

Enron Development would often sign and book deals which later proved to be dead in the water.
Accounting rules required that projects which were no longer in progress be written down in current
earnings. Enron Development fought these write-offs at every turn. Rich Kinder had instructed the unit
that these unrecognized losses, called “snowballs” within Enron, be kept below $90 million in total. In
early 1996, however, they soared to over $200 million.

The Dabhol, India, project was a microcosm of Enron’s business model.7 In December 1993, after
roughly 18 months of negotiations, Enron Development signed a long-term power sales contract with
the electricity board of Maharashtra, India (MSEB). Enron would build a 2000-megawatt natural gas-
fueled power plant at an estimated cost of $2.8 billion. The Maharashtra energy board agreed to buy
90% of the power produced by the plant at a U.S. dollar-denominated price for a minimum of 20 years.
From the very beginning, problems mounted. It took Mark more than two years and millions of dollars
in negotiations, court cases, and contract restructurings to get the financing in place. Within months, a
change in the Maharashtra government resulted in an outpouring of project opposition. Once again,
Mark went into overdrive for months of negotiations and renegotiations. Finally, on February 23, 1996,
a new contract was signed between Enron and the MSEB. By December, financing was in place and the
project’s construction resumed. But opposition continued, and it became clear that the MSEB would
never be willing or able to pay for the power (estimated at over $30 billion for the project life).

The project was dead. In the words of one Wall Street Analyst on Enron’s India activities, “I’ve
never been to another country where every single person hates one company.” Phase I of the project was
operational for only a short period of time, and Phase II, as of December 2003, was still only 80%
complete. The Dabhol power plant today is considered a failure for everyone involved but Rebecca
Mark. Mark earned bonuses for both the original deal and the successful renegotiation. In 1996, Enron
International generated 15% of Enron’s total earnings, and was expected to grow at double-digit rates
for years to come. Rebecca Mark was named CEO of Enron International. Many people believed that
Rebecca Mark would be Enron’s next CEO.

Financial Focus
The financial philosophy which emerged at Enron in the 1990s was one which catered nearly exclu-
sively to Wall Street. All other things ignored, it was all about earnings. Both Ken Lay and Jeff Skilling
believed that the market rewarded earnings growth over all other, including cash flow and quality of
earnings.

In the first half of the 1990s, when Enron’s business results were still primarily from gas pipeline
operations, earnings and cash flows were largely aligned. When earnings were recognized (recorded as
occurring), they were realized (showing up as cash flow). Exhibit 1 illustrates this relative balance, as
Enron’s net business cash flows (cash flows from operating activities less cash flow committed to invest-
ing activities) remained either slightly positive or balanced. Earnings were growing throughout this
1991 to 1996 period, and the Enron story was growing in the marketplace.

But with the growth of Skilling’s gas bank and associated businesses, net business cash flows
moved radically into deficit. Mark-to-market accounting was employed to a larger and larger extent to
reflect all of the earnings associated with a trade or deal up front. As Enron’s business grew into power

7
The Dabhol, India, project is analyzed in depth in Enron and the Dahbol Power Company, by Andrew
Inkpen, Thunderbird Case A07-02-0008.

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trading, broadband, and other market-making activities, the gap between reported earnings and cash
flows grew.

Exhibit 1 Enron’s Growing Discrepancy Between Earnings and Cash Flow (millions)

$1,000

$500

$0

-$500

-$1,000

-$1,500

-$2,000

-$2,500
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Earnings Operating CF—Investing CF

The financial schism between earnings and cash flow was not, however, confined to Jeff Skilling’s
trading activities alone, but also—and possibly in the end more significantly—to the company’s grow-
ing international commitments generated by Rebecca Mark at Enron International. Rebecca Mark,
who has often been characterized as the champion of the asset-heavy Enron business as opposed to Jeff
Skilling’s asset-light investment philosophy, was also focused on what was rewarded at Enron: deals
done.

Once following this path, the company was indeed “on dope,” as a former employee notes. In-
come from pipelines was recurring; it came regularly and predictably. Earnings from deal-making and
trading was not. New deals and new trades were needed at an ever-increasing pace if the company was
going to fulfill the promise made by Ken Lay to Wall Street of 15% annual growth, year in and year out.
Ken Lay, in the end, came to believe that Jeff Skilling would be able to deliver on the 15% promise; he
had no such confidence in Rich Kinder or Rebecca Mark.

The Performance Review Committee

To motivate the needed deals at Enron, rewards were based only on what deals had been signed in the
current period. This reflected Jeff Skilling’s belief in the value of confrontational debate; only through
debate would the best ideas rise to the top. He also believed that ideas and intellect were the true sources
of value, not the execution of those ideas or the management activities required to deliver on the prom-
ises. And what motivated people who created or possessed these ideas? In the words of Jeff Skilling:

I’ve thought about this a lot, and all that matters is money. You buy loyalty with money. This
touchy-feely stuff isn’t as important as cash. That’s what drives performance.8

8
The Smartest Guys in the Room, p. 55.

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 The performance review process which emerged within Enron reflected this philosophy. Every
employee was the subject of an intense review process conducted twice a year by the Performance
Review Committee (PRC). After the submission of detailed performance reports for each individual, a
series of committee meetings were held, often far into the night, in which a business unit leader pro-
moted, defended, and negotiated their own peoples’ futures against other business units. What was
increasingly valued at Enron, however, was clear. During one specific PRC session, Skilling yelled an-
other director down saying, “This guy has spent 30 years in the same job in oil and gas. If he’s that good,
he’d be a trader by now.”9

The PRC, in a system affectionately referred to as rank and yank, rated everyone from 1 (highest)
to 5 (lowest). Each employee under review, represented by a name card, was then pushed, thrown, and
prodded up and down the conference room table. Although employees were rated on a breadth of
criteria, it was widely known that deals done and bottom-line results were all that mattered. Only deals
done this year mattered; no credit was given for historical performance. A final rating of 1 was consid-
ered premier, and often meant promotion and stock option bonuses. Those receiving a rating of 2 or 3
would be entitled to hundreds of thousands of dollars worth of salary benefits and bonuses. Those with
a rating of 4 or 5 (and it was required that certain percentages of the total be given 5s) were given
roughly six months to improve their rating or they were fired. As the marathon evaluation sessions grew
into weekends and nights, it was often who could deal most effectively, yell the loudest, or stay on the
debate the longest who got their people rewarded. For the names on the table, however, a weak leader
was costly.

