PSIRU profile of Enron www.psiru.org June 2001
Enron: A corporate contribution to global inequality
y
by
Kate Bayliss and David Hall
PSIRU, University of Greenwich
June 2001
Post Script: December 2001
This report was prepared by PSIRU in June 2001 for the Trade Union Trustees on the Board of the California Public Employees’ Retirement System (CalpPERS), one of the largest pension funds in the US. The trustees were concerned about Calpers’ investments in Enron. In view of Enron’s impending expected bankruptcy, we believe it now deserves a wider audience.
1 Structure and history 2
1.1 Enron’s main activities 2
1.1.1 Gas and Oil production 3
1.1.2 Gas and electricity transmission and distribution 3
1.1.3 Electricity generation 3
1.1.4 Electricity and gas trading 3
1.1.5 Trading in other commodities and services 3
1.2 History 4
2 Financial Review 4
2.1 Performance overview 5
2.2 Breakdown 5
3 Policies and Performance 7
3.1 Trading 7
3.1.1 California - energy 7
3.1.2 Mid-west USA, 1998 8
3.1.3 Water trading in California 8
3.2 Independent Power plants 9
3.2.1 India: Dabhol Power company 9
3.2.2 Nigeria 11
3.2.3 Croatia 11
3.2.4 Poland 12
3.2.5 Dominican Republic 12
3.2.6 Indonesia 13
3.3 Water - Azurix Corp 13
3.3.1 Argentina - Buenos Aires province 13
3.3.2 Failure to compete 14
3.4 Pipelines 14
4 Strategy: prices and politics 15
4.1 Short-term profits and long-term monopolies 15
4.2 Profits 16
4.3 Secrecy 16
5 Political influence 16
5.1 Enron and Bush 17
5.2 Outside the US 17
5.2.1 Employing ex-regulators: in USA, UK and Nordic countries 18
5.3 World Bank 18
5.3.1 Ghana 19
5.4 Directors 19
6 Enron as employer 20
6.1 ‘Rank and yank’ 20
6.1.1 "Get rid of people" 20
6.1.2 Labour relations and strikes 20
6.1.3 Enron's safety record - the major accidents 20
7 Annexes 22
7.1 Annex A - Directors 22
7.2 Annex B – Major subsidiaries 22
1 Structure and history 2
1.1 Enron’s main activities 2
1.1.1 Gas and Oil production 3
1.1.2 Gas and electricity transmission and distribution 3
1.1.3 Electricity generation 3
1.1.4 Electricity and gas trading 3
1.1.5 Trading in other commodities and services 3
1.2 History 4
2 Financial Review 4
2.1 Performance overview 5
2.2 Breakdown 5
3 Policies and Performance 7
3.1 Trading 7
3.1.1 California - energy 7
3.1.2 Mid-west USA, 1998 8
3.1.3 Water trading in California 8
3.2 Independent Power plants 9
3.2.1 India: Dabhol Power company 9
3.2.2 Nigeria 11
3.2.3 Croatia 11
3.2.4 Poland 12
3.2.5 Dominican Republic 12
3.2.6 Indonesia 13
3.3 Water - Azurix Corp 13
3.3.1 Argentina - Buenos Aires province 13
3.3.2 Failure to compete 14
3.4 Pipelines 14
4 Strategy: prices and politics 15
4.1 Short-term profits and long-term monopolies 15
4.2 Profits 16
4.3 Secrecy 16
5 Political influence 16
5.1 Enron and Bush 17
5.2 Outside the US 17
5.2.1 Employing ex-regulators: in USA, UK and Nordic countries 18
5.3 World Bank 18
5.3.1 Ghana 19
5.4 Directors 19
6 Enron as employer 20
6.1 ‘Rank and yank’ 20
6.1.1 "Get rid of people" 20
6.1.2 Labour relations and strikes 20
6.1.3 Enron's safety record - the major accidents 20
7 Annexes 22
7.1 Annex A - Directors 22
7.2 Annex B – Major subsidiaries 22
1 Structure and history
1.1 Enron’s main activities [1]
Enron is a USA-based energy company. Originally focused on gas and oil production, the company has increasingly moved towards trading-based activities mainly in energy as well as a broadening range of commodities. This section sets out some of the main activities in which Enron is involved.
1.1.1 Gas and Oil production
Originally a gas company, Enron’s exploration activities used to come under its subsidiary company, Enron Oil and Gas. In 1999, the company – which is now known as EOG Resources - “struck a deal with Enron… to basically buy our stock back” [2] . Enron gave back all its shares, but in exchange was given all the gas and oil interests in India and China.[3] EOG is now an independent company, owning all the former Enron activities in Trinidad and US and Canada.
