The Viridian Design Movement

Viridian Note 00281: Enron Disappears

Bruce Sterling []

Key Concepts
Enron Corporation, Kenneth Lay, Bush Administration, California energy crisis, Texas, Houston, financial scandal, corporate destruction, hubris, nemesis, Dynegy

Attention Conservation Notice
It's about big business and even bigger politics. Delves into considerable corporate detail. Over 3,000 words.

During the California energy crisis last summer, Enron was living large at the expense of Californians (and many others).
Enron handled about a quarter of all energy trades. They made a pile of money, but rather less than they said they did.
Business is golden when you're the gray eminence of the Bush Administration's energy policy.
Few could match Kenneth Lay in his eager presidential fundraising.
And why would Ken do that? Because it was supposed to be great for the oil and gas business! How could he lose?

Ken Lay in happier days: an innovator, a consummate insider, an industry titan!
BUSINESS WEEK loved the guy! Couldn't get enough of him!,1640,7641,00.html Ken was bringing the New Economy to one of the stodgiest industries on earth: natural gas pipelines!
He was an energetic messiah blazing a trail for the global industry.

But guess what? All that time, Enron was cooking its own books!


"Free-marketeer Enron hits the skids

"November 5, 2001

"Last June, the California State Senate asked energy suppliers such as Enron Corp. to open their books so examiners could determine whether they had been manipulating prices. Enron refused, stating that it was a Texas, not a California company.

"Enron's argument had some logic. After all, wasn't the whole point of deregulation to get the government to butt out? But the argument was disingenuous because deregulation created national markets which meant Enron had ceased to be a purely Texas company, and Californians had a right to know about its pricing practices.

"The state Senate was stiffed, and now we are finding out why. Since June, Enron has gone from being the driving force behind deregulation, the unstoppable top dog on the energy hill, the company with a very big friend in the White House, to a company in deep trouble.

"Enron is under investigation by the Securities and Exchange Commission, has had its debt downgraded by Moody's, has lost its CEO and CFO and has seen its stock fall off a cliff. At $80 last year, Enron's share price closed last week near $11.

"The company's shenanigans are complex, but all seem related to the fatal flaw of deregulation: secrecy and lack of oversight. Not only did Enron not want Californians to see its books, it didn't want anyone to see them.

"This tactic may work well enough for selling shoelaces, but when a company deals in electricity, the product that makes things go, people want the facts. No state will hand over control of its electricity to unaudited price manipulators. (((That's why you want to skip right over mere states like California, and own the feds.)))

"Kenneth Lay, Enron's chairman, who has resumed control of the company with the resignation of CEO Jeffrey Skilling, has been a leading advocate of deregulation. His views found their way onto the Federal Energy Regulatory Commission and through FERC to the California Public Utilities Commission, which oversaw deregulation in California. ((("His views found their way" — hey, that's nicely phrased.)))

"Thus when California's energy crisis began in the spring of 2000, FERC did nothing. When spot energy market prices hit $2 per kilowatt hour last spring — 50 times the normal price, FERC still did nothing. (((California went for Gore.)))

"Some FERC members wavered as prices soared, but deregulation was given such a strong boost by the Bush administration's energy policy (strongly influenced by Lay, who was the largest single contributor to the Bush campaign) that nothing was done. Pacific Gas & Electric declared bankruptcy, Southern California Edison faced bankruptcy, and some wondered if the state government would not go bankrupt paying electricity bills. (((Remember those times, Californians? I rather hope you do, as you still owe something along the line of $10 billion.)))

"Lay and Skilling were talented political pitchmen who claimed they were doing God's work. 'We're on the side of the angels,' said Skilling when Californians accused Enron of profiteering. Lay, visiting California in February, said God was on the side of free markets and the profit motive.

"California's problems were caused, Lay said, by 'very flawed' deregulation. Why did our prices soar 100 times? 'We see this in other commodity markets,' he replied breezily. (...)

"Until someone has a thorough look at Enron's books — even Andersen, its auditor, apparently missed the manipulations — it's impossible to know the connection between Enron's core business, which is energy trading, and the company's slide. Lay's philosophy of deregulation apparently reached so deep into the company that not even common corporate disclosure requirements were met." (((Well, no, not really. This is hokum. Enron wasn't that badly exposed in the California market. The real problem is that Enron's Chief Financial Officer bought his way into way too many dotcom companies. It made no sense to just leave the cash sitting there when all those stock valuations were going ape, so the CFO took Enron's fossil-fuel money and sank it into a bunch of digital stuff that looked sure to skyrocket. It worked great, for a while. He resigned last October.)))