Leadership Transition
Ken Lay had always led Rich Kinder to believe that he would eventually assume the role of CEO.
Kinder’s no-nonsense approach to business, concentrating on management, execution, and control, was
thought to be a valuable counterbalance to Ken Lay’s aggressive grow-the-business fast, hands-off ap-
proach. Kinder’s roots were in the gas pipeline business, and he had always been highly suspicious of Jeff
Skilling’s trading enterprises and Rebecca Mark’s deal-based endeavors. But Lay had always been some-
what condescending in his attitude towards Kinder, and Kinder openly resented it. In 1992, Kinder
made it known that he wanted to move to the CEO position. Lay was reluctant. In the following
contract negotiation, Kinder had a clause added to his contract stating that in the event that he and
Enron were “unable to agree upon an acceptable employment position,” he could leave the company
with bonuses. The implicit understanding between the two was that Kinder would become CEO at the
end of Lay’s contract in December 1996.

In mid-November 1996, Enron’s Board met in New York. Although Kinder expected Lay to
resign and Kinder to be offered the CEO position, Lay accepted a new five-year contract as Chairman
and CEO. Lay later told Kinder that, although he had supported him for the position, the Board had
refused.10 Kinder received a parting gift of $2.5 million in cash, forgiveness of his outstanding Enron
loan of $4 million, and an indeterminate number of additional vested stock options.11 Although Lay
had originally intended to leave the long-dead office of President at Enron vacant, Jeff Skilling moved
quickly to fill the post himself, probably to prevent other suitors such as Rebecca Mark from filling the

9
“The Price and the Fall of Enron,” Tom Fowler, Houston Chronicle, October 20, 2002.
10
A multitude of stories surrounds Ken Lay’s and Rich Kinder’s relationship. In 1996, Rich Kinder began an
affair with Ken Lay’s longtime personal assistant and senior vice president, Nancy McNeil (they were later
married). When Lay was told, he was purportedly furious and felt like both had betrayed his trust.
11
Prior to leaving Enron, Rich Kinder acquired something else of extraordinary value: an agreement to
purchase from Enron a pair of natural gas pipelines for $40 million in cash. Enron sought no additional
outside bids and no fairness opinions on the sales price from consultants or auditors. Rich Kinder formed a
partnership with another University of Missouri fraternity brother (Ken Lay was also one), Bill Morgan,
creating the highly successful enterprise known today as Kinder Morgan.

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slot. On December 10, 1996, Jeff Skilling was made both President and Chief Operating Officer of
Enron Corporation.

The New Enron

With the ascension of Skilling to the COO position, Skilling’s ECT subculture moved to the driver’s
seat within Enron’s complex web of business units and corporate cultures. There had always been a
number of obvious differences in the subcultures across business units. And although both trading and
international had increasingly shared accounting practices, there were still fundamental differences in
how business was done and the personality characteristics of those doing it.

The battles between traders and the deal-makers were also aggravated by cultural differences.
The origination teams cultivated personal relationships with customers and hammered out
deals with them over many months. The traders did business by phone and computer in a
matter of seconds. The originators viewed the traders as bloodless mercenaries, who, as one
prominent member of the group put it, “would sell their mom for a buck.” The traders viewed
the originators as dinosaurs, destined for extinction; they believed they were bringing harsh
economic efficiency to what had long been a good-old-boy business.12

In Enron-speak, the traditional operators and originators simply didn’t get it.

Jeff Skilling often characterized Enron’s corporate culture as loose-tight. The loose was the no-
holds-barred approach to creativity and business development. Taking risk was considered a necessary
part of Enron’s innovation (Fortune Magazine annually anointed Enron “America’s Most Innovative
Company”). The tight, as Skilling described it, was the organizational processes within Enron to man-
age the risk. All transactions requiring the investment of capital by Enron had to go through the Risk
Assessment and Control Group (RAC), an in-house consultancy which evaluated the expected risks and
returns on the proposed investments. Enron was very proud of its ability to manage risk, not take risk.

Skilling now moved Enron into power trading in a bigger and bigger way. This was a truly power-
ful move, and resulted in a significant repositioning of much of the company’s core returns. The energy
trading business, primarily electrical power in North America, boomed in the 1996 to 2000 period.
Wholesale energy services grew from $12 billion in 1996 to nearly $95 billion in 2000. Although many
people still considered Enron a natural gas company, it had become a nearly pure trading company by
the late 1990s. Wholesale energy services made up more than 94% of Enron’s revenues in 2000. Appen-
dix 2 provides additional detail on Enron’s revenues by business segment.

By Ken Lay’s vision, Enron had indeed gotten big fast. In 2000, Enron broke the $100 billion in
revenues mark for the first time. Its market capitalization, the value of the total outstanding shares of the
company, was now worth roughly $70 billion. Enron’s perception of its own core competence was
changing. Its expertise was not confined to building and operating natural gas pipelines and power
plants, or even to the trading of natural gas and electrical power. Its self-defined competence was simply
in trading. The evolving strategy was to create markets where markets had never existed, exploit them
for all they were worth, and when profits declined with increasing competitor entry, move on to the
next cutting edge market creation. Between 1996 and 2001, Enron tried, sometimes failed and some-
times succeeded, in trading water, weather derivatives, bandwidth, and coal, to name but a few. As an
analyst at Bear Stearns noted, “Enron aims to commoditize the uncommoditizable.”13

Enron’s venture into water was something of a microcosm of the company’s transition from a
bricks-and-mortar business to a clicks-and-mortar trading house. In July 1998, Enron paid $2.4 billion
for Wessex, a British water utility company. The company, like Portland General Electric (PGE) before

