Introduction

In the mid-1990s, Enron was composed of five businesses: international energy infrastructure development, gas and oil exploration and production, interstate natural gas transmission, natural gas liquids, and natural gas and electricity marketing. Power generation, a stand-alone US-side business during the PURPA-driven boom, was reduced to an engineering division offering worldwide construction and operating services for power plants and pipelines.¹

Ken Lay’s company had two orientations. Iron-in-the-ground, traditional Enron was rooted in the old Houston Natural Gas Corporation, its 1984 acquisitions, and its 1985 merger with InterNorth. The 1980s Enron was a well-defined upstream-midstream energy company of wells, pipelines, storage, and gas liquids facilities, joined by gas-fired cogeneration plants and an emerging gas-marketing operation.

Liquids, once a stand-alone division, was now part of Enron Capital & Trade Resources (formerly Enron Gas Services). Included in Liquids were the troubled MTBE and methanol plants, expensively purchased from Tenneco in 1991. In 1992, the bulk of Enron’s liquid pipelines, also part of Enron Liquids Fuel Company in the Mike Muckleroy era, were spun off in the first public offering since Enron Oil & Gas (EOG) three years before.

After Enron Liquids Pipeline (ENP), Enron monetized assets by selling fractions of Northern Border Partners (stock symbol: NBP) in third-quarter 1993; EOTT Energy Partners (stock symbol: EOT) in first-quarter 1994; and Enron Global Power & Pipelines (stock symbol: EPP) in fourth-quarter 1994. Operating agreements for all these assets provided service income to part-owner Enron.²

The 1990–96 era heralded two new large profit centers. Beginning with Teesside UK, Enron was now in 20 countries, many in the developing world, building gas and power infrastructure. (The oil majors had a petroleum focus.) Additionally, Enron was first, biggest, and best in the wholesale marketing of natural gas and electricity. Venture capital investing was also a growing part of EGS/ECT.

Although not in gas distribution (Peoples Natural Gas Company had been sold by HNG/InterNorth in 1985), Enron was the most integrated major natural gas company in America. The self-proclaimed natural gas major was organized to profit “by adding value to the gas molecule every step of the way from the time it is produced at the wellhead to the point at which it is delivered at the burner tip.”

Enron benefitted from synergies. One was a premium-priced long-term contract between Enron’s Texas City cogeneration plant and EOG, described in chapter 5. EGS’s Gas Bank contracted with EOG reserves, and Skilling’s side looked to EOG as a backstop for its nonhedged sales commitments.

Synergies were otherwise modest within Enron’s natural gas chain. The five aforementioned entities that became public companies were, at least nominally, independent from Enron.³ FERC regulation functionally separated interstate transmission from gas commodity sales, precluding the most natural would-be integration with Enron’s two largest wholly owned divisions.

Office of the Chairman was the common denominator of the dozen or so Enron divisions and spinoffs. Ken Lay was the visionary, image maker, and delegator. Performance was the responsibility of Richard Kinder, who was the conscience, the last line of defense, the brake for the whole corporation. But when it came to making the numbers, specifically the 15 percent annual earnings growth promised by Ken Lay, Kinder was also the accelerator, even corner cutter.⁴

Lay had two divisional heads who vied as Enron’s number three. (Forrest Hoglund of EOG was ensconced in his own public company.) Jeff Skilling, the wunderkind of Enron Capital & Trade Resources, worked well with Kinder and was prized by Lay. Rebecca Mark of Enron International/Enron Development had wide license and high confidence from Lay, but Kinder (and Skilling) were less confident about her mission and abilities.

In the upper chain of command, Ken Lay had the allegiance of the board of directors and Richard Kinder. Skilling had the allegiance of Kinder and Lay. Rebecca Mark had the allegiance of Lay. Rich Kinder had the allegiance of everyone else, in addition to respect from above.

Chapter 10 describes traditional Enron in the mid-1990s. Enron Oil & Gas operated apart from Enron and was being sold down (it would completely divorce from the parent in 1999). The interstate natural gas pipeline group—Northern Natural Gas, Transwestern Pipeline, and (half-owned) Florida Gas Transmission—was the other major bedrock. Oil transportation and trading, accounting for half of Enron’s total revenue, was deemed noncore and spun off as EOTT Energy Partners in 1994.

EOG and the interstates, under Forrest Hoglund and Stan Horton, respectively, were steady, profitable, and built to last. There were no accounting tricks or financial engineering, just old-fashioned planning and execution. These assets produced the cash flow that largely funded Enron’s aggressive, even imprudent, ambitions in the 1990s.

Chapter 11 chronicles Enron Capital & Trade Resources. ECT was rapidly growing amid an industry-wide consolidation that saw its competitors drop by half. ECT was centered on wholesale marketing of natural gas, then electricity, enabled by federal regulation establishing nondiscriminatory access to the nation’s interstate transmission systems.⁵

In Europe, ECT introduced large-scale natural gas and electricity marketing centered on Teesside, the world’s largest cogeneration plant. From the physical base constructed and run by Enron Power, an ECT-like trading operation sprang up in the United Kingdom, a model for other West European centers.

Chapter 12 describes Enron’s international ambitions. Rebecca Mark and Joe Sutton were bringing “project development, fuel supply, and financing” to underserved, capital-poor markets, part of Enron’s wider effort of “providing integrated energy solutions worldwide.”

Enron had power plants in India, China, Guatemala, the Philippines, and the Dominican Republic; pipelines in Argentina and Colombia; and a raft of other developing-nation projects in “final development.” And Mark was promising Lay 20 percent earnings growth in the years ahead. The new Enron International (absorbing Enron Development) was just part of Ken Lay’s global reach, with EOG and ECT expanding afar with their core competencies.

At mid-decade, Enron was on a steep growth trajectory with hardly a Plan B. The years 1984–85 were about creating a megacompany; 1986–87 involved adjustment and survival; and 1988–89 focused on recovery. The period 1990–93 witnessed division-by-division progress and breakout profit centers. In 1994–96, North America’s most integrated natural gas company was redefining its energy sphere and building energy infrastructure worldwide.

Enron enjoyed a reputation as innovative, well managed, and focused. It was championing the right fuel at the right time, the press proclaimed. Vision was complemented by operational excellence. The risk taker was an able risk manager—by all appearances. Enron was a different energy company, making higher returns. And what better place to work if you were in the energy industry or at a law firm or an investment bank related to energy? Ditto for a student from a top business school looking to begin a career.

But a closer look reveals a different Enron in the mid-1990s. With accounting and finance trickery here and special government favor there, dressed up with political correctness in the socioeconomic mixed economy of political capitalism, contra-capitalist Enron—while depending on a solid upstream-midstream base—was beginning to fool many, and even itself.