"Last year, Enron's revenues reached $100 billion (a 250 percent increase over 1999), and this year's second quarter earnings were up 40 percent over last. But last month, the company revealed a $600 million third quarter loss and a mysterious $1.2 billion loss of shareholder equity related to partnership deals worked out by its former CFO, Andrew Fastow. (((A hundred billion dollar company, dead in one month... sold off in indecent haste for a lousy 8 billion.)))

"The SEC, Wall Street analysts, bond-rating agencies and shareholders are besieging and beseeching the company, and Lay is lying low. The fear is that Enron has billions of dollars in off-balance sheet debt that may or may not be related to its core business of energy trading.

(((This would be just another sad case of dotcom overreach, and a pity in some ways because Enron really was very innovative in an industry that needs that sorely. But Kenneth Lay of Enron is also the chief architect of the Bush energy policy. This scandal is potentially devastating, or it would be, if Enron was still around to absorb heat. With its stock down almost 90%, its credibility in tatters, and no one to blame but Ken, Enron is hastily ceasing to exist.

(((Henceforth Enron will be known as "Dynegy," if, that is, that merger and acquisition can pass muster at the Justice Department. That Dynegy/Enron trust looks nothing like a "free market", but consider the sweet deal Microsoft got. The current Justice Department will fall all over themselves for the scandal-blazing hulk of Enron. Assuming, that is, that Dynegy itself doesn't collapse as well, before the deal goes through.)))

Source: CBS MarketWatch

"Dynegy to buy Enron for $7.8 billion By Lisa Sanders,

"Last Update: 8:24 PM ET Nov. 9, 2001

"HOUSTON (CBS.MW) — Enron Corp. on Friday agreed to sell itself to smaller rival Dynegy Inc. for the firesale price of $7.8 billion in stock, halting one of the steepest and most sudden corporate downfalls in Wall Street history.

"Dynegy also said it would immediately give Enron $1.5 billion in equity to help stabilize the troubled power merchant. The deal, which requires Dynegy to assume $15 billion of debt, comes with a $350 million breakup fee.

"The announcement ended a week in which Enron's (ENE: news, chart, profile) shares fell sharply and it announced it would restate earnings for four years and two quarters.

"In a conference call, Enron Chairman and Chief Executive Kenneth Lay said the deal, which he admitted he couldn't have envisioned a month ago, was necessary to get the investment community refocused on Enron's core operations — wholesale trading and retail energy services.

"'This is an enormously strong combination,' he said. 'This is the best alternative for our shareholders, our employees... and for Houston.' (((And for the Bush Administration, and for the Arctic drilling....)))

"Terms of the deal

"Houston-based Dynegy (DYN: news, chart, profile), with a market capitalization of about $13 billion, said it would pay $10.40 a share for Enron. (...) In the call, Dynegy said it didn't immediately expect to layoff employees. (((How nice.))) The companies hope to close the deal in the next six to nine months, and don't expect 'significant' regulatory hurdles. (((Well, uh, no.)))

"ChevronTexaco (((Chevron and Texaco used to be two different companies, too, just a little while ago))) plans to invest $2.5 billion in new equity into Dynegy to support the deal. It already owns 27 percent of Dynegy. (...)

"Together, Dynegy and Enron would dwarf rival natural gas and power marketers in the U.S with revenue of more than $200 billion a year and $90 billion in assets.

"How things have changed (((And how...)))

"Glen Hilton, portfolio manager for the Montgomery New Power Fund, said that the deal would have been inconceivable 12 months ago.

"'Dynegy stands to become the dominant player in the energy trading market,' he said. 'Dynegy isn't going to do a dumb deal, and they know their own investors would tell them if they were making a mistake.' (((Just like the investors told Enron about Enron's mistakes?)))

(...) "Hilton had predicted that Lay wouldn't be involved in the day-to-day operations of the combined company because he was trying to remove himself from that role at Enron. (((And because Ken now glows in the dark.))) Lay had to step in as CEO after Jeffrey Skilling abruptly resigned in August after six months on the job. Skilling cited 'personal reasons' for his departure.