12
The Smartest Guys in the Room, p. 63.
13
Enron Corp, Bear Stearns, January 26, 2001, p. 15.

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it, was the first step in acquiring a producing company to provide the backbone to a growth strategy of
ownership, operations, and trading in a new market. Rebecca Mark, hungry to prove her worth in an
organization now under the influence and control of Jeff Skilling, accepted the Chairman and CEO
position of the newly created water business, Azurix. Azurix’ strategy was to acquire water utility com-
panies all over the globe and create a consolidated giant that would be the “global leader in the water
industry.” Many believe the venture was dead on arrival. Mark went about the building of the company
much as she had with Enron International: jet-setting all over the world trying to kick-start deals.
Underfunded from the start, Mark spent lavishly in hiring and sales support, with little success. Enron
and Mark took Azurix public on June 9, 1999, raising $700 million, of which only $300 million was
available for the business after Enron itself had funneled much of the cash back into the corporate
parent.
In February 2000, Azurix and Rebecca Mark announced a new strategy: Azurix would become a
trading company for water rights. It was an admission of failure of the utility acquisition strategy, and,
in the eyes of many, an act of desperation. But water was not a commodity by traditional standards, and
the idea simply did not fly. During an internal meeting evaluating different turnaround strategies for
Azurix in March 2000, one staff member noted cynically that “the stock will only triple when pigs can
fly.” Rebecca Mark, not to admit failure, responded:
I grew up in Missouri on a pig farm, and I know a lot about pigs. And I am here to tell you,
sometimes pigs do fly.14
By August 2000, the writing was on the wall. Rebecca Mark resigned as CEO of Azurix. She then
exercised stock options and liquidated shares totaling more than $80 million on her way out of Enron.
A few months later, Enron announced it would buy back all outstanding shares of Azurix and shut it
down. Many believed the failure of Azurix was proof of the failure of the old Enron; others, the failure
of the new. Regardless, it sealed the fate of Rebecca Mark and eliminated the last remaining threat to Jeff
Skilling within Enron.

Feeding the Beast

A particularly troublesome feature of Enron’s emerging business model was that revenues were growing
much faster than earnings. The cost of undertaking these new trading ventures and creating all-new
markets was, in the words of one former executive, hideous. The salaries, bonuses, start-up costs, and
general lack of control over all operating costs drowned whatever profits arose from new ventures. Even
the more successful trading lines, including electricity, did not generate the margins the marketplace
had come to expect from Enron and its older portfolio of businesses. As illustrated in Exhibit 2, the
actual operating income (IBIT, income before interest and taxes) by business line was not growing in
line with revenues.

The growing deficit in corporate cash flows illustrated previously in Exhibit 1 also led to a more
fundamental financial management problem for Enron—the growing need for external capital, or, as it
was described in-house, “feeding the beast.” Rapidly escalating investments in new businesses, whether
the Portland General Electric (PGE) acquisition of 1997 or the power projects pursued by Rebecca
Mark globally, were absorbing more capital than the current business could self-finance. Enron’s cash
flows fell increasingly behind its investments and sales.

Enron needed additional external capital—new debt and new equity. Ken Lay and Jeff Skilling,
however, were both reluctant to issue large amounts of new equity because it would dilute earnings and
the holdings of existing shareholders. The debt option was also limited, given the already high debt
levels Enron was carrying (and which it had carried since its inception), which left it in the continuously
precarious position of being rated BBB, just barely investment grade by credit agency standards.

14
The Smartest Guys in the Room, p. 257.

TB0123 9
 Exhibit 2 Enron’s Earnings by Segment (IBIT, millions)

$2,500

$2,000

$1,500

$1,000

$500

$0

-$500
1996 1997 1998 1999 2000
Transp & Dist Wholesale Energy Retail Energy Broadband E&P Other

IBIT = income before interest and taxes

Although Jeff Skilling had first employed the concept of a fund of capital to be created to support
business development within Enron with the creation of the Cactus Fund in 1991, it was Andrew
Fastow who took the concept to a whole new level. Andrew Fastow and his wife, Lea Fastow, had both
joined Enron in 1990 after being introduced to Jeff Skilling socially (Lea was from a prestigious Hous-
ton family). The couple had met while attending Tufts University in Boston, and after graduation they
both joined Continental Bank of Chicago, earning MBAs at Northwestern’s Kellogg School at night.
Lea Fastow moved into the treasurer’s office at Enron, while Andy Fastow was added to the staff in
Enron Gas Services and later ETC.
Fastow’s personality was something of an enigma. Generally considered mild-mannered and quiet,
he quickly became known for his fiery temper and heavy-handed approach to dealing with both em-
ployees and in bank relationships. But he delivered solutions which soon made him invaluable in the
world of growing problems at Enron. Unfortunately, as it became apparent in later years when pro-
moted by Skilling to the CFO position, Fastow did not really have the skill or interest for financial
management. Fastow was uninterested in the managerial and control functions of funding and manag-
ing a corporation; he was, however, very interested in deal-making and its accompanying rewards.
Fastow’s experience in banking, specifically in the use of special purpose entities (SPEs), a common
tool in financial services, was his ticket up the corporate ladder at Enron.
Many of the transactions involve an accounting structure known as a “special purpose entity” or
“special purpose vehicle” (referred to as an “SPE” in this Summary and in the Report). A
company that does business with an SPE may treat that SPE as if it were an independent,
outside entity for accounting purposes if two conditions are met: (1) an owner independent of
the company must make a substantive equity investment of at least 3% of the SPE’s assets, and
that 3% must remain at risk throughout the transaction; and (2) the independent owner must
exercise control of the SPE. In those circumstances, the company may record gains and losses on
transactions with the SPE, and the assets and liabilities of the SPE are not included in the
company’s balance sheet, even though the company and the SPE are closely related. It was the
technical failure of some of the structures with which Enron did business to satisfy these require-
ments that led to Enron’s restatement.15

15
The Powers Report, p. 5.

10 TB0123
 The SPEs created by Andy Fastow and his assistant, Michael Kopper, served two very important
purposes. First, by selling troubled assets to partnerships like LJM1 and LJM2, Enron removed them
from its balance sheet, taking pressure off the firm’s total indebtedness, and simultaneously hiding
underperforming investments. This also freed up additional room on the balance sheet to fund new
investment opportunities. Secondly, the sale of the troubled investments to the partnerships generated
income which Enron could then use to make its quarterly earnings commitments to Wall Street.

The problem with this solution was that it was only temporary. The SPEs were largely funded
from three sources: (1) equity in the form of Enron shares by Enron; (2) equity in the form of a
minimum 3% of assets by an unrelated third party (in principle, although this was later found to be
untrue in a number of cases); and (3) large quantities of debt from major banks. This capital base made
up the right-hand side of the SPE’s balance sheet. On the lefthand side, the capital was used to purchase
a variety of assets from Enron. Fastow sold these partnership deals to the banks on the premise that
because he was uniquely positioned as both the CFO of Enron and the Managing Partner in the SPE, he
could cherry pick the assets to be purchased by the SPE. Fastow did indeed cherry pick, but they were the
rotten cherries. Most of the assets purchased by the SPEs were troubled or underperforming.