Enron still has exploration businesses in China and India (although it has been trying to sell its stake in the India project) [4] and continues to be active in this sector. In May 2001 it was announced that Enron was one of eight companies selected to exploit Saudi Arabia’s vast gas reserves.[5]
1.1.2 Gas and electricity transmission and distribution
Enron operates gas transmission and distribution in the USA and Latin America, and an electricity distribution utility in sSouth America and in the USA (through Portland General Electric, which in June 2001 Enron is trying to sell).
1.1.3 Electricity generation
Enron is also extensively involved in energy production with interests in a number of power generation plants throughout the world. Most are underwritten by Power Purchase Agreements whereby the government or public sector utility guarantees to buy power for a set price over a long period. Enron also has investments in wind power, including manufacturing of wind turbines.
1.1.4 Electricity and gas trading
Enron is actively trading in energy – electricity and gas - wherever it is possible to do so: in the USA, most European countries, Argentina and Brazil. In the US, Enron is the biggest ‘electricity marketer’ even though it produces almost no power in the country.[6] This trading includes the wholesale market, and retail supply direct to customers.
1.1.5 Trading in other commodities and services
The company has also expanded its trading activities to deal in other commodities and services. These include gas, power, oil and refined products, plastics, petrochemicals, liquid petroleum gases, natural gas liquids, coal, emission allowances, bandwidth, pulp and paper, metals, weather derivatives, credit derivatives, steel. The company also provides trading in options, weather derivatives and conducts emissions trading.
Its subsidiary Enron Online was launched in October 1999 to offer these services. According to Enron CEO Jeff Skilling, "Unlike other Internet commodity service providers, Enron Online doesn't match buyers with sellers…Customers will be able to instantaneously conduct transactions directly with an Enron company as a principal."[7]
Table 1: Summary of Enron operations
Activity / Main RegionsEnergy exploration / China, India, Saudi Arabia
Gas Transmission pipelines / USA, Bolivia-Brazil, Colombia, Argentina, Mozambique
Gas Distribution / Puerto Rica, Brazil, Venezuela, South Korea
Electricity Distribution / Brazil, Venezuela, USA
Electricity Generation / Italy, Poland, Spain, Turkey, UK, Panama, Dominican Republic, Palestine, Brazil, China, Puerto Rico, Romania, India, Croatia, Mexico
The Philippines, Guam
Renewables: Wind Turbine manufacturing / Spain, US, Germany
Electricity and Commodity Trading, including retail supply / USA, Europe, Argentina, Brazil
Electricity Supply / Retail (Enron Direct) / UK, USA, Canada, Spain, The Netherlands
Water (Azurix.) / UK, Argentina, Mexico
1.2 History[8]
1985 Enron created in 1985 from the merger of two natural gas companies InterNorth (which goes back to the 1930s) and Houston Natural Gas (HNG – which was formed in 1925). In 1985 InterNorth bought HNG for $2.4 billion, creating the US's largest natural gas pipeline system. Kenneth Lay became CEO of the new company, called it Enron (the first name choice, Enteron, was dropped after its meaning, "alimentary canal," was discovered). Gas dominated the company’s activities until the early 1990s as Enron acquired interests in other gas companies.
1989 Enron began operating in the UK establishing UK beachhead and a year later construction of a power plant at Teeside which became operational in 1993. Enron began trading natural gas commodities through its subsidiary GasBank
1992 Enron and three partners acquired control of Transportadora de Gas del Sur - a 4,100-mile pipeline in Argentina.
1993 Dabhol (India) power purchase agreement signed (December).
1994 Enron Europe established a trading centre in London and began trading U.K. power and gas.
1995 Phase I of the Dabhol Power Project began construction. Enron opened its Oslo office for electricity, trading and risk management activities.
1997 Construction began on the 790 MW power station at Sutton Bridge, U.K. Enron acquired US distributor Portland General Electric (PGE). Enron announced its first commodity transaction using weather derivative products.
1998 Enron acquired Wessex Water in the UK and formed Azurix Spain and Germany awarded Enron power marketing licenses. Acquired Brazilian electricity distributor, Elektro,
1999 Phase I of the Dabhol project began operation. Enron announced Azurix initial public offering. The 3,000-kilometer Bolivia-to-Brazil natural gas pipeline began commercial operation. Enron sold its interest in Enron Oil & Gas, but retained its China and India assets. Enron launched EnronOnline.
2000 Enron and strategic investors, IBM and America Online, launch The New Power Company, for US residential and small businesses energy consumers.
2001 Bush becomes president of USA. Enron bought back the publicly traded shares in Azurix after the share value plummeted. Dabhol project stopped production. Lay resigned as CEO, and president and CEOO Jeff Skilling replaced him although Lay remains as chairman
2 Financial Review
Business is currently booming for Enron. Revenue and share prices have increased dramatically - but it is not entirely clear why. The company accounts reveal little about the underlying activities and even Wall Street analysts are not clear about the true value of Enron stock. Enron keeps specifics hidden and the data it does provide are extremely complicated causing headaches for stockbrokers and regulators alike (see below).