"'At best, Lay will have a board seat,' Hilton said. Lay said he's been asked to join the board, but wouldn't be involved in the management of the new company.

"Shares of both companies closed higher Friday. Enron's stock is off close to 90 percent since it reached a 52-week high of $84.88 on Dec. 29.

"Analyst concerns

"When talks of the merger surfaced this week, analysts expressed surprise, citing Dynegy's size compared to Enron (((Dynegy is one third Enron's size))) and Dynegy's own debt load, which totals $3 billion. (((Maybe they'll both go broke, which would really make a fantastic Texan wheeler-dealer spectacle.))) Market players said the deal would only make sense if Dynegy intended to unload Enron's non-core assets such as its water business, Azurix, and its power plant in India. (((And while you're at it, guys, stop raiding California.)))

"'Enron has limited options if the credit markets won't extend additional credit and their trading partners won't trade with them,' said Paul Fremont, an electric utility analyst with Jefferies & Co. (((Well, yeah; if you smell so bad that no one will even talk to you, you're sunk.)))

"Market players told on Thursday that trading counterparties had begun to limit their exposure to Enron. (((It's global capitalism at its finest... "You own the President of the USA? Who cares?")))

"Fremont said he would be concerned about the merger if he held shares of Dynegy.

"'It's an added risk for Dynegy shareholders unless the company figures out some way to unwind the (off- balance sheet) obligations,' he said. 'I would be very concerned that adding such a high level of risk won't be offset by the potential profitability of the transaction.'

"How Enron unraveled

"Enron's saga began in earnest on October 16, (((That's not even one month ago! The thing's flown apart like a tissue-paper pinata!))) though serious questions about the company surfaced far before then. Investors continually voiced concerns about Enron's failing broadband business and the Dabhol power plant project in India. Skilling's departure caused an outcry in the investment community.

"One of the ongoing complaints of analysts was Enron's unwillingness to provide details about how the company makes money. ((("We buy politicians cheap, and we sell them high."))) When Lay reclaimed the CEO role, he promised more information would be forthcoming.

"On Oct. 16, Enron reported a third-quarter net loss and said it took a $1 billion charge to write off bad investments.

"The following day, Enron disclosed that it took a $1.2 billion equity reduction to unwind transactions by two limited partnerships created and run by former Chief Financial Officer Andy Fastow. (((That'd be Andy "Fast Andy" Fastow, "The Guy Who Broke Enron.")))

"The next week, Enron announced that the Securities and Exchange Commission had launched an informal inquiry into the partnerships. The inquiry seeks to find out whether Enron adequately disclosed information about the transactions and the partnerships. More than a dozen shareholder lawsuits have been filed as a result.

"Following the revelation, Enron fired Fastow and replaced him with former treasurer Jeff McMahon. Subsequently, the SEC elevated the inquiry into a formal investigation and moved the case from Fort Worth, Texas to its headquarters in Washington, D.C. The SEC sent letters to Enron in 1998 and 1999 raising questions about the company's accounting and disclosure practices. (((When is the fossil fuel industry going to get around to buying the SEC? This outfit is a real drag.)))

"Moody's Investors Service, Standard & Poor's and Fitch downgraded Enron's credit ratings, respectively, and Moody's took further action Friday. ((('Tis the very knell of business death.)))

"Earlier in the week, Enron was seeking a capital infusion of at least $2 billion from a multitude of sources before Dynegy stepped in. (((Doin' the dotbomb cringe.))) Also this week, Skilling was called by subpoena to testify in Washington, D.C., though the SEC would not confirm that it was talking to him.

"On Thursday, Enron disclosed in an SEC filing that it had fired two officers and would restate its earnings for the years 1997 to 2000 and the first two quarters of 2001. In the call, Watson said he wasn't concerned about additional disclosures from Enron. Lay said Enron would have a conference call next Wednesday to discuss off- balance sheet partnerships.

"Lisa Sanders is a Dallas-based reporter for"


(((Here's the Enron press release announcing their self- immolation at the hands of a former rival. If you're into oleaginous corp-speak, this stuff is pure schadenfreude.)))

"You are here:  >>  >>Press Room  >>Press Releases  >>2001  >>Enron Corp.


"HOUSTON (Nov. 9, 2001) — Dynegy Inc. (NYSE: DYN) and Enron Corp. (NYSE: ENE) today announced the execution of a definitive agreement for a merger of the two companies. The combined company, to be called Dynegy Inc., will be headquartered in Houston, Texas.