Exhibit 3 depicts the structure of LJM1, one of the most controversial of the SPEs. The upper half
of Exhibit 3 describes the initial capitalization, with Fastow contributing $1 million, and two limited
partners $15 million. Enron itself contributed 3.4 million shares of restricted stock. The $15 million in
third-party equity would support a total fund of $500 million. LJM1 was approved by Enron’s Board,
and a waiver of Enron’s Code of Conduct granted because an officer of the corporation, Andrew Fastow,
would be conducting business with the corporation itself.

LJM1 undertook a number of individual transactions with Enron Corp., purchasing an interest
in the Cuiaba power plant in Brazil and interests in at least two other Enron SPEs. Its most controversial
transaction was in the sale of a put option to Enron on 5.4 million shares of Enron’s holdings of an
Internet stock called Rhythms NetConnections. (A put option gives the holder the right, but not the
obligation, to sell an asset at a specific price.)This was an Internet start-up company which Enron had
originally invested $15 million in, only to see its investment soar to over $300 million when Rhythms
went public. Jeff Skilling was particularly worried about retaining the value of these shares, fearing they
would fall substantially in value (which they ultimately did). But Enron’s Rhythms shares were re-
stricted and could not be sold until the end of the year.

Fastow proposed to hedge the investment by having the newly created LJM Swap Sub sell a put
option on the shares to Enron, guaranteeing Enron’s investment in the Rhythms stock. Unfortunately,
this meant that Enron hedged with Enron, which meant there was no economic logic, only accounting
manipulation. (A true hedge is when a transaction is entered into with a third party, an outside
counterparty, who will take on the economic risk of a loss for a fee.) When the hedge was explained to
Vince Kaminksi, Enron’s head of research, his response was that it was “so stupid only Andrew Fastow
could have come up with it.”16

One other off-balance-sheet partnership, Chewco, later proved instrumental in Enron’s collapse.
Chewco (named after the Star Wars character Chewbacca) was set up in 1997 to buy the California
Public Employees Retirement System (CalPers) out of the Joint Energy Development Investment, or
JEDI, a partnership which Enron had established in 1993. Buying CalPers out would allow it to invest
in a new fund being established by Enron. Barclays Bank was to be the outside investor, providing the
needed 3% of assets in equity. But Barclays was uncomfortable with the risk associated with the trans-
action and insisted on a guarantee of the initial $11.49 million it was putting up. Enron then posted
$6.6 million in collateral to appease Barclays. This collateral agreement, which Arthur Andersen later
argued it was never told about, should have caused Chewco to be reported with Enron on a fully

16
“Visionary’s Dream Led to Risky Business,” by Peter Behr and April Witt, Washington Post, July 28, 2002.

TB0123 11
consolidated basis (the guarantee breaks one of the requirements for SPEs to remain off-balance-sheet).
This issue was one of the critical elements which came to the top later in October 2001.

Exhibit 3 The LJM1 Special Purpose Entity (SPE)

LJM Partners, L.P. ERNB Ltd. Campsie Ltd.

(Fastow) (CSFB) (NatWest)
General
Limited Partners
Partner

$1.0 M $7.5 M $7.5 M

$64 M note
LJM Cayman, L.P.
(LJM1)
Enron Corp.
ENE shares (3.4 M)

Andrew Fastow Limited ENE shares (1.6 M) Put option on 5.4 M shares of
Sole Director Partner $3.75 M cash Rhythms stock with a strike
price of $54/share in June 2004.

LJM SwapCo LJM Swap Sub, L.P.

General
Partner

Source: The Powers Report, Februrary 1, 2002, p. 81. LJM1 was established on June 28, 1999. The Board
of Enron Corp. approved the creation of the partnership with a waiver of the Enron Code of Conduct
because Andrew Fastow was an officer of the Corp. and would be conducting business with the Corp., but
this transaction “will not adversely affect the interests of Enron.”

A final detail of the SPEs proved, in the end, devastating to the financial future of Enron. Since
the primary equity in the SPEs was Enron stock, as the share price rose throughout 1999 and 2000, the
SPEs could periodically be marked-to-market, resulting in an appreciation in the value of the SPE and
contributing significant earnings to Enron. These same shares, once their price began sliding in 2001,
resulted in partnerships which should have been marked-to-market for substantial losses, but were not.
As Enron’s share price plummeted in the early fall of 2001, the equity in the SPEs would no longer meet
accounting guidelines for remaining off-balance-sheet. (Appendix 3 provides a brief overview of a num-
ber of the multitude of Enron partnerships.) The SPEs were becoming something of a synthetic busi-
ness for Enron.

The trouble was, the Raptors, like the rest of LJM2, had become something of a dumping
ground for bad properties. In an effort to make quarterly earnings (and, of course, annual
bonuses), Enron originators were hooked on making deals with Fastow instead of outside third
parties— who would have asked a lot of questions, slowed down the process, and, in many cases,
killed deals. Again, none of this mattered to most people at Enron, as long as the stock kept
rising.17

The Fall of the World’s Coolest Company

Most people associate Enron’s fall with the ascension of Jeff Skilling to the office of CEO in February
2001. Although Skilling had worked tirelessly for the past decade to create the new Enron, he did not
really want the job. By the spring of 2001, Jeff Skilling was burned out. Ironically, like Skilling himself,
the entire point of Enron—its share price—was now sliding. Skilling was tired, wished to spend more
time with his family, and felt that he was spending more and more of his time and effort plugging holes

17
Power Failure, p. 232.

12 TB0123
in the Enron dike: Dahbol, India, was once again in the news; Broadband was clearly failing; and
Enron’s role in the California power crisis was under increasing scrutiny.