2.1 Performance overview
Table 2: Performance indicators
2000 / 1999 / 1998Revenue ($m) / 100,789 / 40,112 / 31,260
Profit ($m) / 979 / 893 / 703
Earnings per diluted share ($) / 1.12 / 1.10 / 1.01
Employees / 20,600 / 17,900 / 17,800
Revenue per employee ($m) / 4.89 / 2.24 / 1.75
Profit per employee ($) / 47,524 / 49,888 / 39,494
Source: Hoovers 2001
Table 1 above, shows that earnings for Enron in 2000 were more than 2.5 times those of the previous year. While a regional breakdown is not provided, it seems likely that much of this increase came from Enron’s activities in the deregulated Californian electricity market. While revenue increased by 151%, employees increased by 15%.
It is not clear to what extent the workforce gained from the enormous increase in revenues, but one clear beneficiary was Enron Chairman, Kenneth Lay. Lay was given a bonus of $7m for 2000 - a 79% increase on his $3.9m bonus for 1999.[9] He also made $123m from sale of Enron shares in the year.[10] (See Annex A for payments to directors.)
The upward trend has continued in 2001. In the first quarter 2001 wholesale trading volumes increased 65%. Revenues rose 281%, to $50.1 billion, with net income up 20% to $ 406 million.[11]
2.2 Breakdown
Enron operations are ‘mind-numbingly complex’.[12] Disclosure is kept to a minimum and the business grouping in the company accounts sheds little light on how the company makes its money.
Table 3: Turnover by region (US$M)
2000 / 1999 / 1998USA / 77,891 / 30,176 / 25,247
Foreign / 22,898 / 9,936 / 6,013
Total / 100,789 / 40,112 / 31,260
Source: Enron Company Reports
Looking at the regional breakdown in Table 3 above, using what limited disclosure is provided in the company’s accounts, Enron’s turnover in the US increased by nearly US$50bn in the course of 2000. Earnings from outside the US also more than doubled in the year.
Table 4: Revenue by business segment
Division / Total Revenue (US$m) / Including…2000 / 1999
Enron Wholesale Services / 94,906 / 35,501 / Enron Americas: includes wholesale merchant businesses related to natural gas and power across North, Central and South America, including trading, marketing and asset development.
Enron Europe: wholesale merchant business across all commodities in Europe, Australia and Japan. This business unit also includes Enron Metals and Enron Credit.
Enron Global Markets: includes commodity businesses in crude and related products, coal, weather, foreign exchange, and agricultural products. Enron Global Markets has responsibility for the company's Middle East and LNG operations.
Enron Industrial Markets: includes business activities in the pulp and paper, paper, lumber and steel markets, including trading, origination and energy outsourcing.
Enron Net Works: wholesale commodity trading across a range of industries using the internet.
Enron Global Assets: energy assets outside of North America and Europe including EcoElectrica in Central America, the Bolivia-to-Brazil Pipeline and Dabhol Power Project in India.
Enron Broadband
Services / 408 / 526 / Includes bandwidth trading, content and application services, and the Enron Intelligent Network
Enron Energy services / 4,615 / 1,807 / Enron's retail business, which provides “integrated energy and facility management outsourcing services”.
Enron transportation Services / 2,955 / 2,032 / Pipeline and transportation services.
Source: Enron website
Table 5: Revenue by sector (US$m)
Breakdown by sector / 2000 / % of total / 1999 / % of total / 1998 / % of totalNatural gas and other products / 50,500 / 50 / 19,536 / 49 / 13,276 / 42
Electricity / 33,823 / 34 / 15,238 / 38 / 13,939 / 45
Metals / 9,324 / 9 / - / -
Other / 7,232 / 7 / 5,338 / 13 / 4,045 / 13
Total / 100,789 / 100 / 40,112 / 100 / 31,260 / 100
Source: Enron 10-K, www.hoovers.com
Table 4 shows the way that business segments are grouped in the Enron accounts. “Wholesale services” covers a vast range of transactions and activities, which includes all its energy trading activities, and all of its energy activities outside the USA except for pipelines, plus commodity trading. This meaninglessly largeill-defined sector accounted for 94% of revenue in 2000, up from 88% in 1999.
Table 5 shows that 50% of the company’s revenue is still derived from gas ‘and other’ activities, and 34% from electricity.
In April 2001, Standard & Poor's said it has affirmed Enron Corp's senior credit rating of BBB+, noting that the company's financial outlook remains stable. It added that Enron is not impacted by recent reports of its credit exposure to the bankruptcy of Pacific Gas & Electric Corp.[13]
3 Policies and Performance
This section reviews some of the major projects that Enron has been involved in. The corporation has many subsidiaries world-wide and they are not all covered here. A list of subsidiaries is shown in Annex B. Contact details for some of the US subsidiaries can be found at www.hoovers.com.