(((The new baseball stadium in Houston is named "Enron Field." What are they gonna do with it now? Poor Houston... Compaq crushed, Continental Airlines broke from 9.11, now Enron in flames, not to mention their catastrophic flood and that evil horde of Greenhouse mosquitos.... The Queen of Fossil Fuels is snakebitten.)))

"The new company will focus on the core businesses of North American and European wholesale energy markets and commercial and industrial energy users, and will capitalize on the opportunities generated by the combined company's diversified asset-backed network supported by the strongest intellectual capital in the industry. ((("We embezzle a little money every time we use our intellectual capital, but we make it up in volume.")))

(...) "The boards of both companies have unanimously approved the transaction, and ChevronTexaco, which owns approximately 26 percent of Dynegy's outstanding common stock, has agreed to invest a total of $2.5 billion into Dynegy.

"Chuck Watson, chairman and chief executive officer of Dynegy Inc., Steve Bergstrom, president of Dynegy Inc., and Rob Doty, chief financial officer of Dynegy Inc., will retain those positions in the combined company. Greg Whalley, the current president and chief operating officer of Enron Corp., will become an executive vice president of the new Dynegy. These executives will comprise the Office of the Chairman upon merger completion. (((We win, you chumps lose, now get lost.)))

"The board of directors of the combined company will be comprised of 14 members. Dynegy's 11 designees will include three from ChevronTexaco. Enron will have the right to designate a minimum of three board members. (((Enron: 3/14ths of a company one third its size.)))

"Chuck Watson, chairman and chief executive officer of Dynegy Inc., said, '(((Blather blather "strategic" blather "existing core business" blather "strong marketing, trading" blather "technology infrastructure" blather "global energy" blather "competitive markets"))) WE WILL KEEP A STRONG BALANCE SHEET AND STRAIGHTFORWARD FINANCIAL STRUCTURE AS KEY PRIORITIES.'

"Kenneth L. Lay, chairman and chief executive officer of Enron Corp., (((He's gray... weary... tugging the chains of Marley before Scrooge...))) said, 'The merger protects Enron's core franchise.(...) The company we are creating will have a strong balance sheet.(...) It also will solidify Houston's position as the energy capital of the world and join two companies with deep roots in the Houston community.(...) Both companies have talented, dedicated people and share a commitment to the safe operation of our facilities and to the environment.' (((A moment of silent pity here. Enron wasn't as bad as any coal company. Enron sold natural gas and they tried to build a cleaner, faster fossil biz. And Ken does mean this sort of thing; last year, Ken bought $123.4 million in stock in his own outfit. Unless he dumped it, Ken must be feeling pretty broke right now. And without good old Ken around — this is the burning question for America — who is gonna tell George W. what to do?)))

"The New Dynegy

"Upon completion of the merger, the new Dynegy is expected to have revenues exceeding $200 billion and $90 billion in assets. Together, the companies have gas sales of approximately 40 billion cubic feet per day through the third quarter of 2001 and power sales exceeding 500 million megawatt hours through the third quarter of 2001. In addition, the new Dynegy's delivery network will include more than 22,000 megawatts of generating capacity and 25,000 miles of pipelines. (...) (((This is no idle matter, ladies and gentlemen: it's a giant, continent- crossing machine.)))


"The business combination will be accounted for as a purchase of Enron by Dynegy. (((So much for the cornball pretense that this is a "merger.")))


"Conference Call Simulcast

"Dynegy and Enron will simulcast a merger conference call live via the Internet on Monday, November 12, 2001, at 8:00 a.m. CT, 9:00 a.m. ET. The webcast can be accessed via (click on "Investor Relations"). The login number is 4365632 and the password is "Dynegy." (((You heard it here first, Viridians.)))

"About Enron Corp.

"Enron Corp. is (((was))) one of the world's leading energy, commodities, and services companies. The company markets (((used to market))) electricity and natural gas, delivers energy and other physical commodities, and provides (((once provided))) financial and risk management services to customers around the world. Enron's Internet address is (((For a while, maybe.)))

Investor Relations, Enron Corp., Enron Building, 1400 Smith Street, Houston, TX 77002, Phone: (713) 853-3956, Fax: (713) 646-3302.

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