The CEO position required Skilling to do more of the external public relations work, an activity
which he was not cut out for. A series of incidents in the spring showed cracks in the Skilling armor. The
conference call of April 17, 2001, has become something of a legend. Richard Grubman, managing
director of short-selling Highfields Capital Management, after being rebuffed by Skilling during a series
of questions, noted, “You’re the only financial institution that can’t produce a balance sheet or a cash
flow statement with their earnings” prior to conference calls. Skilling’s response sent the analyst com-
munity into shock: “Well, thank you very much. We appreciate that. Asshole.”18
Although continuing to trumpet Enron’s stock, Skilling gave increasingly vague and incompre-
hensible explanations. In the midst of the post-energy crisis California debate, when it was well known
that companies like Enron made millions in 2000 and 2001 on gaming the power system’s botched
deregulated market, he made public comments and even jokes which showed, at the least, poor judg-
ment. (Skilling: “What’s the difference between California and the Titanic? At least when the Titanic
went down, its lights were on.”)
One example of the growing tension under which Skilling fell was the August 3 Enron Energy
Systems (EES) floor meeting of more than 100 employees. In the meeting, Skilling predicted that EES
would be generating more than $500 million in earning within three years. One employee, Margaret
Ceconi, asked, “How in the world are we going to do that? What’s your strategy?” Jeff Skilling answered,
“Well, that’s what you guys are for. You guys are the creative ones—you’ve got to figure it out.” Later
that same afternoon, EES laid off three hundred people, including Margaret Ceconi.
Ceconi is also remembered for an e-mail to the Securities and Exchange Commission in July 2001
in which she posed the following hypothetical question:
A public company owns an ice cream business and a popcorn business. The popcorn business is
losing money, but the ice cream business is very profitable. If you move the popcorn business into
the ice cream division, under accounting rules, can you avoid reporting the popcorn business’s
losses?
Two days later, an SEC staff member called her to tell her that full disclosure of the individual
businesses would be required. She let it drop, and the SEC never followed up.
As the bills came due throughout the spring and early summer of 2001, Jeff Skilling found himself
alone and treading water in the midst of the hundreds of sharks he had recruited and created. His
longtime friends were leaving (Cliff Baxter, Lou Pai, Ken Rice), and he was afraid to appoint any of the
other “kill-to-eat” brethren to the COO position. One of Skilling’s oldest friends, Amanda Martin, put
it to Skilling rather directly: “The people you’re closest to and loyal to, you’ve made too much money for
them. The next layer down, the Whalleys, the Fallons, they will slit your throat if it means they’ll get to
the trough faster.”19 Skilling had drafted his first resignation letter in April but did not actually tender it
until August 13.
The news of Jeff Skilling’s resignation was bewildering to people inside and outside of Enron.
Insiders were confused, feeling that Skilling was abandoning a sinking ship, all the while claiming that
all was in order. To outsiders, new alarm bells sounded over fears of an imminent collision; was Enron
hiding more business and financial risks than what they had reported? Two days following Skilling’s
resignation, an anonymous memo was sent to Ken Lay. The memo was authored by a former Arthur
Andersen accountant, Sherron Watkins, who had been hired by Fastow in 1993. The Watkins memo
began:

18
Pipe Dreams, p. 269.
19
The Best and the Brightest, p. 337.

TB0123 13
 Dear Mr. Lay,
Has Enron become a risky place to work? For those of us who didn’t get rich over the last few
years, can we afford to stay? Skilling’s abrupt departure will raise suspicions of accounting
improprieties and valuation issues....... I am incredibly nervous that we will implode in a wave
of accounting scandals.20
Watkins quickly took credit for the memo and met with Ken Lay to explain her concerns. Ken Lay
responded by launching a brief investigation into Watkins’ accusations. While the investigation was
under way (eventually reaching what many considered a self-fulfilling whitewash conclusion), Lay had
his corporate lawyers examine the company’s alternatives toward firing Sherron Watkins. (In the end,
they chose not to, and Watkins remained with Enron until the spring of 2002.) The memo incident
later became something of a lightning rod among critics who argued that Lay had chosen to ignore the
obvious problems deep within the Enron organization.
The following three months saw Enron enter into a death spiral. As more and more questions
arose in the financial press about Fastow’s partnerships, Enron’s share price continued to slide. The
dominoes began to fall. Most of the SPEs possessed debt which contained share price triggers; in the
event that Enron’s share price fell below a certain level, the debt was instantly due and/or Enron was
required to inject additional share equity to recapitalize the fund. As the share price fell in September
and October, the triggers were pulled and the depth of Enron’s total indebtedness began to be revealed.
Enron’s CFO, Andrew Fastow, was fired on October 24.21 The World’s Leading Company (Lay and
Skilling had earlier in 2001 debated Enron’s new slogan, agreeing on “the World’s Leading Company,”
though their first preference had been “The World’s Coolest Company”) had $13 billion on its balance
sheet, but actually possessed debt obligations totaling $38 billion. Ken Lay and some of his remaining
lieutenants, both inside and outside of Enron, seemingly remained in denial to the bitter end.22
November 8 saw the reconciling of the “new past” with the market. Arthur Andersen, after deter-
mining that Chewco had never met the requirements for SPE off-balance-sheet treatment (the memo
describing the $6.6 million in Enron collateral was rediscovered), insisted that Enron restate its finan-
cial results from 1997 onwards. Enron disclosed, in a 21-page SEC filing, the impact of consolidating
the off-balance-sheet partnerships. As illustrated in Exhibit 4, Enron’s earnings for the 1997-2000 pe-
riod were written down.
On Tuesday, November 27, it was announced that the recently negotiated acquisition of Enron by
Dynegy, a smaller competitor, was off. The following morning, Wednesday, November 28, 2001, Stan-
dard & Poors, Moody’s, and Fitch rating services downgraded Enron from BBB- to B, reclassifying
Enron from investment grade to speculative grade (junk). More debt obligations were instantly triggered.
With the downgrade, most trading counterparties were prohibited from conducting business with
Enron.23 On Sunday morning, December 2, Enron filed for bankruptcy protection under Chapter 11.
In January 2002, Enron’s board completed a detailed forensic analysis of selected Enron SPEs,
today known as the Powers Report. Ken Lay was forced to resign first from the CEO position and then
from Enron’s Board; then shareholder suits, creditor suits, and a multitude of state and federal regula-
tory and judicial parties swarmed over the carcass.24
20
Enron: The Rise and Fall, p. 338F.
21
Although it was not fully revealed until the spring of 2002 in a series of Congressional hearings, Fastow was
found to have earned more than $60 million in bonuses, fees, and distributions through the multitude of
partnerships.
22
The Sanford Bernstein analyst report dated November 1, 2001, by David Wideman and Duane Grubert,
was entitled “Enron: Reports of Death Greatly Exaggerated: Enron’s Numbers Work. Outperform.”
23
On Friday, November 30, an Enron trader called the author from the massive—but silent—trading floor
of the new $200 million Enron building in Houston. When asked what they were doing, the trader
responded, “Drinking beer. Since no one can trade with us, we have four kegs sitting out on the trading floor.
And we can’t find out from anyone upstairs whether we are supposed to come back to work on Monday.”
24
An additional trigger in Ken Lay’s contract raised momentary outrage within Enron when it was
announced that Lay was entitled to a $60 million severance agreement. Lay, under pressure, chose to forego
the payment.

