Enron: How They Succeeded and How They Failed

On December 2, 2001 Enron announced the biggest bankruptcy ever in history. Stocks prices that were at around $80 per share plummeted to under a dollar. An analogy that I have compared Enron to is an Olympic track coach who heard about a runner who had broken the World Record for the mile run by 45 seconds faster than everyone else. The coach would probably refuse to believe it. When Enron made equally unlikely pronouncements no one seemed to have asked not even one question or even think twice if the amount the company earned was even possible.

On October 16, Enron announced a $638 million loss for the third quarter, and Wall Street reduced the value of stockholders' equity by $1.2 billion. Enron also announced on November 8, that it had overstated earnings in annual reports for nearly five years by $586 million and that it was responsible for up to $3 billion in obligations to various partnerships. For example, J.P Morgan recently announced that they had $500 million in unsecured loans to Enron. This is just one company that has been affected by the collapse of Enron. Many are being blamed, and this is still under investigation (Taub).

Based on those falsified reports, investors and thousands of Enron employees decided to buy or hold the company's stock and options. Shortly after the discovery of the misrepresented profits, Enron's auditors at Arthur Anderson admitted that they had incorrectly approved the flawed profit and destroyed documents related to Enron, which is an accounting sin (www.about.com). It is apparent that they failed to disclose many of its lobbying expenses to congress last year as the energy trader headed towards this financial disaster.

Enron was the seventh largest company in the nation. They acted as the "middleman" in large natural gas and electricity deals. The way they define their business in one sentence is: "we make commodity markets so that we can deliver physical commodities to our customers at a predictable price."

Enron, which is based in Houston, Texas, was formed in 1985 by the merging of Houston Natural Gas (HNG) and InterNorth. After InterNorth bought HNG for $2.4 billion they were burdened with debt. Enron, which became the new company name after the merger, began selling off portions to Citrus Corp. Enron along with three partners gained control of a 4,100-mile pipeline in Argentina. It bought businesses from a gas giant known as Williams in 1993, and in 1997 it bought its own electric utility which was Portland General Electric (PGE). The next year it began power trading in Australia, Brazil, and it became the first power marketer in Argentina. This how the company began and it continued to build in 1998 by buying interests in New York City. It transformed itself from a gas pipeline operation into the world's largest energy trader. It was one of the world leaders in the development of energy infrastructure. Enron has now agreed to sell its 16,500-mile Northern Natural Gas pipeline and also its North American power and gas trading unit to Swiss-bank UBS in exchange of earnings for up to 10 years (www.hoovers.com).

Fortune magazine named Enron the most innovative company for six years in a row. Enron is also #5 on the 2001 Fortune 500 list. They were 18 on the list the year before. Last year they had $139 billion in revenues during the first nine months of the year. At the end of the year in December they filled for bankruptcy. Therefore they were not disqualified from the list. Fortune decided to rank Enron based on the revenues they incurred during the first nine-months of the year (www.fortune.com).

Enron Energy Services offers companies a way to develop and execute their energy strategies. The volatility of energy prices across the U.S. has heightened the value of energy management. They focus on the customer's primary concerns, which is to manage energy prices and consumption. Their unique skills, experience, depth, and versatility enable them to provide an ample solution to address uncertain, rapidly changing markets (www.enron.com).

Enron generated huge revenue numbers, but little profits. They did this by buying and selling the same goods over and over. "A lot of it is from buying and selling the same [gas or electricity] multiple times. They might resell to one customer the same electricity they sold to another," says Charles Fischman, an analyst at A.G. Edwards who covers Dynegy, which was one of Enron's competitors. Enron's sales also grew because it was a "market maker," who served as the middleman on deals. It would put a buyer together with a seller, take "delivery" of the contract for one transitory moment, and book the entire "sale" as revenue to Enron. They were allowed to do this because a task force of the Financial Accounting Standards Board (FASB) couldn't decide how energy contracts should be accounted for explains Douglas Carmichael, the Wollman distinguished professor of accounting at Baruch College. He also says that Enron had little or no understanding of how they reported such huge numbers.

As of Monday, April, 29, 2002 the stock was at .20 under its symbol ENRNQ.PK. The 52 week range for last year was $0.19-$89.50. Millions of shares are still being traded everyday. According to the article "Investors Buy, Sell Enron Shares by Kristen Hays," the volume was around 2.6 million shares on March 7, 2002. Also as of April 29, 2002 the volume was 2,302,900. Hays said that this stock is popular with penny-stock investors. Although it is frequently being traded it may go from .24 to .48 and back to .23 again all in one day. For the 9 months ended 9/30/01 revenues rose from $59.89 billion to $138.72 billion. Revenues reflect growth in the wholesale and retail energy business and the natural gas pipelines. The P/E (trailing 12 months) ratio was .88, and the total debt per equity (most recent quarter) ratio was1.35.

Enron has performed very well in the past even just months shy of the day they filed for chapter 11. In September 2001 they ended the quarter with $46,877 (in millions) in revenues. In 2001 they ended the quarter with $30,007 (in millions) in revenues. Income statements also indicate that the total net income for the third quarter alone in 2000 was $292,000,000 and in 2001 it was $644,000,000. Balance sheets show that cash for September 2001 was 1,001.00 (in millions) and in 2000 it was 697.00 (in millions). For the year 2001 revenues were $138,718,000, which does not include the 4th quarter. As compared to the year 2000 revenues were $100,638,000, which includes all four quarters. For one year the revenue percentage growth rate was 151.27 (in millions), and for five years it was just 61.45 (in millions).

It was reported by ABC news that two companies

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