14 TB0123
 Exhibit 4 Enron’s Earnings after Restatement (millions)

$1,000

$900
$800
$700
$600
$500

$400
$300
$200
$100
$0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Earnings Restated Earnings

Moral of the Story

What happened at Enron? Was it the ethical and business judgment failures of select people at the top,
or did it go deeper? Was Enron’s leadership responsible for the creation and growth of a corporate
culture which was inherently flawed? Or was it a good business burdened with bad leadership, or a bad
business with bad leadership? Or was Enron a company which was the victim of a marketplace which
had suddenly grown cynical as a result of the dotcom bubble and collapse of the go-go stock market of
the1990s? Did this culture grow from specific instances of individual greed and leadership malfeasance,
or was it—in the words of former CEO Jeff Skilling—the victim of a “run on the bank?” You decide.

First, contrary to the refrain in the press, while I was at Enron, I was not aware of any inappro-
priate financing arrangements designed to conceal liabilities, or overstate earnings. The off-
balance-sheet entities or SPEs that have gotten so much attention are commonplace in corporate
America; and if properly established, they can effectively shift risk from a company’s shareholders
to others who have a different risk/reward preference. As a result, the financial statements issued
by Enron, as far as I knew, accurately reflected the financial condition of the company. Second,
it is my belief that Enron’s failure was due to a classic “run on the bank,” a liquidity crisis
spurred by a lack of confidence in the company.
Jeff Skilling, Statement before House of Representatives, February 7, 2002.

TB0123 15
16
Appendix 1 Statements of Consolidated Income, Enron Corporation, 1991-2000

(000s of dollars) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Net sales $5,562,670 $5,812,527 $7,985,800 $8,984,000 $9,189,000 $13,289,000 $20,273,000 $31,260,000 $40,112,000 $100,789,000
Cost of goods 3,633,655 4,222,395 5,566,026 6,517,000 6,733,000 10,478,000 17,311,000 26,381,000 34,761,000 94,517,000
Gross profit 1,929,015 1,590,132 2,419,774 2,467,000 2,456,000 2,811,000 2,962,000 4,879,000 5,351,000 6,272,000
Gross margin (%) 35% 27% 30% 27% 27% 21% 15% 16% 13% 6%

R&D expenditures 58,959 59,178 75,743 84,000 79,000 89,000 102,000 NA NA NA

Selling, G&A expenses 1,018,783 1,137,909 1,255,041 1,226,000 1,327,000 1,558,000 1,570,000 2,674,000 3,238,000 3,464,000
EBITDA 851,273 393,045 1,088,990 1,157,000 1,050,000 1,164,000 1,290,000 2,205,000 2,113,000 2,808,000

Depreciation & amortization 353,272 376,019 458,188 441,000 432,000 474,000 600,000 827,000 870,000 855,000
Non-operating income 202,130 732,524 137,123 177,000 471,000 439,000 -194,000 50,000 541,000 298,000
Interest expense 368,114 330,282 300,149 273,000 284,000 274,000 401,000 550,000 656,000 838,000
Earnings before tax (EBT) 332,017 419,268 467,776 620,000 805,000 855,000 95,000 878,000 1,128,000 1,413,000

Income taxes 90,898 90,468 135,254 167,000 285,000 271,000 -90,000 175,000 104,000 434,000
Minority interest (income) NA NA NA NA NA NA 80,000 NA NA NA
Net income before extra income 241,119 328,800 332,522 453,000 520,000 584,000 105,000 703,000 1,024,000 979,000
Net income/sales 4.3% 5.7% 4.2% 5.0% 5.7% 4.4% 0.5% 2.2% 2.6% 1.0%

Excluded items & other 657 -22,615 NA NA NA NA NA NA -131,000 NA

Net income 241,776 306,185 332,522 453,000 520,000 584,000 105,000 703,000 893,000 979,000
Outstanding shares 101,218 118,591 249,095 251,675 251,242 255,124 311,246 661,761 715,527 751,628

Source: SEC filings and Enron Corporation

TB0123
TB0123
Appendix 2 Enron Corporation’s Revenue by Business Segment, 1992–2000

(millions of $) 1992 1993 1994 1995 1996 1997 1998 1999 2000
Transportation & Distribution 1,419 1,386 938 805 748 1,402 1,833 2,013 2,955
Gas Pipeline Group 1,419 1,386 938 805 748 656 637 634 699
Portland General - - - - - 746 1,196 1,379 2,256
Wholesale Energy Services 4,737 6,201 7,558 7,903 11,894 17,334 27,220 35,501 94,906
Domestic Gas & Power 3,872 5,450 7,166 7,064 11,681
International Gas & Power 865 751 392 839 213
Retail Energy Services - - - - - 683 1,072 1,518 4,615
Broadband Services - - - - - - - - 408
Exploration & Production 260 399 489 481 647 789 750 429 -
Corporate & Other 55 385 651 (2,095)
Total Revenues $6,416 $7,986 $8,985 $9,189 $13,289 $20,263 $31,260 $40,112 $100,789

(percent of total) 1993 1993 1994 1995 1996 1997 1998 1999 2000
Transportation & Distribution 22% 17% 10% 9% 6% 7% 6% 5% 3%
Gas Pipeline Group 22% 17% 10% 9% 6% 3% 2% 2% 1%
Portland General 0% 0% 0% 0% 0% 4% 4% 3% 2%
Wholesale Energy Services 74% 78% 84% 86% 90% 86% 87% 89% 94%
Domestic Gas & Power 60% 68% 80% 77% 88%
International Gas & Power 13% 9% 4% 9% 2%
Retail Energy Services 0% 0% 0% 0% 0% 3% 3% 4% 5%
Broadband Services 0% 0% 0% 0% 0% 0% 0% 0% 0%
Exploration & Production 4% 5% 5% 5% 5% 4% 2% 1% 0%
Corporate & Other 0% 0% 0% 0% 0% 0% 1% 2% -2%
Total Revenues 100% 100% 100% 100% 100% 100% 100% 100% 100%

Source: Bear Stearns, Enron Corporation, January 26, 2001, p. 81. Note that Enron ceased separating reported revenues between domestic and international operations
in 1997.

17
Appendix 3 Selected Enron Special Purpose Entities (SPEs)

Name Date Purpose

Cactus 1991 Created by Jeff Skilling to provide funding for natural gas production and trading
by Enron in the faltering deregulated natural gas markets

JEDI I 1993 Organized as a partnership with capital from the California Public Employees
Retirement fund (CalPers)

Chewco 1997 Set up specifically in order to buy CalPers interest out of JEDI, allowing it to free
up capital to invest in other Enron transactions

Marlin 1998 Created by Andy Fastow to take Azurix’s debt off the Enron books; Marlin’s debt
was due at the end of 2001, when Azurix’s capital would not cover it, and when
Enron would be on the hook for the balance; Marlin was restructured in the
summer of 2001 to avoid this

LJM1 1999 Fastow set up this $500 million SPE specifically to hedge Enron’s investment
value in Rhythms.

LJM2 1999 Fastow’s expanded internal fund which eventually possessed 50 limited partners
and conducted 20 different transactions with Enron, and was representative of
the peak of Fastow’s influence upon the firm.

Raptors I-IV 2000 Created by Andy Fastow to take failing assets off Enron’s books, create short-term
earnings for Enron, and enrich he and his partners (also called Talon, Timberwolfe,
Bobcat, and Porcupine). Raptor IV was specifically created to hedge The New
Power Company (entity given to Lou Pai), but capitalized with New Power
warrants.

Appendix 4 Enron’s Values

Communication
We have an obligation to communicate. Here, we take the time to talk with one another… and to listen. We
believe that information is meant to move and that information moves people.

Respect
We treat others as we would like to be treated ourselves. We do not tolerate abusive or disrespectful treatment.

Integrity
We work with customers and prospects openly, honestly, and sincerely. When we say we will do something, we
will do it; when we say we cannot or will not do something, then we won’t do it.

Excellence
We are satisfied with nothing less than the very best in everything we do. We will continue to raise the bar for
everyone. The great fun here will be for all of us to discover just how good we can really be.

Source: Enron Annual Report, 2000, p. 53.

18 TB0123
 Appendix 5 Prepared Statement of Jeffrey Skilling, Former President and CEO of Enron Corporation,
Congressional Hearings, February 7, 2002

Good morning, Chairman Greenwood and members of the Committee. My name is Jeff Skilling. I worked for
Enron for over 10 years, leaving in August of 2001 after being CEO for six months. During my time at Enron,
I was immensely proud of what we accomplished. We believed that we were changing an industry, creating
jobs, helping resuscitate a stagnant energy sector, and, by bringing choice to a monopoly-dominated industry,
were trying to save consumers and small businesses billions of dollars each year. We believed fiercely in what we
were doing. But today, after thousands of people have lost jobs, thousands have lost money—and, most tragically,
my best friend has taken his own life—it all looks very different. As proud as I was of what we tried to accomplish
at Enron, as I sit here today, I am devastated by, and apologetic about, what our company has come to represent.
I know that no words can make things right. Too many have been hurt too much. I am here today, because I
think Enron’s employees, shareholders, and the public at large have a right to know about what happened. I
have done all I can to help this investigation. I have testified for two days at the SEC—spoken on three
occasions to the Special Board Committee—and have spoken to the staff of this Committee. I have not exercised
my rights to refuse to answer a single question—not one. And I don’t intend to start now. So, let me first talk
about Enron and its demise.

First, contrary to the refrain in the press, while I was at Enron, I was not aware of any inappropriate financing
arrangements, designed to conceal liabilities, or overstate earnings. The off-balance-sheet entities or SPEs that
have gotten so much attention are commonplace in corporate America; and if properly established, they can
effectively shift risk from a company’s shareholders to others who have a different risk/reward preference. As a
result, the financial statements issued by Enron, as far as I knew, accurately reflected the financial condition of
the company. Second, it is my belief that Enron’s failure was due to a classic “run on the bank,” a liquidity crisis
spurred by a lack of confidence in the company. At the time of Enron’s collapse, the company was solvent and
highly profitable—but, apparently, not liquid enough. That is my view of the principal cause of its failure.

Now, let me address some of the questions about my specific involvement in these events. First, I left Enron on
August 14, 2001, for personal reasons. At the time I left the company, I fervently believed that Enron would
continue to be successful in the future. I did not believe that the company was in financial peril. Second,
similarly, I did not “dump” any stock in Enron because I knew—or even suspected—that the company was in
financial trouble. In fact, I left Enron holding almost the same number of shares that I held at the beginning of
2001: On January 1, 2001—the start of my final year at Enron—I owned approximately 1.1 million shares of
Enron. On August 14, the day I left, I owned about 940,000 shares. Indeed, in June of that year, I terminated
an SEC-sanctioned stock sale plan, and elected to hold on to more Enron shares. Third, with regard to the so-
called LJM Partnerships, the Powers Report criticizes me for supposedly not taking a more active role in
reviewing the conflict of interest arising from the involvement in those partnerships of Enron’s then-CFO. I
believed at that time that there were adequate controls in place—that the controls were being complied with
and that I was discharging—to the full extent of my mandate—my obligations to the Board with respect to this
process. Fourth and finally, the Powers Report also criticizes me for supposedly approving the restructuring of
certain hedging transactions. The Report then suggests that “if the account of other Enron employees is accurate,”
that transaction “was designed to conceal” losses on some of Enron’s investments and that I may have withheld
information from the Board about that restructuring. I can state here today that I did not have any knowledge
that that transaction was designed to conceal losses, and I did not do anything to withhold information from
the Board. Ours was a company that emphasized creativity, but always in a manner that relied on the advice of
the best people we could find—both those inside the company and the lawyers and accountants outside the
company who advised us.

With that, Mr. Chairman, I am prepared to answer any questions that you may have.

Source: Hearing before the Subcommittee on Oversight and Investigations of the Committee on Energy and Commerce,
House of Representatives, U.S. Congress, February 7, 2002 (text of prepared statement)

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 Appendix 6 Enron Stock Sales, October 19, 1998 - November 27, 2001

Name Position at Enron Shares Sold Share Proceeds

Lou Pai CEO, Enron Energy Services 3,912,205 $ 270,276,065
Ken Lay Chairman, Enron 4,002,259 $ 184,494,426
Robert Belfer Member of Board of Directors 2,065,137 $ 111,941,200
Rebecca Mark Chief Executive Officer, Azurix 1,895,631 $ 82,536,737
Ken Rice CEO, Enron Broadband Services 1,234,009 $ 76,825,145
Ken Harrison Member of Board of Directors 1,011,436 $ 75,416,636
Jeffrey Skilling Chief Executive Officer, Enron 1,307,678 $ 70,687,199
Mark Frevert Chief Executive Officer, Enron Europe 986,898 $ 54,831,220
Stan Horton CEO, Enron Transportation 830,444 $ 47,371,361
Joe Sutton Vice Chairman 688,996 $ 42,231,283
Joe Hirko CEO, Enron Communications 473,837 $ 35,168,721
J. Clifford Baxter Vice Chairman 619,898 $ 34,734,854
Andy Fastow Chief Financial Officer 687,445 $ 33,675,004
Rick Causey Chief Accounting Officer 208,940 $ 13,386,896
James Derrick General Counsel 230,660 $ 12,563,928
Rick Buy Chief Risk Officer 140,234 $ 10,665,595
Mark Koenig Executive Vice President 129,153 $ 9,110,466
Cindy Olson Executive Vice President 83,183 $ 6,505,870
Steve Kean Executive Vice President, Chief of Staff 64,932 $ 5,166,414
Jeff McMahon Treasurer 39,630 $ 2,739,226
Michael McConnell Executive Vice President 32,960 $ 2,506,311
John Duncan Member of Board of Directors 35,000 $ 2,009,700
Norman Blake Member of Board of Directors 21,200 $ 1,705,328
Joe Foy Member of Board of Directors 38,160 $ 1,639,590
Charles LeMaistre Member of Board of Directors 17,344 $ 841,768
Robert Jaedicke Member of Board of Directors 13,360 $ 841,438
Ronnie Chan Member of Board of Directors 8,000 $ 337,200
Wendy Gramm Member of Board of Directors 10,328 $ 278,892
Kevin Hannon President Enron Broadband Services unknown unknown
Greg Whalley Chief Operating Officer, Enron unknown unknown

Totals 20,788,957 $ 1,190,488,473

Source: Mark Newby, et al. vs. Enron Corp., et al., Securities and Exchange Commission filings, Congressional
testimony, Enron Corp. press releases. Gross proceeds do not include any potential costs in stock sales.

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Appendix 7 The Enron Culture, Excerpt from “To Our Shareholders,” Annual Report 1999

The Enron Culture

Creativity is a fragile commodity. Put a creative person in a bureaucratic atmosphere, and the creative output will
die. We support employees with the most innovative culture possible, where people are measured not by how
many mistakes they make, but how often they try.

Our culture of innovation is difficult to duplicate. Individuals are empowered to do what they think is best, and
most of our outstanding initiatives in 1999 came directly from our own ranks. Our philosophy is to not stand in
the way of our employees, so we don’t insist on hierarchical approval. We do, however, keep a keen eye on how
prudent they are, and rigorously evaluate and control the risk involved in each of our activities. We insist on
results, and the results have been quite good. Throughout this annual report, you will see how enthusiastic,
motivated people have created their own networks of Enron-wide talent and resources to quickly advance ideas.

We are doing something that is recognized outside the company. This year, in addition to again naming us
“America’s Most Innovative Company,” Fortune ranked Enron “No. 1 in Quality of Management” and “No. 2 in
Employee Talent” of all American companies. The magazine also acknowledged us as one of the 25 best places to
work in America. We recognize that our intellectual capital is our most important asset, and we cherish it. All
employees are shareholders. Our values of communication, integrity, respect, and excellence are equally applicable
to our dealings with each other as with our customers and suppliers.

Increasingly, energy will serve as our entrée to customers who can benefit from Enron’s intellectual capital and
services. The fundamental skills and expertise we use to develop energy and communications solutions can be
applied to many situations that inhibit our customers’ profits and growth. It is that core of expertise, rather than
tradition, that will define Enron in the future.

Kenneth L. Lay
Jeffrey K. Skilling
Joseph W. Sutton

Source: Enron Annual Report, 1999, p. 5.

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 Appendix 8 Key Enron Management during 2000-2001

Position and Office

Chief Executive Officer and President Ken Lay
Chief Operating Officer Jeff Skilling
Chief Financial Officer Andy Fastow
Chief Accounting Officer Rick Causey
Treasurer Ben Glisan
Chief Risk Officer Rick Buy

CEO, Azurix Rebecca Mark

CEO, Enron North America Cliff Baxter
CEO, Enron Energy Services Lou Pai
CEO, Enron Broadband Services Ken Rice
CEO, Enron Communications Joe Hirko
CEO, Enron Transportation Stan Horton

Note: These are approximate dates for the people filling these specific positions.

Appendix 9 “Hotel Kenneth-Lay-A” by James Hecker, an Arthur

Andersen auditor assigned to the Enron Account

(Sung to the tune of Hotel California by The Eagles.)

Welcome to the Hotel Mark-to-Market

Such a lovely face
Such a fragile place
They livin’ it up at the
Hotel Cram-It-Down-Ya
When the suits arrive, bring your alibis

Mirrors on the 10-K, makes it look real nice

And she said, we only make disclosures here
Of our own device
And in the partners’ chambers
Cooking up a new deal
3% in an SPE
But they just can’t make it real

Last thing I remember I was running for the doors

I had to find the entries back
To the GAAP we had before
“Relax,” said the client
“We are programmed to succeed
You can audit any time you like
But we will never bleed”

Source: As quoted in The Smartest Guys in the Room, 2003, p. 149.

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